Investing

XTB Maturity Ladder Model Portfolio

XTB Maturity Ladder Model PortfolioMaturity Ladder Portfolio

Description

A bond maturity ladder is a portfolio with one bond maturing per year.  A 7 year portfolio will have a bond maturing in each of the next 7 years.  The portfolio can be constantly rolled by reinvesting the maturing capital every year into new 7 year bonds.  Or investors may use the maturing capital elsewhere.

A key purpose is to take advantage of bonds maturing at a fixed amount during a rising interest rate environment.  Rising bond yields means bond market prices are falling.  But all bonds mature at par value ($100 for XTBs), no matter what happens to bond yields, interest rates or market prices before maturity (assuming no issuer default).

If bond markets move into a period of sustained yield increases (prices falling), the bond ladder provides protection against this and in fact allows investors to take advantage of it by delivering capital back to investors annually that is impervious to the changes in yields or interest rates.

An example

In the 7 year portfolio above, when the first XTB matures, the $100 is reinvested into a new 7 year XTB.  If yields have risen because the RBA has increased the cash rate, this new XTB will now be cheaper and its yield higher.  $100 fixed capital now buys more XTBs than before the rate hike.

This turns the apparent disadvantage for fixed-rate bonds of their prices falling when interest rates are rising into an advantage.

 

Investors must hold the XTBs to maturity to take advantage of this approach.  If you sold the 7 XTBs in the example in the second year of investment, and yields have risen in the meantime – you will be selling XTBs on market that will have been impacted by the yield increase (their prices will have dropped).  Maturity delivers this advantage.

Example of a bond maturity ladder

Investment objective

Overall, the objective of this approach is to construct a fixed income model portfolio within the investable universe of XTBs that aims to provide:

  • An opportunity to benefit from rising interest rates using fixed-rate bonds
  • A regular and predictable income stream
  • Return of capital from maturing XTBs on an annual basis
  • A capital preservation focus and low levels of price volatility
  • Liquidity, to ensure investment flexibility

Model portfolio manager

Australian Corporate Bond Company Limited (ACBC)

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Investment strategy and approach

To ensure the best opportunity to meet the model portfolio’s objectives, ACBC selects a portfolio of XTBs using a 2-stage quantitative process, with a qualitative overlay.

Quantitative process

Stage 1: Selection

Define the investment universe of:

  • Rank by increasing maturity date
  • Rank by highest yield to maturity
  • Investment grade credit only¹
  • Weighting parameters (issuer, security, sector²)
  • Available liquidity

¹ At time of establishment
² As defined by GICS Sub Industry

Stage 2: Application

Apply a set of rules to select an optimal XTB maturity ladder model portfolio.

Qualitative overlay

Adjustments may be made to the portfolio to reflect market conditions, despite the rules being satisfied.

The general approach is to hold securities to maturity and have a security mature on a yearly basis.  However, model portfolio changes may be made in response to:

  • An increase in the yield to maturity, by adding securities
  • An increase in the universe of available securities
  • Improvement to the portfolio, by switching securities

Designed for investors who…

  • Are looking for protection against rising interest rates
  • Have a firm view rates will increase over a period and want to take advantage of this using fixed-rate XTBs that will mature at $100
  • Seek a transparent and capital-stable fixed income model portfolio that offers a regular and predictable income stream
  • Seek a return of capital on a yearly basis to manage their cash flow requirements.

Portfolio parameters

Parameters
Inception date 14 July 2016
Investment universe Available XTBs, fixed or floating
Minimum number of securities 5
Minimum credit rating Individual bonds must be investment grade at the time of inclusion within the model portfolio
Maximum individual issuer exposure 30%
Maximum individual security weighting 20%
Maximum individual sector² weighting 30%
Capital structure parameters
  • 100% exposure to senior corporate bonds
  • 0% exposure to hybrids
Benchmark RBA cash rate
Maximum maturity Maximum maturity of 8 years per security
Liquidity All XTBs must have sufficient observable liquidity

View portfolio rules and maintenance

View Model Portfolio Performance Reports

Request this portfolio

To request more information about this portfolio, and receive details of the XTBs included within the portfolio please contact us, or complete the form on the link below:

Tel: 1800 995 993
Email: advisers@xtbs.com.au

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