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Model Portfolio: 30 January 2008
January valuations show financials, retail and real estate bonds remain under pressure...............   
   

Since the start of the year, Gilt prices have fallen away from their peaks after 10yr bonds failed to push through the 4.4% yield barrier. Credit spreads (the incremental yield available from corporate bonds) have also continued to drift wider, reflecting investors uncertainty and the lack of appetite for risk. Thus, the holdings in our portfolio are currently under pressure from two fronts, and this has resulted in some mark-to-market losses on our valuation (see table below) resulting in a figure around 1% below last month’s.

Particularly hard hit are the lower rated credits. We note that bonds issued by companies from the financial, retail and real estate sectors remain under the cosh. Overall, the portfolio has remained in profit since its inception at the start of 2007, with the unrealised losses offset by the steady flow of income back into the portfolio, this being one of the happy benefits of income investing. Indeed, the overall volatility of the model portfolio (calculated on a total return basis) shows a range between £99,900 and £103,495, a quite satisfactory figure given the current market conditions and proving the points that a well-structured portfolio will be less volatile than its individual constituents.

Reviewing the individual holdings, we note that the high quality bonds such as the 2011 Gilt and 2012 European Investment Bank (EIB) continue to perform well whilst the Kingfisher 2014 and Segro 2018 continue to slide. Our strategy remains unchanged; we are gradually investing our remaining cash, re-investing the dividend flow as it rolls back into the portfolio. This allows us to average into market troughs and peaks. Also, our "ladder" structure of short, medium and long dated maturities keeps the liquidity moving back in. Given that the trend of corporate bond yields appears to be still upwards, this will enable us to acquire higher yielding assets over the course of time.

Model Portfolio

Date of Purchase

Issue

Nominal

Purchase Price

Current Price

Value  

P&L         

Accrued

16 Jan 2007

Vodafone 6.25% 10 July 2008

10,000

 100.42

  99.75

 9,975

 -67

 356

30 Jan 2007

Kingfisher 5.625% 15 Dec 2014

10,000

 95.24

  85.50

 8,550

 -974

  78

15 Feb 2007

Alliance & Leicester 4.25% December 2008

10,000

 97.46

  97.00

 9,700

 -46

  41

7 Mar 2007

Segro 5.5% 20 June 2018

10,000

 97.35

  84.50

 8,450

-1,285

 344

28 Mar 2007

EIB 4.75% 06 June 2012

10,000

 96.82

  99.48 

 9,948

 +266

 315

18 April 2007

Merrill Lynch 5.125% 24 Sept 2010

10,000

 97.66

  95.25

 9,525

 -241

 186

12 June 2007

Experian (GUS) 6.375% 16 July 2009

10,000

 99.99

  100.12 

10,012

  +13

 350

18 July 2007

Treasury (Gilt) 4.25% 7 March 2011

10,000

 95.20

   99.40

 9,940

 +420

 170

19 Aug 2007

Portman (Nationwide) 6.25% PIBS

 5,000

 97.50

   92.00

 4,600

 -275

  89
9th Jan 2008 Marks & Spencer 5.625% March 2014  10,000   95.82    94.80  9,480  -102  487
Bond sub total            

 

 

 

Category Sum            Notes
Securities

90,180

Valuation of current holdings
Accrued

2,416

Interest accrual on above 
Cash

9,945

Including interest & coupons received. 
     
Total

102,541

 

Mark Glowrey

Notes: Dealing costs are £15 per trade, and this is factored into the total valuation of the portfolio. There is no stamp duty payable on bonds, although this may be applied to preference shares and other classes of security. Valuations are based on bid-side levels.