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Model Portfolio: 17 October 2008

Corporate bond valuations lower across the board................................

    

Model Portfolio

Whilst shorter-dated government bonds have benefited from inflows of money, the majority of corporate bonds have been sold off heavily as the perceived risk of default increases. The general trend is illustrated (right) by the chart of the iShares Sterling Corporate Bond ETF (SLXX) which holds a cross section of the aforementioned securities.

As might be expected, our own holdings in corporate and financial sector bonds are marked considerably lower this month, bringing the value of the portfolio down to below the initial cash investment for the first time since launch.

We also note that liquidity in the corporate bond market is also poor at present, and "real" bid levels may be several points below indications on the screen, indicating that the credit crunch is still very much with us.

Over the month, our main activity has been a drive to liquidity in order to set ourselves up to re-invest in some of the high yield opportunities now available. With this in mind we have taken a profit in short dated Gilt holdings (the UK Treasury 4.25% 2011).

Whilst all the valuations are down, the biggest blow has been the B&B PIBS. The assets and liabilities (minus the retail savings) of the bank have now passed into the hands of the government and the value of this subordinated debt security is severely impaired. At present, we do not know if the next coupon (December) will be paid and the government has issued no guidance on this. Looking on the bright side, we note that, unlike the equity, these securities are still (just) trading. Where there is life there is hope; there is at least the potential for further coupon payments and/or some partial repayment as the whole mess is unwound. We tentatively value our holding at 10p in the pound, seeing that trades have printed on the LSE in the 11-13p range over the past few days.

So what should the bond investor on the Clapham omnibus do? Firstly, he or she should remember that bond portfolios are not quite the same as equity portfolios . With shares, one is wholly relient on the future market price in order to regain one’s capital; with bonds, the combination of income and redemptions keeps the cash rolling back in, thus a "buy and hold" strategy has a rather better chance of success.

We now have around 15% cash, with more due to come back at Christmas from the redemption of the Alliance & Leicester (now Santander) Dec 2008. We will be keeping our "ladder" structure of tiered maturities and re-investing, hopefully picking up a few bargains in the 7-10% yield bracket.

Model Portfolio

Date of Purchase

Issue

Nominal

Purchase Price

Current Price

Value  

Accrued

30 Jan 2007

Kingfisher 5.625% 15 Dec 2014

10,000

  95.24

79.5

7,950

479

15 Feb 2007

Alliance & Leicester 4.25% December 2008

10,000

  97.46

98.9

9,890

344

7 Mar 2007

Segro 5.5% 20 June 2018

10,000

  97.35

73.1

7,310

186

28 Mar 2007

EIB 4.75% 06 June 2012

10,000

  96.82

99.4

9,940

179

18 April 2007

Merrill Lynch 5.125% 24 Sept 2010

10,000

  97.66

95.1

9,510

39

19 Aug 2007

Portman (Nationwide) 6.25% PIBS

 5,000

  97.50

83

4,150

151
9th Jan 2008 Marks & Spencer 5.625% March 2014 10,000   95.82

83.7

8,370 326
10th April 2008 Bradford and Bingley 11.625 PIBS 10,000  112.00

10

1,000 ?
1st May 2008 Citigroup 5.125% Dec 2018 10,000  85.30

73.5

7,350  441
23 July 2008 Experian (GUS) 6.375% July 2009 5,000  98.95     98.90 4,945  85
20 Aug 2008 Next 5.25% Sept 2013 5,000  86.5     82.1 4,105  15
Bond sub total            

 

Category Sum            Notes
Securities

£74,520

Valuation of current holdings
Accrued

£2,245

Interest accrual on above 
Cash

£15,537

Including interest & coupons received. 
     
Total

£92,302

 

 Mark Glowrey