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Model Portfolio: 28 November 2008
Gilts and government guaranteed bonds perform strongly. Banks and financials recover from the lows but selected corporates show weakness............   
    
Bonds remain broadly split into two camps. Gilts and government guaranteed issues remain very strong as investors seek the security of government guarantees and fixed coupons in a falling interest rate environment.  Some recovery is now underway in the beleagured financial sector, suggesting that the billions of pounds, dollars and euros thrown at this industry is having some effect , but corporates bonds are another matter. Some highly regarded names such as Tesco and BP remain in demand, but many other bonds issuers are seeing risk premiums increase. This is particularly true in the retail and real estate sectors and we suffer increasing mark-to-market losses in the Next 5.25% 2013 and particular, the Segro 5.5% 2018 bond.
 
Turning to our Model Portfolio, we took the profit on our Gilt holding in late September, somewhat too early, but our position in the AAA European Investment Bank is performing well. These profits have largely been offset by the unrealised losses from our corporate bond holdings. However, the offside positions continue to produce income, gradually moderating these valuation setbacks.
 
Structurally, we remain happy with our portfolio, which has a good spread of maturities. Liquidity continues to come back in to the portfolio, both through coupons and upcoming maturities (the A&L 4.25% Dec 2008). We have continued to re-invest into the falling markets in corporates and have added positions in BT and GE (see table below) over the last month or so, locking in some good yields.
 

Finally, we continue to hold our position in the Bradford & Bingley PIBS. Unlike the equity, this distressed security continues to trade and our valuation price of 15p in the pound reflects this. At present we are not factoring in any accrued interest for the bond and the next test for this security will be the coupon payment on January 20th. A recent statement from B&B to the Investors Chronicle indicated that the company expects to pay this coupon, which will offer the portfolio (and possibly the valuation of the PIBS)some uplift. On this subject, we also note that Northern Rock subordinated coupons have, to date, been paid.  

Next month’s valuation will include the Model Portfolio’s performance for the year.

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

74.6

 7,460

 544

15 Feb 2007

Alliance & Leicester 4.25% December 2008

10,000

  97.46

99.0

 9,900

 393

7 Mar 2007

Segro 5.5% 20 June 2018

10,000

  97.35

65

 6,500

 250

28 Mar 2007

EIB 4.75% 06 June 2012

10,000

  96.82

102.4

 10,240

 234

18 April 2007

Merrill Lynch 5.125% 24 Sept 2010

10,000

  97.66

96.8

 9,680

 98

19 Aug 2007

Portman (Nationwide) 6.25% PIBS

 5,000

  97.50

84

 4,200

 36
9th Jan 2008 Marks & Spencer 5.625% March 2014 10,000   95.82

85

 8,500  195
10th April 2008 Bradford and Bingley 11.625 PIBS 10,000  112.00

15

 1,500    ?
1st May 2008 Citigroup 5.125% Dec 2018 10,000  85.30

74.9

 7,490  499
23 July 2008 Experian (GUS) 6.375% July 2009 5,000  98.95     98  4,900  121
20 Aug 2008 Next 5.25% Sept 2013 5,000  86.5     79.3  3,965  46
20 Oct 2008 GE Capital 4.75% 15 Jun 2011 5,000  88.46     95.0  4,750  171
27 Nov 2008 British Telecom 5,000  97.5      97  4,875  394
Bond sub total            

 

Category Sum            Notes
Securities

£83,960

Valuation of current holdings
Accrued

£2,587

Interest accrual on above 
Cash

£5,885

Including interest & coupons received. 
     
Total

£92,432

 

 Mark Glowrey