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Model Portfolio: 21 September 2011

Bank bonds and non-investment grade bonds give back gains. We are overweight cash and look to make selective purchases...........

    

Its not been a great month for corporate bonds. Flight-to-quality money has headed to gilts. The less blue-blooded credits, notably financials and sub-investment grade, have been hit. As a result, the Model Portfolio (MP) is down a couple of percent since the last valuation in July.

Luckily, the MP is sitting on a fair bit of cash at the moment. We had lightened up over the summer in areas where we were overweight certain credits - notably Lloyds TSB. Market timing is, of course, a tricky subject and many fund managers avoid it all together. The problem is; to make money on market-timed investment moves, you have to get both the exit and the entry point right. Calling the top is not enough. Thatís tricky, which is why many portfolios focus more on relative value.

Given the sharp pullbacks in bank debt and non-IG debt over the summer, our move looks to have been reasonably well timed, but I have not yet pulled the trigger on the re-entry. Thus, the portfolio has around £30,000 cash; more than I have had for some time. This will need to be put to work if we are not to miss out on the all-important compounding.

The first £10,000 will be used to apply for the new National Grid issue, launching later this month. Readers will note that we have taken a profit in the previous holding of the Nat Grid 2.983% 2018 bond. That will leave £20,000 spare. What to buy? Bank debt is the cheapest, but we already have a fair weighting here, so I am understandably cautious from an asset allocation point of view.

The other point to consider is the spread of credits/quality. In truth, the best performance over the past few months has been in gilts and liquid AAA-rated bonds (for instance the EIB 5.375% 2021 issue). Whilst such instruments may yield very little  (perhaps 1 to 3.5% YTM), the total returns have been strong. This is a good illustration of the maxim that the cheapest bond is not necessarily the best bond. I will consider buying gilts or some EIB to leaven the load.

 

Date of Purchase

Issue

Life (yrs) 

Nominal

Purchase Price

Current Price

Value  

Accrued

16 Aug 2009 RBS "Royal Bond 5.3% 2015 4 100  £100  97*  9,700 /
24 March 2011 Provident Financial 7.5% 2016 5 6,000  100.15  107  6,420
21 June 2011 Places For People 5% 2016  5 10,000  100  103.4  10,340  

7 Mar 2007

Segro 5.5% 20 June 2018

7

5,000

  97.35

 104.5

 5,225

 

16 Aug 2010 Enterprise Inns 6.5% Dec 2018 7 6,000

  83.5

 72  4,320

 

04 Feb 2010 GKN 6.75% 2019 8 10,000  97.56  103.75  10,375  
28 July 2010 RBS Royal Bond  5.1% 2020 9 5,000  96.03  89.7  4,485  
06 May/19 Nov 2010 Goldman Sachs 5.5% Oct 2021 10 10,000  87.9  84  8,400  
04 Nov 2010 RBS Inflation-Linked (3.9% min) 2022  11 5,000 100  87  4,350 /
20 Sept 2010 Yorkshire Building Society 13.5% 2025 CoCo 14 5,000  116  114  5,800  
08 Mar 2011 Italy 6% 2028 17 5,000  100.44  99  4,950
16 Sept/01 Dec 2010 Lloyds 6.5% Sept 2040 29 10,000  96.35  88.8  8,880  
08 March Nationwide 6.875% U/D 5,000    88  91.5  4,575  
12 Dec 2010 Ecclesiastical 8.625% prefs U/D 5,000   1.02  1.09  5,450  /

 

Category Sum            Notes
Securities

£93,270

Valuation of current holdings
Accrued

£2,416

Interest accrual on above 
Cash

£30,355

Including interest & coupons received. 
     
Total

£126,041

 

 

* The RB53 trades "dirty" and is now ex-coupon.