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Analysis & Comment:  

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The Fixed Income Investor Model Portfolio* is now slightly short of its fourth birthday, and what a four years those have been. We kicked off about eight months in front of the credit crunch and have experienced the greatest volatility that I have ever seen in my 25 years in and around the fixed income markets. Such volatility is not a normal characteristics of the bond markets and it has brought with it both opportunity and risk. By-and-large, the best tactic has been to weather the storms, picking up bargains as they appear.

What is encouraging is that although the volatility of the individual bonds has been high, portfolio volatility has been lower - generally around 1% a month. That shows that my basic approach, namely a "ladder" structure of short-to-long bonds plus a diversification overlay is working. I certainly intend to keep plugging away with this approach.

This month, we have added a holding in the new Intermediate Capital Group bond. The 7% coupon and medium-dated maturity looks to be a good fit. This purchase drops our univested cash down to six thousand pounds and I will continue to look for a home for the money. The problem with cash positions in a low interest rate environment is that they are a drag on performance. The flip side is the marvelous optionalty such cash creates. Itís a hard call to make.

Overall, we finish the month just £200 up from our last valuation at £125,627 on a total return basis. That put the portfolio up £8,222 from this time last year, a percentage increase of 7%. Itís a fairly satisfactory result, beating cash and equities without too many heart-stopping moments en-route, although it is notable that the gains were all made in the first half of the year. The chart shows the portfolioís performance overlaid against the IBOXX5-10yr Non-Gilt Total Return index.

To compare, the FTSE is has returned about -3.8% for 2011 on a total return basis (although we still have two trading days to go). 

Of course, we could have done better. Had I shifted the whole portfolio into to gilts at the beginning of the year, the gains would be in double digits. Ten-year gilt benchmarks are up 12 points in price terms on the year; the five-year is up seven points. However, I will not spend too much time looking over my shoulder. The Model Portfolio is doing what it should, namely providing reasonable returns at reasonable levels of risk.

I look forward to the challenges of next year.

 

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  94.8  9,480  /
24 March 2011 Provident Financial 7.5% 2016 5 6,000  100.15  104.25  6,255  116
21 June 2011 Places For People 5% 2016  5 10,000  100  104

10,400

 9

7 Mar 2007

Segro 5.5% 20 June 2018

7

5,000

  97.35

 104  5,200  207
20 Dec 2011 Int Capital Group 7% Dec 2018 7 6,000  100  100.5  6,030  0
16 Aug 2010 Enterprise Inns 6.5% Dec 2018 7 6,000

  83.5

 65  3,900

29

04 Feb 2010 GKN 6.75% 2019 8 10,000  97.56  106.6  10,660  121
28 July 2010 RBS Royal Bond  5.1% 2020 9 5,000  96.03  86.9  4,345  234

13 Oct 2011

National Grid PLC 1.25 2021 10 10,000  100  102.5  10,250  31
06 May/19 Nov 2010 Goldman Sachs 5.5% Oct 2021 10 10,000  87.9   82  8,200  124
04 Nov 2010 RBS Inflation-Linked (3.9% min) 2022  11 5,000 100  82  4,100  /
20 Sept 2010 Yorkshire Building Society 13.5% 2025 CoCo 14 5,000  116  114          5,700  173
08 Mar 2011 Italy 6% 2028 17 5,000  100.44  89  4,450  124
27 Sept 2011 British Telecom 5.75% July 2028 17 10,000 103.5  104.5  10,450  41
16 Sept/01 Dec 2010 Lloyds 6.5% Sept 2040 29 10,000  96.35  91.5  9,150  191
08 March Nationwide 6.875% U/D 5,000    88  83  4,150  0
12 Dec 2010 Ecclesiastical 8.625% prefs U/D 5,000   1.02  105    /

 

Category Sum            Notes
Securities

£117,970

Valuation of current holdings
Accrued

£1,400

Interest accrual on above 
Cash

£6,257

Including interest & coupons received. 
     
Total

£125,627

 

* The Model Portfolio was started in Feb 2007 with £100,000