Many conservative fixed interest investors have faced challenges in recent times following the RBA’s reduction of the cash rate in mid-2019. The two most common issues experienced by those managing low risk portfolios of term deposits and other bank securities have been a fall in the absolute yields on portfolios and re-investment risk as investments mature and the monies cannot be re-invested at the same rates as the original investment.
The two methods to address these risks were to have a proportion of the portfolio in fixed rate investments and to have invested in longer duration assets. Investors who were hardest hit by the fall in the cash rate were generally those who had adopted a strategy of simply rolling 3-month term deposits.
Amicus runs a model portfolio based on a theoretical client following its recommendations each month and investing accordingly to build up a portfolio of “Amicus Recommendations” that we have been publishing to our clients since 2013. The graph below shows the performance of that portfolio over rolling 12-month periods. The portfolio has consistently out-performed the common benchmark indices and a strategy of simply rolling 3-month term deposits from the best rates available in the market.
Performance against short-dated term deposits has been particularly strong in recent months since the RBA began to reduce the cash rate, principally because the “Amicus Recommendations Portfolio” contains a roughly even spread of investments that mature each year over a five year period.
One of the issues with investing for a longer term is increased credit risk because obviously over a longer period any investment has a greater risk of default than over a shorter period. To address this risk, Amicus has only ever recommended investments that are explicitly rated by the major ratings agencies and within this group it has favoured investments with more highly rated entities, particularly for any maturities greater than 3 years. The current “Amicus Recommendations Portfolio” by composition is shown below. There are no investments rated BBB or below with maturities greater than 18 months as we have generally been more conservative in our recommendations over the last year.
The portfolio has a far higher degree of liquidity than most others with just under 20% in cash or in securities maturing before the end of March 2020. In addition, the portfolio has a high proportion of FRN’s with 40% of the total portfolio being comprised of FRN’s maturing in the next two years. All these FRN’s are priced above par because their trading margins are now less than their coupon margins meaning if additional liquidity is required they can be sold and cash received within 2 days and a “profit” taken on the sale. However, our general preference is for investments to be held to maturity and it is through this strategy the recommendations portfolio contains so many short-dated FRN’s that are now a source of contingent liquidity.
The bottom line is that consistent out-performance requires long-term strategic planning to construct a robust investment portfolio that is insulated from the most likely and common risks. Amicus works with its clients to achieve this result as an overriding objective and we welcome any enquires from conservative investors who would like to discuss how Amicus could potentially help them make higher returns with higher liquidity and less risk.
