FIIG Conservative retail model portfolio

Investment objective

To provide retail investors with a diversified portfolio of bonds that are conservative, producing reliable cash flows with superior total returns to term deposits.

Target return

RBA cash rate plus 1.0%.

Strategy and selection process

Key requirements of each investment choice are:

a) preservation of capital, and

b) reliability of cash flow and therefore total return.

Subsequently, the portfolio is weighted with the largest percentage of exposure to senior debt, which ranks highest in the capital structure. This key ratio is set at a minimum of 60%.

The portfolio is weighted with a lower percentage of exposure to subordinated debt, which ranks below senior debt, but above Tier 1 hybrid debt (debt that can have the maturity date extended in perpetuity) in the capital structure. This key ratio is set at a maximum of 40%.

The portfolio has no exposure weighting allocation to Tier 1 hybrid debt.

Bond exposure is predominately to Australian companies that are considered to be well removed from the risks in Europe and the United States. While Australian financial institutions do have some indirect exposure to offshore developments, Australian infrastructure companies are viewed to be very well insulated and relatively stable, low risk investments.

The portfolio has a mix of fixed, floating and inflation linked payment types, paying particular regard to the following:

a) fixed rate bonds are often best used in a counter-cyclical fashion to reduce portfolio volatility if an investor has a large allocation to equities

b) floating rate notes (FRNs) will best suit investors worried about rising interest rates because the notes pay a margin over bank bills that are reset periodically and are positively correlated to the official cash rate and inflation

c) inflation linked bonds (ILBs) will best suit investors worried about inflation because the bonds pay a margin over CPI that is periodically reset

To improve overall portfolio diversity, the process looks to select companies that the average retail investor is unlikely to have a large exposure to already as part of an existing equity or superannuation portfolio.

The pool of bond investments from which the portfolio will choose an allocation to must exceed the sub-investment grade rating by at least two notches and will subsequently be rated no lower than BBB.

All investments, individually and collectively, must pass:

a) a rigorous credit and relative value assessment by FIIG Securities’ in-house Research and Risk Teams. Detailed research reports are available on each company that is included in the final portfolio, and

b) an assessment by the Portfolio Risk Team to ensure appropriate diversification by country, industry, maturity, payment type (i.e. fixed, floating and inflation linked) and capital structure (i.e. senior debt, subordinated debt) given the investment objective.

Portfolio parameters

Investment Universe/Authorised investments

Because the portfolio is constructed for retail investors, only those bonds that are available to retail investors and available in retail parcel sizes of $10,000 face value are included.

Minimum number of bonds

A minimum of five bonds each with face value of $10,000 or total spend of $50,000. Larger portfolios can be populated with additional bonds and/or bonds that have $50,000 or $100,000 minimum face values.

Minimum security rating

Individual bonds must be rated BBB or above.

Minimum portfolio rating

Weighted average rating of the portfolio must be BBB+ or above.

Maximum individual issuer exposure

30%.

Maximum individual security weighting

30%.

Capital structure parameters

• >= 60% exposure to senior debt
• 0% exposure to Tier 1 hybrid debt permitted.

Benchmark

RBA cash rate plus 1.0%.

Maximum maturity

Maximum weighted average maturity of 8 years (the call date of the subordinated debt is used to calculate the maximum weighted average maturity date).

Liquidity

All bonds must be on the FIIG Securities DirectBonds list.

This list is deemed to provide appropriate liquidity as a function of FIIG’s strong demand for bonds, in both retail and wholesale parcel sizes, all of which provides a natural exit mechanism for those wanting to sell.

Research overlay

All bonds within the authorised investment universe must pass through FIIG Securities’ research process which will include the publication of a full research report.

Value overlay

Having passed the research assessment, the individual securities also must be assessed as appropriate return for the risk i.e. demonstrating relative value.

The portfolio of collective securities will be assessed in a similar manner, having regard to diversity, industry correlation risk, maturity range and average credit rating. Diversity improvement may be chosen at the expense of lower returns for the purposes of reducing risk.

Risk considerations

Prior to making any investment decision, it is important to understand the risks that can affect your investment. All forms of investment involve a degree of risk. While bonds are typically much lower risk than equities, investors should be aware of the risks being taken (listed below) and the return the portfolio is expected to achieve. Ultimately the investor must be comfortable that they are being rewarded appropriately for the risk undertaken:

• credit - the risk you won’t receive interest and principal when it’s due. This is an assessment of the creditworthiness of the issuer
• liquidity - the ability to sell your investment at short notice without loss of value
• inflation - the prices of goods and services accelerates and devalues the purchasing power of your capital
• interest rates - impacts the value of fixed rate bond prices which fall (rise) when interest rates rise (fall)
• credit spread – impacts the value of fixed, floating and CPI linked bonds
• call risk - that a subordinated bond or Tier 1 hybrid debt security is not called (repaid) at the first opportunity
• market risk - unexpected conditions (i.e. economic, political) can have a negative impact on the returns of all investments within a particular market. General movements in local and international stock and credit markets, prevailing and anticipated economic conditions, investor sentiment, interest rates and exchange rates could all affect the market value of investments
• diversification - failure to adequately diversify between companies, industries and asset sectors can significantly increase risk. Correlation increases risk while diversification reduces risk.

FIIG Conservative Retail Model Portfolio

For more information please contact your local dealer.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.