Income Report / Income Report: Amending asset allocation in the MM Income Portfolio (MXT, CBAPF) **Alert - MXT**

The market opened higher this morning following strong leads overnight, although with the Dow Jones up more than +400ps, a rally in excess of 46pts / +0.68% could have been expected. Around the grounds, strong performance coming from the resource sector, Costa Group (CGC) also enjoying the prospect of rain up by more than 5% through $3 while a number of companies are out this morning with earnings, namely:

Centuria Industrial REIT (CIP) +0.82%half yearly results reaffirming FY20 guidance of FFO/share of between 19.6cps and 19.9cps with a dividend of 18.7cps. NTA increased 3.7% to $2.83/share. Occupancy was flat at 95.8% while the WALE increased from 4.3 years to 7.1 years.

Centuria Metropolitan REIT (CMA) +0.68% half yearly results reaffirming FY20 guidance of FFO/share of 19.0cps with a dividend of 17.8cps. NTA increased 3.2% to $2.57/share. Occupancy up from 98.5% to 99.2% while the WALE increased from 3.9 years to 5.1 years.

Genworth (GMA) -5.88% full year results from GMA this morning, a recent sale from the MM Income Portfolio. Results were in line with company forecasts although stock has run hard into the numbers. Always interestingly to see GMA’s take on Australian housing.

House values have bounced strongly in most regions but particularly NSW, VIC and QLD while WA house prices are showing signs of stabilisation.

Total deliquesces have increased marginally with QLD showing the largest uptick, however the rate overall remains low.  

Whether or not one has a job really dictates whether or not one can pay a mortgage, and unemployment is very low nationally, but especially in NSW. Mining states (QLD & WA) have experienced most improvement in terms of employment which supports the stabilisation in property prices.

Overall, the ASX 200 is currently trading up +48 points / 0.66% at 6994.

ASX 200 Chart

The Income Portfolio saw negative performance during the week, falling -0.22% however this was against the backdrop of the ASX200 Accumulation Index which fell -0.6% as coronavirus fears gripped the market. There was more general weakness in the portfolio’s commodity exposure however it was Ive Group (IGL) which was hit hardest, falling -5.07% on no news.  Both MXT and NBI paid distributions in the week. Despite the pullback, the portfolio continues to track above the benchmarks, currently up +4.08% financial year to date, versus its absolute return benchmark of +2.90%. Since inception the portfolio is up +21.42% vs the benchmark of +13.82%.

Amending asset allocation in the MM Income Portfolio

Last week we wrote if the market follows our anticipated path into an early February trading low, we are likely to tweak this skew back in favour of equities. The natural position of the portfolio is a 60/40 split in favour of equities.

As we discussed in the morning note today, the market has pulled back into an early February low which we view as a buying opportunity.

Currently the income portfolio is weighted 48% towards equities & 52% towards more defensive Hybrids, Listed Income Securities & Cash, with cash being only 2%. To reduce weightings towards more defensive style fixed income assets (hybrids are not actual fixed income), we see two main options.

  1. Reduce MCP Master Credit Income Trust (MXT)
  2. Sell a hybrid security with our preference being CBAPF.

1 Metrics Credit (MXT) $2.02

The MM Income Portfolio currently has a 7.5% weighting in this listed investment trust (LIT) after buying in the IPO 2 years ago at $2. When they listed, they were the first sort of listed vehicle tapping an alternative style income market, in this case being domestic corporate loans, so sitting alongside, or in place of banks, lending to Australian corporates. Over that time, MXT has been a consistent performer, have stayed true to label and led the charge into an asset class that retail investors generally couldn’t access.

They target the cash rate plus 3.25% and have over delivered versus that benchmark since that time. We like that they’re a specialist manager that was first mover in the space, they are now a lot more copy-cat funds although the newer funds typically have wider mandates and are less focussed in their approach. MXT have a realistic performance target, a good fee structure of 0.66% and no performance fee. In short, we have no issue with the security however we view a 7.5% portfolio weight as high given their underlying exposure is corporate loans. This makes pricing them more difficult so NTA may not be reflective of actual realizable value of the underlying assets.

MXT are currently raising additional funds through an entitlement offer plus an attached shortfall offer. The raise is a big one ~$648m and it opens on the 13th February, priced at $2, which is a 2c discount to the current market price. Our slight concern here is that a number of these trusts are raising big amounts of money at a time when there is building political pressure to remove ‘stamping fee’s’ for financial advisers promoting these products (marketing / stamping fees are typically between 0.75% & 1%).

Ultimately, we think stamping fee’s will be banned and that will (rightly or wrongly) reduce the ability of these funds to raise capital. The cynic in me would suggest they’re raising money now because of this likely change. Raising money because of a potential external influence is not ideal, it puts pressure on them to invest the capital perhaps at an inopportune time. That may or may not be the case, and the loan market is a big one, however for now, reducing our weighting seems a prudent course.

MM is reducing our weighting in MXT from 7.5% to 5%

Metrics Credit Income Trust (MXT)

2 Commonwealth Bank Hybrid (CBAPF) $104.11

This is a tier 1 bank hybrid that was issued in March of 2017. It has 2.2 years to first call date and is currently trading on a margin over the 90-day bank bill rate of ~2.40%, implying a total yield per annum of ~3.30%. Over the past 12 months the return on the security has been a solid 6.54% and over the past 2 years it delivered us 5.62% per annum, exactly what it’s meant to, although we don’t see these performance numbers being repeated.

While this is a solid security, we see more opportunity into recent market weakness to marginally reduce our weighting towards hybrids and increase our weightings towards equities.

For instance, Westpac stock is expected to yield 9.2% inclusive of franking v the CBA hybrid at around ~3.30%, or in other words, this is close to a 6% spread in yield terms.  

MM plan to sell CBAPF to allocate funds into equities **watch for alerts**

Commonwealth Bank Hybrid (CBAPF) Chart

Conclusion

We are reducing MXT by 2.5% taking our weighting to 5%

We will likely cut the CBAPF to increase our allocation to equities

Have a great day!

James, Harry & the Market Matters Team

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