Income Report / Income Report; Interest Rates the key as volatility spikes

By Market Matters 31 January 18

Income Report; Interest Rates the key as volatility spikes

Market Matters Income Update 31st January 2018

A short Income Report today as markets have taken a tumble overnight with the S&P 500 down by -1.09%  and the Dow Jones off -362pts creating a busy day on the desk - however our market, after an early sell off has just ticked into the green – strong buying of the dip ahead of Trumps State of the Union address – the Trump Trade strokes again it would seem! Worth noting also that end of month pension redemptions are happening in the US, and given the massive strength/outperformance of equities this month, it makes sense the sell equities to fund redemptions. That theme could again play out tonight + it probably explains why our mkt held up in the face of the US led weakness. .

S&P 500 Daily Chart

Taking a step back and having a look at last night’s trade tells an interesting  story - a sharp sell-off in bonds, pushing yields higher was the main catalyst – a theme we’ve spoken about at length and one that I covered in the AM report again this morning. The prevailing moves in the bond market in recent times highlights why we’ve been extremely focussed on holding income streams in this portfolio that are floating, and avoiding long duration / bond like equities that will simply struggle in a rising interest rate environment. The most pertinent chart this morning that we had in the AM report is worth re-printing here.

Comparison of US stocks and 2-year bond yields

The significance of the above trend simply can’t be ignored, particularly for income investing. Traditionally, bonds are held for yield and equities for growth. As global central banks have meddled in and around bond markets to artificially reduce interest rates (and stimulate spending / economic growth) we’ve seen equities become a destination for the ‘yield hunters’, however equities are not a natural fit given greater levels of volatility and risk.  The above chart highlights the move higher in bond yields and helps to explain why equities were sold off as a result – primarily because in a relative sense  fixed income becomes more attractive while higher interest rates should reduce equity valuations.

Today we’ll focus on portfolio positioning highlighting the level of flexibility we currently have. With our Platinum Portfolio we ensure flexibility by holding high levels of cash at times, and right now the ~20% level feels comfortable. In the Income Portfolio we ensure flexibility by holding Hybrids, and other less volatile securities alongside cash and equities and we have the option of amending these allocations depending on the relative attractiveness of the underlying asset class at the time, or in simple terms, we can have a stock skew when things are good and a cash and income security skew when they are not – rotating between when opportunities arise – this is an active approach to income investing  but more on this later.

In terms of the MM Income Portfolio over the week, similar to the prior week, not a lot of movement in the portfolio however the market overall was down. Since inception (5th July 2017), the portfolio is up by ~7.685 %.

In terms of asset allocation within this portfolio, the below provides an outline in terms of our target allocations versus where we currently sit. As it stands, we’ve got a skew towards equities which makes sense for now however there will be a point in the future where this changes, and the equity allocation will drop to the bottom of the 30-80% range.  At that point, Income securities will be weighted more highly as will cash.


It’s important to have structure within portfolios, however as regular readers would appreciate, the typical diversified, set and forget approach is not one we follow – and that theme flows through to the Income Portfolio.

Taking a look at the current stats below, in aggregate, there’s not a lot there that floats the boat, particularly versus ~7% yield expected for the MM Income Portfolio. In short, equity yields are fine but not compelling, buying bonds here ‘still’ makes no sense at all, Term Deposits make more sense than Govt Bonds but are still hardly compelling and Hybrids are OK at this point in time, however as we wrote about a few weeks ago – they are not as attractive as they once were – click here to read. 

So, nothing stands our in aggregate at a time when risks are increasing as shown by the selloff in equities overnight courtesy of higher interest rates. So, in this sort of environment, MM believes that having an active approach that looks for the best opportunities at any given time is simply the only way to generate strong returns, even for income focused investors.

As the income portfolio has progressed, these weekly notes have attempted to highlight opportunities but also detail our thinking towards this portfolio, and  educate readers on the different components of income investing, at a time when the external environment becomes more complex. In the coming weeks, we’ll focus more on specific investment opportunities for the portfolio.

Conclusion (s)

We’re comfortable with the current allocations in the MM Income Portfolio for now, however we will continue to tweak these into the future

The trend of higher interest rates is clear and this will likely increase market volatility and impact the portfolio allocations.


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Wednesday, or after the session when positions are traded.


All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 31/01/2018.  

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.

If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

To unsubscribe. Click Here