Income Report / Income Report: Tweaking the MM Income Portfolio (MXT, BOQ, CBAPF, TAH, SGP, NBI)

By Market Matters 10 July 19

Income Report: Tweaking the MM Income Portfolio (MXT, BOQ, CBAPF, TAH, SGP, NBI)

Market Matters Income Report 10th July 2019

A very bullish session for the ASX today and there is clearly a decent index buyer out there that started in the futures market overnight and has continued into the cash market this morning. All sectors are in the green bar the material names which we alluded to in the AM  note today – it seems Iron Ore and related stocks are showing some signs of a short term top.

In the banks, NAB and CBA have been bought aggressively and are the two clear outperformers  while the IT stocks are keying off a strong move in the US tech sector overnight. As I type, its 11.30am and intra-day market tops can often come into play around this time frame, however it’s hard to go against this aggressive trend today.  

Sectors today

The market is trading on the session highs at 6718, only around 50pts below last week’s milestone.

Currently, the ASX 200 is trading up +52pts or +0.78% to 6718.

ASX 200 Chart

The Income Portfolio had a reasonable week, adding +0.3%. There was very little volatility in the underlying holdings, with Rio Tinto off less than 2% being the biggest mover in either direction. The portfolio has kicked off FY20 on the front foot with a +0.7% gain in the first 7 trading days as it continues to track over and above its benchmark of RBA + 4%. Since inception the portfolio is up 17% vs the benchmark of 11.03%.

For those interested in investing for income in a low rate environment, Market Markets does run an Separately Managed Account (SMA) which is open for investment. The portfolio is based on the MM Income Portfolio below. The SMA is now approaching its first anniversary and performance has remained sound printing an overall gain of 10.17% for the year to June 30. The Monthly Performance for June can be viewed here

Tweaking the MM Income Portfolio

Today we’re tweaking the Market Matters Income Portfolio, in a number of areas as outlined below.

1 Reducing Metrics Credit Partners (MXT) $2.07: This is a listed investment trust (LIT) which recently raised capital offering existing holders the ability to purchase 1 new unit for every 1.8 existing units held. The portfolio subscribed to the rights at $2 which increased the position weighting above our traditional limit of a maximum 10% weighting, currently residing at 11.67%. This was a tactical decision to take advantage of units being offered at a price below the current market price. We are now trimming back the holding at $2.07 taking a ~3.5% profit on the recently issued units. MM is reducing the holding in MXT to 7.5%.

MCP Master Income Trust (MXT) Chart

2 Selling Bank of QLD (BOQ) $9.50: In the MM Platinum Portfolio we recently trimmed our banking exposure into strength, and today we’re selling Bank of QLD from the Income Portfolio for the same reason. BOQ was added into panic lows below $9.00, we received the dividend and franking credits and are now taking a 11% profit on the position. BOQ is facing operational issues, higher regulatory costs, margin pressure, weaker revenue growth and the like, however there is the possibility that these issues will prompt consolidation amongst the regional banks. MM are selling BOQ in the income portfolio only

Bank of QLD (BOQ) Chart

3 Reducing CBAPF $104.55: The recent search for yield and a lack of new supply of hybrids has seen margins reduce sharply across the hybrid universe (prices have gone up) with the typical margin on a tier 1, major bank hybrid with ~5 years to first call now well below 3%. Those with a good memory will recall the backlash towards CBA’s ~$3bn issue of the CBAPD back in October 2014 at a margin of 2.8% over bank bills – the margin was simply too tight for the risks / exposure offered in a hybrid (apparently)! We’re now seeing that sort of margin becoming the norm across the asset class.  That security is now trading on a margin of 2.55% over bank bills with ~3.4 years to run while the CBAPG with 5.8 years to run is trading at a margin of 2.70% over bills. MM currently the has a 7.5% weighting toward CBAPF, reducing this to a 5% weighting.

CBAPF Chart

4 Buying Tabcorp (TAH) $4.68: The MM Income Portfolio is following the MM Platinum Portfolio into Tabcorp (TAH) today gaining exposure to a very defensive earnings stream along with a solid 5.34% fully franked yield. TAH has been a clear underperformer against other ASX listed defensive yield plays, presumably because of competitive pressures facing its wagering business. However its TAH’s lotteries business that provides the bedrock of its earnings growing at an average of 3% per annum for the last 20 years. MM is adding TAH to the Income Portfolio with a 5% weighting

Tabcorp (TAH) Chart

5 Buying Stockland (SGP) $4.47: The search for yield has clearly intensified while there are growing signs that the low has been seen in the residential property market, Stockland (SGP) will benefit from both trends. SGP recently sold a 50% stake in a large residential land development in South East QLD for a 30% premium to book value – a strong result in what is said to be a very weak market. Currently SGP trades on a price to book value of 0.9x and an estimated P/FFO (property stocks version of a P/E) of 12x, a 34% discount to the sector and a 15% discount to its 5 year average. While there are risks around residential property, those stocks with residential / retail exposure have underperformed dramatically and from a risk / reward perspective, now look attractive. Stockland is expected to yield 6.4% unfranked. MM is adding SGP to the Income Portfolio with a 3% weighting.

Stockland (SGP) Chart

6 Adding to NB Global Income Trust (NBI): $2.10: Global Bond Manager NBI has recently completed an entitlement issue offering existing holders the ability to purchase 1 new unit for every 1 existing units held, or in other words, they have effectively doubled their size by raising an additional $476m. The offer was priced at $2 per share which was a slight discount to NTA at the time the offer was announced. NBI now trades at $2.10. The portfolio took up the NBI rights and as a consequence, the position doubled to a 10% weighting. MM’s target weighting in NBI is 7.5% hence we are trimming 2.5% around $2.10.   

NB Global Income Trust (NBI) Chart

Conclusion(s)

MM is selling BOQ, reducing CBAPF, reducing MXT, buying SGP, & TAH while adding to NBI overall.

Have a great day!

James, Harry  & the Market Matters Team

Disclosure

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 Friday, or after the session when positions are traded.

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