ASX Income Portfolio: About

19 Sep 2019
This portfolio was developed for investors who want to hold a portfolio of high-yielding hybrid securities. From this portfolio of securities, we expect to receive a steady dividend stream that is an attractive percentage of the original investment amount.

About the portfolio

The portfolio invests in listed ASX hybrid securities. The investment premise is to identify the highest yielding hybrids in the investment universe and hold them long term to collect the regular income stream that comes with these securities. The benefit of this portfolio is that the capital value of the portfolio is less volatile than a typical portfolio of common stocks. The process for selecting hybrids for inclusion in the portfolio is to rank the universe of hybrid securities by their yield to maturity and then eliminate the ones that have low liquidity or are issued by a company that we consider has a moderate or higher risk of not being able to make the dividend payments. We then pick the seven highest yielding securities subject to holding no more than one security from a single issuer.

Income Portfolio

Although hybrid securities can be considered complex financial products, an understanding of their characteristics can help investors accept and manage risks associated with them. The main feature of hybrid securities is that they pay a regular dividend at a predetermined rate (usually an amount above the Australian Bank Bill Swap Rate) that makes the dividend income more predictable than for an ordinary share. Hybrid securities also have a par value which is the amount that in investor would receive back if the issuing company decided to redeem them. This redemption date is specified in the issuing prospectus and in some cases, it can be indefinite (for a perpetual hybrid).

Our investment team selects the top seven hybrid securities based on their yield to maturity and includes them in the Income portfolio. Some additional criteria (such as liquidity and an aversion to holding more than one hybrid per issuer) can also come into the ranking process.


How To Follow This Portfolio

Our portfolios are designed to be as easy as possible for investors to follow. To follow the ASX Income portfolio, investors need to buy the securities in the above table in equal weights. Weights can drift over time as prices move, but we only recommend re-balancing security weights if they stray too far from the target weight (14.3% per security). The volumes shown in this table are based on a $5,000 investment per hybrid which produces a $35,000 portfolio.

Now and then, the list of stocks will be updated in what we call a ‘re-balance’. This means investors will need to look at the new list and sell any stocks that are no longer on the list. After these stocks are sold, the new stocks from the current table can be bought.


Investment Characteristics

The ASX Income portfolio has been developed by coming up with a rigorous investment process for selecting eligible securities. Only securities that pass all of our criteria are included in the portfolio. Based on the characteristics of the securities we hold, we are able to produce some ‘expected’ performance data based on the current yield of these securities. The table below lists some of the characteristics of this portfolio relative to the ASX 200.


Construction Seven of the highest yielding hybrid securities listed on the ASX Free-float-adjusted market cap weighted, comprising 200 of the largest ASX stocks
Management Changes made infrequently, on average 2-3 trades per year Rebalanced four times per year according to market cap and liquidity
Annual Average Return* 6% per annum, before fees (excluding franking) 8.4% per annum, before fees

*As at 31 December 2018, based on average yield of current portfolio


Minimum Investment Amount and Period

There is no specific minimum investment amount although as the portfolio holds seven stocks the minimum brokerage charged by your broker can put a practical limit on the minimum investment size. For example, if your broker charges a minimum of $10 per trade, this would represent a 0.5% charge on a trade size of $2,000. Due to the low activity of this portfolio, such a brokerage charge would be acceptable but we wouldn’t recommend a lower trade size than this. With seven hybrids in the portfolio, this would be a minimum initial investment of $14,000.

Our analysts recommend a time horizon of at least three years for this portfolio due to the long-term nature of the securities held. Many of the hybrids held have maturity dates five years or more into the future so it is best to have a similar timeframe when investing in them. The lower liquidity of these securities also makes it unattractive to trade in and out of them frequently.


Fees and Charges

Our advice product attracts a fixed annual subscription fee that does not depend on the amount invested. Other than this, the only fees and charges relate to those charged by your broker for trading. Under this model, the more funds you invest in our portfolios, the lower the annual cost on a percentage basis. This portfolio is also offered in a Separately Managed Account version for which you pay a small management fee for us to follow the portfolio on your behalf.



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