Pref shares and bonds that are still paying

[MickR]

Hi,

I'm just about to move around £300k from a company DC pension scheme into my II SIPP. I used to hold a number of preference shares, PIB's and ECN's in the past but have slowly moved back into shares and funds over the last few years and now only hold £20k or so of BoI 13.385 subs. I would like to invest around 50% of my pot in similar type investments, but want to spread over 4 or 5 different options to spread the risk etc.

Any advice on similar investments, with similar returns that have a good chance of continuous payment. I'm not after making a quick buck, just long term investment that will pay a reasonable return

Thanks

[Alaric]

I used to hold a number of preference shares, PIB's and ECN's in the past but have slowly moved back into shares and funds over the last few years and now only hold £20k or so of BoI 13.385 subs.

I don't think there have been many new issues or redemptions, so your old knowledge may still be applicable. What may be new is the development of the retail bond market. These are (mostly) dated corporate bonds, so you would have to roll them over periodically.

Hargreaves, presumably amongst others, have a list of what's on offer.

https://www.hl.co.uk/shares/corporate-b ... /gbp-bonds

The redemption yields on the better quality bonds are not over exciting, around 4%. But that's higher than getting 0.5% to 1.5% from the UK Government. You could let someone else or a computer do the selection work and go for a Bond OEIC or ETF.

[johnhemming]

I am studying long term investment for a reasonable return at the moment and am tending to think towards equity rather than fixed interest.

[88V8]

Following Aviva's attempt last year to cash in their Prefs at par, there was a good deal of analysis and discussion on Mark's late lamented site to determine which of the 'usual suspects' might be susceptible to such action, and which in the light of the contract terms appeared safe.
Those in the latter category were NWBD and BWRA.
Raven Russia RAVP RAVC also seems safe in that regard, but I sold mine as I am uncomfortable about the company's health.
In addition, ELLA are deemed safe because Ecclesiastical have said that they would not attempt to emulate Aviva.

If you think that Aviva themselves, having had their knuckles rapped, are also 'safe' then their AV.A and AV.B would be investable.

I also hold BP.B as I do not think that BP would want the hassle of cancelling them.

In addition I hold Lloyds' LLPC, LLPD, LLPE, but having regard to their antics over their ECNs I am not adding.

I also have a good deal in SAN and SAN.B.

And of course BOI but prices are high right now.
Indeed, all FI seems to have been chased up of late. If you are looking to invest £300k, now is perhaps not the ideal time. I have more than that sitting in cash as I cannot decide what to do with it.

You might also consider Co-op's 42TE, a welcome divergence from the usual Financials.
SKIP has some followers. And NBSR. But how will Building Societies fare in the next crash.

There are other options extant, some of which I hold but nothing I would particularly recommend.

V8

[MickR]

Following Aviva's attempt last year to cash in their Prefs at par, there was a good deal of analysis and discussion on Mark's late lamented site to determine which of the 'usual suspects' might be susceptible to such action, and which in the light of the contract terms appeared safe.
Those in the latter category were NWBD and BWRA.
Raven Russia RAVP RAVC also seems safe in that regard, but I sold mine as I am uncomfortable about the company's health.
In addition, ELLA are deemed safe because Ecclesiastical have said that they would not attempt to emulate Aviva.

If you think that Aviva themselves, having had their knuckles rapped, are also 'safe' then their AV.A and AV.B would be investable.

I also hold BP.B as I do not think that BP would want the hassle of cancelling them.

In addition I hold Lloyds' LLPC, LLPD, LLPE, but having regard to their antics over their ECNs I am not adding.

I also have a good deal in SAN and SAN.B.

And of course BOI but prices are high right now.
Indeed, all FI seems to have been chased up of late. If you are looking to invest £300k, now is perhaps not the ideal time. I have more than that sitting in cash as I cannot decide what to do with it.

You might also consider Co-op's 42TE, a welcome divergence from the usual Financials.
SKIP has some followers. And NBSR. But how will Building Societies fare in the next crash.

There are other options extant, some of which I hold but nothing I would particularly recommend.

V8

Thanks for the info. Mark's website was fantastic. Real pity it seems to have been run down, but we can't complain as he:'s done so much good for the community

I'll take a look at all the suggestions, and probably start my own spreadsheet . I think if I can lock in 5% on £100k or so, I can afford to play with some riskier investments

[Gan020]

I went through a similar exercise to you about a year ago when I was looking to create a bond safety net to provide a stable income base. I continue to watch it every day.

Regrettably it is my view that all fixed income regardless of whether retail bonds, pref-shares or bond funds is expensive right now and that investors are ignoring the risks. I set myself a target of 5% but have constanty been disappointed by the risk required to get this return. Certainly there isn't a broad range of products where you can spread your risk.

There have been 4 recent examples of overpricing in the last 2 months:
1. Rea prefs collapsed 30% overnight as underlying company profitability disappeared
2. Burford bonds collapsed as much as 40% last week although they have recovered more than half of this
3. IPF had to roll their bonds at a much higher interest rate and are trading below par
4. UEX couldn't get their retail bond issue away.

Bond funds are not much better. MGCI a good example which was launced last year. Targets LIBOR+4% so say 4.5% depending on which LIBOR it is which I haven't looked up. Something I would be very happy to buy at par, mainly because it would track interest rates (albeit a big laggy as they rise perhaps) and I could invest and forget about it for 40 years. It's not par though, it's 108.5 to buy and currently it's NAV is 101.33 as at 30.06.19 It's gone XD since then as well so presumably the NAV is now below par. My research shows it's unlikely to make 4.5% in it's second year of trading either by quite a bit. At some point I think some of the premium to NAV will get eroded, resulting in a capital loss to me whilst not even making 4.5%

In the end I had to decide whether persuit of the 5% was worth the risk or not. I have over time dropped my target for new investments to 4.5% which was uncomfortable but the only way I could find to get the risk where I wanted it. Even at 4.5% I am struggling and at the moment I'm inclined to sit on cash until either Brexit is resolved or it produces such stress in the markets that bonds re-price.

It is my perception that demand from the retail investor for fixed income currently outstrips supply by a large number, resulting in mis-pricing of risk

[SKYSHIP]

Mick - for a start, if not already read, then do read this recent thread:

viewtopic.php?f=52&t=18863

I would also highly recommend having a few Regional Properties (RGL) which at 105p offer a 7.86% yield at an 8% NAV discount. Loads of info on the very active RGL thread - see under REITs.

viewtopic.php?f=87&t=8008

[Alaric]

Even at 4.5% I am struggling and at the moment I'm inclined to sit on cash until either Brexit is resolved or it produces such stress in the markets that bonds re-price.

It is my perception that demand from the retail investor for fixed income currently outstrips supply by a large number, resulting in mis-pricing of risk

Had you noticed that the dividend yield on the FTSE 100 is now 4.5% or above? Risks to capital not present with bonds of course, but also the potential for price growth. I'd suspect there's demand for income from equity investors as well. Shares where the dividend increases have been both high, consistent and seemingly earned from profits can now have dividend yields which are below the 4.5% weighted average.

Again in comparison to equities, what should the yield relationship between a Company's shares and bonds look like? A few months back, I noted that Vodafone bonds had redemption yields of 4% to 4.5% and stood above par, whilst the dividend yield was around 8% until they cut the dividend.

[UncleEbenezer]

It is my perception that demand from the retail investor for fixed income currently outstrips supply by a large number, resulting in mis-pricing of risk

Is there an asset class to which that doesn't apply?

First it was the house price bubble fuelled by magic money. Then the big bust, and money-printing to prevent house prices crashing. So much money sloshing around looking for a home every asset class that might previously have offered value has been inflated away. Annuities became poorer value even than houses. Equity Income/HYP became capital erosion. Growth became (higher) Risk. Even assets traditionally seen as adventurous like private equity and venture capital now look expensive after a fantastic run.

Had you noticed that the dividend yield on the FTSE 100 is now 4.5% or above?

Had you also noticed how many dividends are now a long way above that, and how many have cut? FTSE companies face brexit at home and Trump's only-man-in-step trade wars around the world: how many more cuts are we due in the near future?

[Walkeia]

One of my biggest personal holdings is NWIDE core capital deferred shares and I would throw this into the mix - it fits what you're looking for.

Equity equivalent in Nationwide; they cannot issue equity because they're a mutual so they came up with this perp bond / pref share style structure. They get into trouble = I lose my capital. I'm happy with NWIDE risk, their capital metrics and their management incentive structures (run by accountants) - I've been in this for a long time and intend to continue topping up. I do find trading it a pain as minimum 250 units to trade so ~£40k cash.

All the best,

[88V8]

The 'yield' on these CCDs is around 6.25% YTP.
Not sure the modest premium over a standard Pref really compensates for their lowly place in the hierarchy.
Can't help feeling that when the next crash comes, they'll suspend paying.

And then there's the tax. Don't recall, as they taxed as income or dividend?

V8

[hiriskpaul]

I don't see much value anywhere, but probably the best I hold based on risk/reward is Co-op Group 11% 2026 (the Final Payment Notes, 42TE). You can buy for around 126.5, for a yield to maturity slightly under 5.9%. Contrast that with Tesco 5.5% 2033, which I also hold, on a YTM of only 2.6%. Despite both being retailers there are good reasons for the disparity. The Tesco bond is senior unsecured, the Co-op bond subordinated and pretty much bottom of the hierarchy. Tesco is also in a much better position to raise money should it need to by issuing more ordinary shares. Even so, 42TE is the one holding I have right now that would be top of the list for a top-up, if I was not already overweight. I hold higher yielders, but a lot of these are getting into overpriced territory considering the risks.

p.s. BBYB is still not bad on a YTM of 4.4% (to buy), but it matures next July, so probably not what you are looking for. Again, I would add but for my already overweight position.

p.p.s. Some of the PIBS would look ok, but it is hard to predict the outcome from Brexit. If you are optimistic and think the risk to the housing market is overblown, buy now. If not, they may get cheaper over the next few months. Undated PIBS I hold are SKIP, NBSR, NOTP and LBS. Well worth watching IMHO over the coming weeks.

[Gan020]

The issue with all the pref shares is where interest rates are going. If you believe the 30 year gilt at 0.9% then they all look fair value. If however, interest rates rise to say 3% at some future point the capital value of the prefs is going to be strongly eroded.

[OwenSwansea]

Gan020,
Hiriskpaul has pointed out to us on many occasions that yields on UK Gilts and UK Prefs. are not related, and he seems to know what he is talking about.

Owen.

[Gan020]

Gan020,
Hiriskpaul has pointed out to us on many occasions that yields on UK Gilts and UK Prefs. are not related, and he seems to know what he is talking about.

Owen.

Hi Owen,
It is my view the price of prefs depends of a mixture of items:
1. The return on other assets which is dependent on many many things but is sensitive to the real cost of borrowing. If as an extreme example interest on 15 year UK gilts goes to 8%, then Aviva prefs are going to suffer capital erosion to say somewhere below par. Whether you use UK Gilts or the base rate or LIBOR the relationship stands. I will agree it is not an exact one and for long periods of time sentiment may override an efficient market
2. The underlying health of the share. If Aviva profits rise significantly the prefs should fall as they are a less risky asset to hold
3. Where we are in the economic cycle
4. Views on whether Aviva or LLoyd or anyone else will try and remove the irredeemable status
5. Supply and Demand

I'm sure there are plenty more.

For me I'm not in agreement with interest rates staying this low for the next 30 years but this is purely my opinion so I don't own any prefs preferring instead fixed term bonds with no more than 5 years to maturity. I see in the press yesterday there are views that the long term interest rates may go negative for a decade. To me it feels like when oil was $30 every commentator was calling it down to $10. The "market" has got itself into a position of "group think" and there will be some random event to change it. Posssibly change in US president, resolution of Brexit, or Italy or Argentina or Greece or China or Hong Kong or Korea. A coalition government in the UK. It could be anything but I don't think the politians/business leaders in the long term are going to continue to let so much money sit on the sidelines not been invested in the future of mankind.

[OwenSwansea]

Hi Gan020,
There is much merit in what you say, however in my opinion, the main feature of Prefs. Is that they are in theory perpetual. As you say, the yield on Gilts could go to 8%, but this would not be a perpetual yield. Investing in Bonds with a 4% yield which mature five years from now means that one is missing out on a 6% yield for the next five years, with a possibility of interest rates being even lower than they are now in five years time.
I would agree that the policy of low interest rates and QE is economic madness, but unfortunately every government in free world appears to be hooked on it for obvious political reasons. In addition, there is always an enormous wall of money sloshing around the world looking for a home, so the era of low interest rates may be with us for some time to come.
Of course there is always the possibility of some “black swan” event taking place that causes interest rates to increase, but for now, I think that I will stick with my Prefs.
IMO the price that society will pay if these low interest rates are to be the new norm is that very few workers will ever be able to afford to retire, but that is another story.

Regards,

Owen,

[GoSeigen]

Gan020,
Hiriskpaul has pointed out to us on many occasions that yields on UK Gilts and UK Prefs. are not related, and he seems to know what he is talking about.

Owen.

hiriskpaul has never said this. He has often said that interest rates and preference share yields are uncorrelated but that is an entirely different statement to the above. Gan020 was talking about 30-year gilt yields. They are far more correlated to pref yields than interest rates, for good reason: both carry very long-term obligations so they share exposure to long-term risks.

It's dangerous to take someone's statement as true just because they seem to know what they are talking about. On the other hand it's pretty safe to treat as suspect anything written by someone who usually seems not to know what they are talking about.

GS

[hiriskpaul]

Yes, long end of the yield curve definitely matters, base rates much less so.

[OwenSwansea]

I stand corrected.

Owen.

[OwenSwansea]

GoSeigen,
Thank you for those few kind words.

Owen.