Investec prefs

[monabri]

I would very much appreciate an explanation of the yield figures being mentioned for INVR in this thread. Looking at the INVR dividends page on HL, the last 5 years 2023-2019 it has paid dividends of 33.03, 11.93, 11, 17.21 and 8.73. During that time it’s share price has been between 350 and 600p. 500-600p more recently (significant variations there). Dividing those two figures gives rather pathetic yields of 1.5-3% roughly. Which ties in with the yield given by HL of 1.97%, which is hugely different to what’s being quoted here.

What am I missing ?

Thanks in advance.

Pref

Is this not covered in previous posts in this thread?

viewtopic.php?p=597380#p597380

viewtopic.php?p=612024#p612024

I'd take note on the effect of BoE rates on the effective yield as discussed within.

It's straightforward but not as straightforward as with other prefs!

[PrefInvestor]

Don't forget that the dividend of Base + 1% is (i.e. 6%) based on the issue price of £10. INVR is currently trading at £5.50 so the yield is 10.9% .

Ok thats useful information, but I want to be able to reconcile this statement with the actual dividend payments. In the example he's expecting to receive 60p in dividends on a SP of 5.50p yielding 10.9%. I get that.

According to HL they paid an interim dividend for the half year ending 8/12/2022 of 11.45p, and a final dividend at the year end date of 8/6/23 of 21.59p. Thats only 33p in total for the year, so only half of the 60p Krick was expecting and a yield of ~6%.

The share price looks to have been ~570p on 8 Dec 2022 (so yield at that price was ~2% for the HY) and ~525p on 8th June 2023 (so yield at that price was ~4.1% for the HY) .

UK base rate was 1.75% in Sept 2022 and 4% in March 2023. So using the formula the payments should have been 1.75%+1% of £10 / 2 = 13.75p for the first HY and 4%+1% of £10 / 2 = 25p (dividing by two as its for a half year). Those figures are in the same ballpark as the actuals but lower in each case.

With the base rate changing every month as it has done do they average out over the 6 months or just take the figure on the XD date ?.

And thats if Ive understood this correctly !.

ATB

Pref

[monabri]

Don't forget that the dividend of Base + 1% is (i.e. 6%) based on the issue price of £10. INVR is currently trading at £5.50 so the yield is 10.9% .

Ok thats useful information, but I want to be able to reconcile this statement with the actual dividend payments. In the example he's expecting to receive 60p in dividends on a SP of 5.50p yielding 10.9%. I get that.

According to HL they paid an interim dividend for the half year ending 8/12/2022 of 11.45p, and a final dividend at the year end date of 8/6/23 of 21.59p. Thats only 33p in total for the year, so only half of the 60p Krick was expecting and a yield of ~6%.

The share price looks to have been ~570p on 8 Dec 2022 (so yield at that price was ~2% for the HY) and ~525p on 8th June 2023 (so yield at that price was ~4.1% for the HY) .

UK base rate was 1.75% in Sept 2022 and 4% in March 2023. So using the formula the payments should have been 1.75%+1% of £10 / 2 = 13.75p for the first HY and 4%+1% of £10 / 2 = 25p (dividing by two as its for a half year). Those figures are in the same ballpark as the actuals but lower in each case.

With the base rate changing every month as it has done do they average out over the 6 months or just take the figure on the XD date ?.

And thats if Ive understood this correctly !.

ATB

Pref

viewtopic.php?p=612024#p612024

"The interest rate payed is based on the issue price of £10. The current price is £5.77. So current interest effectively is (5.25 + 1) * (10/5.77) = 10.83%"

( at that time when the post was made).

[OldBoyReturns]

Don't forget that the dividend of Base + 1% is (i.e. 6%) based on the issue price of £10. INVR is currently trading at £5.50 so the yield is 10.9% .

Ok thats useful information, but I want to be able to reconcile this statement with the actual dividend payments. In the example he's expecting to receive 60p in dividends on a SP of 5.50p yielding 10.9%. I get that.

According to HL they paid an interim dividend for the half year ending 8/12/2022 of 11.45p, and a final dividend at the year end date of 8/6/23 of 21.59p. Thats only 33p in total for the year, so only half of the 60p Krick was expecting and a yield of ~6%.

The share price looks to have been ~570p on 8 Dec 2022 (so yield at that price was ~2% for the HY) and ~525p on 8th June 2023 (so yield at that price was ~4.1% for the HY) .

UK base rate was 1.75% in Sept 2022 and 4% in March 2023. So using the formula the payments should have been 1.75%+1% of £10 / 2 = 13.75p for the first HY and 4%+1% of £10 / 2 = 25p (dividing by two as its for a half year). Those figures are in the same ballpark as the actuals but lower in each case.

With the base rate changing every month as it has done do they average out over the 6 months or just take the figure on the XD date ?.

And thats if Ive understood this correctly !.

ATB

Pref

I am sure all this has been covered earlier in this thread.

The INVR terms are in the Articles of Association which you can find at: https://www.investec.com/content/dam/in ... 202020.pdf

You are looking at historic dividend payments when base rate was lower whereas the yield I have been calculating is based on the current base rate of 5.25%. The actual dividend calculation uses the actual rate each day rather than an average of the start point and end point rates.

A base rate of 5.25% held over a 6 month dividend period would equate to an annual dividend of 62.5p per preference share.

Also INVR trades 'dirty' so the dividend accrues in the market price. The next ex-div date will be around 7 Dec so there is over 20p of dividend in the current market price. I strip this out to calculate a clean yield.

INVR is currently about 585 to buy so about 565 after stripping out accrued divi. 62.5/565 = 11.06%

BTW - Yield and divi figures shown in HL for prefs and bonds can be unreliable especially where the coupon rate is a floater. CEBB is another example where the figures on HL are wrong. Hence I work them out for myself using the methodology stated in the terms.

Hope that helps.

[GoSeigen]

With the base rate changing every month as it has done do they average out over the 6 months or just take the figure on the XD date ?.

Maybe read Clause 150 in the issuing company Articles and then come back if there is anything unclear?


GS

[PrefInvestor]

OK thanks for all the help in response to my query, particularly thanks for the link to the prospectus. I think that I understand it now.

ATB

Pref

[bofh]

Thanks to OP and others for drawing my attention to this one - certainly under my radar. I recently started a position, making this the first preference share in my portfolio.

[PrefInvestor]

I have always liked preference shares for a number of reasons:-
a) Their stability / lack of volatility as they are frequently unmoved by events that are very damaging to equity markets.
b) That the dividend income that you get is high and fixed as soon as you buy, can never change and you know exactly when it will arrive.
c) That their bond like price behaviour means that as interest rates fall their share price should rise offering the potential for capital gains in the future.
d) The fact that dividends on preference shares are almost certain to be paid and are rarely missed unless the issuing company is in financial distress.

However with INVR it seems to me that almost none of those advantages apply ?.

INVR appears to offer:-
- A high yield now (when the base rate is high).
- A highly variable share price that its not obvious how to predict how it will move in response to rates (eg the share price today appears little different to it did back in 2016 when the base rate was 0.25%, whereas the share price tanked during the pandemic as did the dividend)
- A guaranteed reduction in the dividend if rates fall but no guarantee of future capital gains if that happens.

On that basis I’m not much interested in INVR. But maybe you guys will tell me I’m reading it wrong ?.

ATB

Pref

[BullDog]

I have always liked preference shares for a number of reasons:-
a) Their stability / lack of volatility as they are frequently unmoved by events that are very damaging to equity markets.
b) That the dividend income that you get is high and fixed as soon as you buy, can never change and you know exactly when it will arrive.
c) That their bond like price behaviour means that as interest rates fall their share price should rise offering the potential for capital gains in the future.
d) The fact that dividends on preference shares are almost certain to be paid and are rarely missed unless the issuing company is in financial distress.

However with INVR it seems to me that almost none of those advantages apply ?.

INVR appears to offer:-
- A high yield now (when the base rate is high).
- A highly variable share price that its not obvious how to predict how it will move in response to rates (eg the share price today appears little different to it did back in 2016 when the base rate was 0.25%, whereas the share price tanked during the pandemic as did the dividend)
- A guaranteed reduction in the dividend if rates fall but no guarantee of future capital gains if that happens.

On that basis I’m not much interested in INVR. But maybe you guys will tell me I’m reading it wrong ?.

ATB

Pref

That's pretty much why I decided not to bother with it.

[Yieldy]

I like them because I already own a fair amount of fixed dividend prefs, and I have noticed (over the years) that the fixed div prefs are (surprisingly) more correlated to shorter dated yields than longer dated. (Perhaps this is because the investor base is mainly retail, or a reflection that the duration of fixed prefs is relatively short (c. 15 years) vs low coupon/long dated gilts at c. 30 years). Anyway, if your exposure from the fixed div prefs is to the shorter end of the curve, then these INVR offer a reasonable hedge - they seem to soften the overall portfolio's P&L. I only have about 8% of my total pref exposure in these, but it's nice to know that if inflation returns and the BoE begins to tighten again, these will be beneficiaries (as the fixed prefs weaken).

[BondSquared]

I have always liked preference shares for a number of reasons:-
a) Their stability / lack of volatility as they are frequently unmoved by events that are very damaging to equity markets.
b) That the dividend income that you get is high and fixed as soon as you buy, can never change and you know exactly when it will arrive.
c) That their bond like price behaviour means that as interest rates fall their share price should rise offering the potential for capital gains in the future.
d) The fact that dividends on preference shares are almost certain to be paid and are rarely missed unless the issuing company is in financial distress.

However with INVR it seems to me that almost none of those advantages apply ?.

INVR appears to offer:-
- A high yield now (when the base rate is high).
- A highly variable share price that its not obvious how to predict how it will move in response to rates (eg the share price today appears little different to it did back in 2016 when the base rate was 0.25%, whereas the share price tanked during the pandemic as did the dividend)
- A guaranteed reduction in the dividend if rates fall but no guarantee of future capital gains if that happens.

On that basis I’m not much interested in INVR. But maybe you guys will tell me I’m reading it wrong ?.

ATB

Pref

That's pretty much why I decided not to bother with it.

I hold some INVR but don't get the hype.

Their return profile is fundamentally different from fixed-rate prefs. INVR is a FRN (floating rate note) in preference share format, tied to a highly illiquid index (BoE Base Rate; 99%+ of FRNs are linked to formerly Libor rates/now overnight rates such as sonia, estr, sofr) with the subordinate credit risk of a south african bank credit/preference share issuer. The RSA sovereign country risk alone is worth ~3% (5y CDS ~255bps, 10y ~355bps). Market implied BoE base rates are steeply inverted, implying sub-4% levels in 2 to 3y time onwards. Looking at the current yield of a floating rate instrument, i.e. the cashflow in the next [6] months, is like looking at the next 6 months cashflows of a zerobond (=zero) and then determining that the bond is worthless. If one thinks that market implied bank policy rates are nonsense and rates will stay higher much longer than the market thinks then fine, sell futures/gilts/any duration, but don't fool yourself into expressing a UK interest rate view via an illiquid south african floating bank preference share. Applying IRR logic based on current cashflows to floating rate instruments is nonsense - they are spread instruments, not fixed return investments.

There are nevertheless good reasons to hold INVR - I hold them as they shorten my weighted duration exposure from all those fixed rate prefs/sub debt/long-dated gilts&linkers I hold, provide a bit of diversification in emerging markets credit, are yieldy due to their credit spread and, above all, have been a fantastic convexity play; in simple terms, when picking them up at 333p (clean) one gets 3% fixed + 3 * UK Base Rate; at 500p it's still 2% fixed + 2 * UK Base Rate, at 1000p one gets the original 1% fixed plus 1 * UK Base Rate etc. That convexity goes both ways and is reducing as the INVR price rallies, and at some point at 600p+ I'll revisit with a view of selling.

I hope I didn't offend all those INVR fanboys out there ... I'm a holder, I just don't think it's mispriced. Nice small portfolio addition, nothing more, nothing less.

[OldBoyReturns]

I hold some INVR but don't get the hype.

Their return profile is fundamentally different from fixed-rate prefs. INVR is a FRN (floating rate note) in preference share format, tied to a highly illiquid index (BoE Base Rate; 99%+ of FRNs are linked to formerly Libor rates/now overnight rates such as sonia, estr, sofr) with the subordinate credit risk of a south african bank credit/preference share issuer. The RSA sovereign country risk alone is worth ~3% (5y CDS ~255bps, 10y ~355bps). Market implied BoE base rates are steeply inverted, implying sub-4% levels in 2 to 3y time onwards. Looking at the current yield of a floating rate instrument, i.e. the cashflow in the next [6] months, is like looking at the next 6 months cashflows of a zerobond (=zero) and then determining that the bond is worthless. If one thinks that market implied bank policy rates are nonsense and rates will stay higher much longer than the market thinks then fine, sell futures/gilts/any duration, but don't fool yourself into expressing a UK interest rate view via an illiquid south african floating bank preference share. Applying IRR logic based on current cashflows to floating rate instruments is nonsense - they are spread instruments, not fixed return investments.

There are nevertheless good reasons to hold INVR - I hold them as they shorten my weighted duration exposure from all those fixed rate prefs/sub debt/long-dated gilts&linkers I hold, provide a bit of diversification in emerging markets credit, are yieldy due to their credit spread and, above all, have been a fantastic convexity play; in simple terms, when picking them up at 333p (clean) one gets 3% fixed + 3 * UK Base Rate; at 500p it's still 2% fixed + 2 * UK Base Rate, at 1000p one gets the original 1% fixed plus 1 * UK Base Rate etc. That convexity goes both ways and is reducing as the INVR price rallies, and at some point at 600p+ I'll revisit with a view of selling.

I hope I didn't offend all those INVR fanboys out there ... I'm a holder, I just don't think it's mispriced. Nice small portfolio addition, nothing more, nothing less.

Apologies for shortness but stuck in immobilising sling for weeks following accident so am a one armed, moody bandit typing slowly and badly with one finger ...

1. Re. RSA sovereign credit premium comments - from memory Investec plc (INVR issuer) is the holdco for the non-RSA operations which includes UK wealth management (recent acquirer of Rathbones) etc with a primary listing in London. And the RSA ops are in a separate holdco (Investec Ltd) with a primary listing in RSA. There is SHA between the 2 listed holdco's which I confess to not having read. Investec senior has decent stable credit ratings and does not seem to be priced with a big risk premium relative to other financials.

2. I haven't seen INVR being conflated with a fixed coupon perp. Rather that at the current INVR price BoE base would have to fall a long way (well below 4%) before the yield fell to that of fixed coupon financial prefs. Latest spout from the chocolate teapot guv at the BoE was not to expect them to lower base rate anytime soon and may need to increase again.

3. Due to lack of similar beasts it is hard to evaluate the relative attractiveness of the current yield. Maybe it is the uniqueness (getting away a perpetual floating pref at base + 1 was some feat / good timing) which makes it look good value / attractive.

BTW I haven't seen INVR 'hype' or 'fanboy'-ism. I clearly stated I don't expect the market to reprice it (although it is up 7% since I bought which is decent for a tracker) and, for me, it is a useful foil for my long dated gilt holdings.

[BondSquared]

For those who see INVR as a UK Base Rate play, or are just generally interested in monetary policy, here are the current market implied (from SONIA futures/swaps) BoE base rates. Make what you want of it.

Current 5.25
3M 5.31
6M 5.27
1Y 4.89
2Y 4.18
3Y 3.98

[simoan]

For those who see INVR as a UK Base Rate play, or are just generally interested in monetary policy, here are the current market implied (from SONIA futures/swaps) BoE base rates. Make what you want of it.

Current 5.25
3M 5.31
6M 5.27
1Y 4.89
2Y 4.18
3Y 3.98

So how accurate have these implied base rates proven in the past? What were they indicating a year ago, for instance? Why should anyone give them the time of day? Seeing as you’ve presented them I assume you believe they have some merit.

As investors, we need to accept that the future is unknown and unpredictable. Given the UK is likely to have a general election next year, anyone trying to predict interest rates that far out would have to be a lunatic tbh.

[BondSquared]

For those who see INVR as a UK Base Rate play, or are just generally interested in monetary policy, here are the current market implied (from SONIA futures/swaps) BoE base rates. Make what you want of it.

Current 5.25
3M 5.31
6M 5.27
1Y 4.89
2Y 4.18
3Y 3.98

So how accurate have these implied base rates proven in the past? What were they indicating a year ago, for instance? Why should anyone give them the time of day? Seeing as you’ve presented them I assume you believe they have some merit.

As investors, we need to accept that the future is unknown and unpredictable. Given the UK is likely to have a general election next year, anyone trying to predict interest rates that far out would have to be a lunatic tbh.

Not at all - this is what the market prices in, and everyone is free to disagree on either side of the market. The point is that these can be traded, i.e. locked in as forwards, making the unpredictable certain for those who want to lock it in. Doesn't mean that it will realise, quite the opposite. There is ample literature on forward rates vs realised, forward bias etc.

[BondSquared]

So how accurate have these implied base rates proven in the past? What were they indicating a year ago, for instance? Why should anyone give them the time of day? Seeing as you’ve presented them I assume you believe they have some merit.

As investors, we need to accept that the future is unknown and unpredictable. Given the UK is likely to have a general election next year, anyone trying to predict interest rates that far out would have to be a lunatic tbh.

Not at all - this is what the market prices in, and everyone is free to disagree on either side of the market. The point is that these can be traded, i.e. locked in as forwards, making the unpredictable certain for those who want to lock it in. Doesn't mean that it will realise, quite the opposite. There is ample literature on forward rates vs realised, forward bias etc.

It should be evident from the values that these are most definitely not predictions of future BoE policy rates ... the MPC doesn't tend to fine-tune its Base Rate in increments of 1 bps.

For the record, the last available meeting minutes (Sep MPC meeting) of the very committee which sets the UK Base Rate makes no less than 4 references to "market implied path for Bank Rate" / "Bank Rate expectations implied by market pricing". That's commentary by those humans which set the Base Rate. Sounds relevant to me, but you're welcome to contact them under mpc@bankofengland.co.uk and tell them otherwise.
https://www.bankofengland.co.uk/monetar ... ember-2023

[simoan]

Not at all - this is what the market prices in, and everyone is free to disagree on either side of the market. The point is that these can be traded, i.e. locked in as forwards, making the unpredictable certain for those who want to lock it in. Doesn't mean that it will realise, quite the opposite. There is ample literature on forward rates vs realised, forward bias etc.

It should be evident from the values that these are most definitely not predictions of future BoE policy rates ... the MPC doesn't tend to fine-tune its base rate in increments of 1 bps.

Of course. That’s all fine. I was just questioning the relevance of these numbers to an investment in INVR which is the topic of this thread. It seems there is no relevance.

[BondSquared]

Not at all - this is what the market prices in, and everyone is free to disagree on either side of the market. The point is that these can be traded, i.e. locked in as forwards, making the unpredictable certain for those who want to lock it in. Doesn't mean that it will realise, quite the opposite. There is ample literature on forward rates vs realised, forward bias etc.

It should be evident from the values that these are most definitely not predictions of future BoE policy rates ... the MPC doesn't tend to fine-tune its base rate in increments of 1 bps.

Of course. That’s all fine. I was just questioning the relevance of these numbers to an investment in INVR which is the topic of this thread. It seems there is no relevance.

thanks. Base Rate pricing isn't relevant to evaluating investments linked to the Base Rate (especially when they have a ~1.8x leveraged exposure to it). Lesson learned, moving on.

[simoan]

Of course. That’s all fine. I was just questioning the relevance of these numbers to an investment in INVR which is the topic of this thread. It seems there is no relevance.

thanks. Base Rate pricing isn't relevant to evaluating investments linked to the Base Rate. Lesson learned, moving on.

Of course it is. But what is the point if the SONIA implied base rates you quoted have historically not been a good predictor of future rates? Why should anyone pay any notice to them?

[88V8]

For those who see INVR as a UK Base Rate play, or are just generally interested in monetary policy, here are the current market implied (from SONIA futures/swaps) BoE base rates. Make what you want of it.

Current 5.25
3M 5.31
6M 5.27
1Y 4.89
2Y 4.18
3Y 3.98

And in contradistinction to the fixed rate prefs, the rate and SP will fall together (ish). So there will come a point where one has to bail out, unless one is willing to give up all one's capital gain. I was late to the party, so for me the implied rate says 12 months or thereabouts. A short life but a gay one.

V8