2026 ,the regs covering Bank PIBs and the logic of Fixed interst investment

[Colevan]

I copied this quote

"Under current regulation the preference shares will no longer count as regulatory capital in 2026. Aviva will work towards obtaining regulatory approval for the preference shares, or a suitable substitute, to qualify as capital from 2026 onwards. If as we approach 2026 Aviva needs to reconsider this position, it will do so after taking into account the fair market value of the preference shares at that time."

I have, after many years, decided to give up on Equity shares and the concept of world growth and moved just virtually everything into Fixed-interest. In the process, I have managed to remove all my dosh out of trading accounts into protected areas ( from income tax) to SIPPS, ISA's and 4 Trusts where we do pay tax. Still, I can claim that back for the Grandchildren, who each have bare trusts, and we keep their dividend income below tax levels by paying monies out for school fees and other similar expenses.

I am working with an average return of 7% of the original capital invested. This value of the capital moves up and down, obviously, but bearing in mind 7% free of tax and thus 40% uplift and a guaranteed amount each year, which only requires thought as to how to reinvest, It turns out to be easy to organise. It carries no surprises apart from requiring patience, Which is the reason for the whole concept.

But . There is always a but. What thought should be given to 2026.
So two real life questions.

Will tenders fly about, and where does one go for future certainties?

I have been through all this before when we had the Bradford and Bingley excitement and the Co-Op and the Lloyds debacle and
I have ignored the request to tender my NWBD.

Comments would be much appreciated

Thank you

[Padders72]

I'm moving down a similar path to you in that in the past few years I have moved an increasing amount into FI. I'm up to around 30% now so a few steps behind. I see the likelihood of tenders as a plus rather than a minus though. If they occur as they have done with BOI (a bond not a pref of course) with very favourable terms for the holder, who were able reinvest elsewhere and gain yield then it is no bad thing. You mention Aviva, it has been suggested that GACA and GACB amongst others are good candidates for a tender at some point. Off the top of my head, I seem to recall that you would have been much better off had you taken the 2021 NWBD offer.

The FI I hold includes GACA, LLPD, SAN, MBSR, INVR & IPF3 (the latter 2 are rather more risky than the previous 4 it must be said but offer a compensatory higher return)

[tjh290633]

I think you should both consider the possibility of rampant inflation. We have just come through a relatively short period of high inflation, nothing like we had in the last century.

Fixed interest stocks offers no protection against inflation, either in terms of income or capital value. Bearing in mind that you may have the prospect of 30 years after retirement, your suggested plans could lead to poverty in advancing years.

TJH

[88V8]

I have, after many years, decided to give up on Equity shares and the concept of world growth and moved just virtually everything into Fixed-interest..
But . There is always a but. What thought should be given to 2026.
So two real life questions.
Will tenders fly about, and where does one go for future certainties?

I am expecting tenders, and I am expecting that they will be at market price + a percentage. So, no worries.

I started buying (more) Prefs a few months ago in anticipation of base rate rises, and because the yield at that time was - and of course still is - very good.

In all, we have roughly a third of our assets in Prefs, AV.A/B, GACA/B, ELLA, RSAB in the insurance sector, plus NWBD, INVR, SAN, STAC, BP.A/B and BWRA.

With the exception of INVR which is a counter-cyclical oddball, prices have lifted off the bottom but have by means topped out. I am surprised that there was not more tender activity while prices were lower, but of course 2026 is a long time and issuers may have felt that there was no rush.

For me, the only certainty is that SPs will rise as the base rate falls, and then at some future point will retrace as rates rise again. There will come a point where SPs have topped out and the question then will be whether to sell for the capital gain, or hold for the income which is what I did during the last cycle.

In addition to direct holdings of Prefs, I have significant exposure to FI ITs - NCYF, BIPS, SMIF, TFIF, where SPs have also started rising, and in due time the same question will arise, whether to trouser the cap app or ride the slide.

Anyway, I think you have done a good thing, at this time, moving into FI. Yes, inflation will nibble the proceeds and it would not be a good long-term move for a youngster, but one knows where one is. As certainly as one can, at any rate.

V8

[hiriskpaul]

I think you should both consider the possibility of rampant inflation. We have just come through a relatively short period of high inflation, nothing like we had in the last century.

The 1970s was far worse.

Fixed interest stocks offers no protection against inflation, either in terms of income or capital value. Bearing in mind that you may have the prospect of 30 years after retirement, your suggested plans could lead to poverty in advancing years.

Never heard lf index linked gilts? or TIPS? There are a few, not many, corporate bonds that also offer inflation linking. Like equities though, equities can fail.

[hiriskpaul]

I have been going the opposite way, FI to equities. Equities I feel are better positioned for short and long term growth and there are a dwindling number of FI situations I like the look of. My concern is that virtually all the FI opportunities worth looking at, bar low risk low return government bonds, are not well diversified. This has long been the case of course, with most of the opportunities being in the financial sector, but I became increasingly concerned over the lack of diversification. I am not exiting entirely and still have big positions in things like NWBD, various PIBS and Co-op Group bonds, but the income and proceeds from redemptions is going elsewhere.

[OldBoyReturns]

Surely 2026 is only relevant to the legacy capital instruments of insurers - eg Aviva & RSA. The legacy capital instruments of banks and building societies all became fully grandfathered back in 2021 so 2026 is irrelevant to most PIBS, prefs and PSBs. Or am I missing something?

[Colevan]

I read a lovely letter in the Times last week mentioning the often used expression "It what It is" but the writer then said remember though "We are we we are"
So, at this moment, I think we are in a period where we the markets have run out of puff and are very confused about the green revolution, war, and demographics. Current thinking appears to be that a profit warning is near suicide . God know if there was an earthquake in San Francisco

So bearing in mind that 12% before tax year return year in and year out would be brilliant ie removing the years in the long run that are less productive
and assuming 40 tax and a cost of financial advice of, say, 1%, the 7 % return on capital invested is OK.

In my case, approaching 80 years old, I am more interested in sorting out the passing on. I think the pursuit of companies that will do well is time-consuming. And I want to ensure that the investments can be managed without needing eyes in the back of the head to keep watch. ie by my trustees

TJH mentioned his fear of rampant inflation. Having lived through the 1970 with a personal 16% per cent mortgage and the company I ran putting in a 10 per cent across-the-board price rise every quarter for almost 30 months /I think and hope the central bank lot are so aware of the perils that we are much safer then we were.

I have some questions

Does anybody know how to put a figure on how much Fixed interest is actually left out there; say with NWBd SAN LLPC STAC AV GACA etc

I do not think there wasn't that much to start off.

And again where does one go if one leaves the bank section?


Having just read OldBoyReturns post viz" The legacy capital instruments of banks and building societies all became fully grandfathered back in 2021 so 2026 is irrelevant to most PIBS, prefs and PSBs. Or am I missing something?"

Am I, too, barking up the wrong tree because my main fear is going FI and then having to sell out and start again?

Thank you for reading

Cheers

[hiriskpaul]

Surely 2026 is only relevant to the legacy capital instruments of insurers - eg Aviva & RSA. The legacy capital instruments of banks and building societies all became fully grandfathered back in 2021 so 2026 is irrelevant to most PIBS, prefs and PSBs. Or am I missing something?

Yes, most of the legacy bank and building society stuff is now treated as Tier 2, some prefs I think CT1, but not CET1. I have been a little surpirised that we have not seen more attempts to clean this all up, particularly some of the smaller issues of PIBS.

[hiriskpaul]

I read a lovely letter in the Times last week mentioning the often used expression "It what It is" but the writer then said remember though "We are we we are"
So, at this moment, I think we are in a period where we the markets have run out of puff and are very confused about the green revolution, war, and demographics. Current thinking appears to be that a profit warning is near suicide . God know if there was an earthquake in San Francisco

So bearing in mind that 12% before tax year return year in and year out would be brilliant ie removing the years in the long run that are less productive
and assuming 40 tax and a cost of financial advice of, say, 1%, the 7 % return on capital invested is OK.

In my case, approaching 80 years old, I am more interested in sorting out the passing on. I think the pursuit of companies that will do well is time-consuming. And I want to ensure that the investments can be managed without needing eyes in the back of the head to keep watch. ie by my trustees

TJH mentioned his fear of rampant inflation. Having lived through the 1970 with a personal 16% per cent mortgage and the company I ran putting in a 10 per cent across-the-board price rise every quarter for almost 30 months /I think and hope the central bank lot are so aware of the perils that we are much safer then we were.

I have some questions

Does anybody know how to put a figure on how much Fixed interest is actually left out there; say with NWBd SAN LLPC STAC AV GACA etc

I do not think there wasn't that much to start off.

And again where does one go if one leaves the bank section?


Having just read OldBoyReturns post viz" The legacy capital instruments of banks and building societies all became fully grandfathered back in 2021 so 2026 is irrelevant to most PIBS, prefs and PSBs. Or am I missing something?"

Am I, too, barking up the wrong tree because my main fear is going FI and then having to sell out and start again?

Thank you for reading

Cheers

Given what you have said, you might be interested in putting some money into a ladder of linkers, with the intention of holding each one to maturity. Prices are such that you will get a small real return on each gilt. More wealth preservation than growth, but if you don't need the higher return, why take the risk of not getting it?

[OldBoyReturns]

I have been a little surpirised that we have not seen more attempts to clean this all up, particularly some of the smaller issues of PIBS.

I guess there have been a few tender offers from banks such as those for the LBG prefs, NatWest prefs and PSBs, BoI prefs and PSBs. As you say building societies haven't other than Nationwide taking a convoluted route to insert a 2030 call option in the terms of its CEBB PIBS. From dealing with a number of societies on the CREST issue I get the impression their PIBS are so far down the agenda for them to bother about.

[Swanmore22]

Colevan, your post brings home a familiar problem when investing for l/term income .

"Irredeemable preference shares " and "Perpetual Bonds" are not what the ticker says and finding alternatives is time consuming particularly so in the current environment ..limited choice and often poor liquidity.
In the company i run we own FREEHOLD residential letting properties in central London and Hants.
The company will be passed onto my children, who i hope will pass onto theirs.
As an alternative to buying physical bricks and mortar , I have increased the company holding in NWIDE CCDS.Pays a dividend which suits.

I have also been adding to posns in equities..LGEN, CSN in the insurance sector , FSN (Foresight) and Impax in the asset management sector.
These two replace Gresham House which has been taken over .. there we go again !

Best Wishes,

Swan

[88V8]

So bearing in mind that 12% before tax year return year in and year out would be brilliant ie removing the years in the long run that are less productive and assuming 40 tax and a cost of financial advice of, say, 1%, the 7 % return on capital invested is OK.

There is no fire-and-forget investment that will yield an ongoing 7% net based on current value. Your FI purchases if made a month or so ago may be yielding c7% gross on the basis of yield at time of purchase. In addition you will be seeing some capital growth but that will cease when rates eventually bottom out.

In my case, approaching 80 years old, I am more interested in sorting out the passing on. I think the pursuit of companies that will do well is time-consuming. And I want to ensure that the investments can be managed without needing eyes in the back of the head to keep watch. ie by my trustees.

In that case you would be better off with collectives, such as the ITs I mentioned, NCYF, BIPS, SMIF, TFIF. They will take care of tenders and other messy day-to-day stuff, their yields are pretty good and SPs are rising, but there also one will see a decline in SP when rates bottom out.
If capital matters as well as income, a decision will then be needed, whether to sell and lock in the gain, or not.

Does anybody know how to put a figure on how much Fixed interest is actually left out there; say with NWBd SAN LLPC STAC AV GACA etc
I do not think there wasn't that much to start off.

AV.A/B were each £100mio.
GACA/B totalled £250mio
SANB was £24mio
LLPC £300mio

One would have to ferret around to find the rump size, but all these mainstream Prefs are not hard to purchase in retail sizes. The killer is the spread, typically 3-4% so once one has bought them one needs to hang on because that's more than half a year's income.

And again where does one go if one leaves the bank section?

Again, I would go to collectives. They have access to instruments which are not available to retail investors.

Am I, too, barking up the wrong tree because my main fear is going FI and then having to sell out and start again?

You will only have to sell out if you wish to lock in the capital gain at the bottom of the interest rate cycle. Probably that is three+ years away.

If you wish to offset the cyclical nature of FI prices, then put some of your funds into generalist ITs such as CLDN Caledonia, or for a steady income CTY or MRCH although they are UK-heavy and the divi will not keep up with inflation, or some of the Vanguard funds that are discussed on the Investment Trust board. None of them will give you 7% though.

If you need all that 7% yield and are not bothered about value fluctuations, your options are limited and I would just sit tight with what you have or, as I have said, move some of it into the FI collectives to simplify future admin.

V8