My latest Financial Times Adventurous Investor column is out online in advance of this weekend’s edition. You can read it here : (subscription required) – https://www.ft.com/content/1265c9db-371a-4983-b9c7-d2487f83e84e
I thought it might be worth adding a sort of epilogue to that column. I deliberately choose to emphasise the complexity of this slightly arcane world of preference shares and PIBs (and yet more acronyms such as ECNs and CoCos). Arguably I have over done that narrative because I think that these hybrid structures are actually really quite interesting. You get really very strong counter parties offering you a (usually) perpetual 6% plus income yield. There are of course complications as I describe around cumulative vs non cumulative, discretionary vs non discretionary, and dirty vs clean pricing. And as I explain in the column many of the issuers (egged on by the regulators) have tried to make life a bit difficult for holders, but once one cuts past these challenges, I think these are high quality credits. By comparison most of the brand names in the table barely offer much above 1.5% interest on their FSCS protected deposits. So, you are in effect getting a 4 to 5% uplift for the extra risk.
Also a few comments after the column on line suggest that liquidity is difficult in these securities. That’s half true. Yes, getting big lines of stock is incredibly difficult but I carefully researched the highlighted securities by talking to dealers, making sure that the shortlisted securities were available in private investor friendly levels of liquidity. I also should have added that these securities are best bought over the phone by using an experienced stockbroker who can tighten up those spreads for you.
One last observation. In my column in the FT I mention the Axiom closed end fund which invests in many of these securities. If I’d have had more space, I would also mention an ETF run by Axiom called the UC Axiom Global CoCo Bonds UCITS ETF. This is a Euro denominated ETF with the ticker CCNU.GY
This innovative ET tracks the broad global CoCo’s market of contingent securities. The main holdings include issues from HSBC, Credit Suisse and UBS ((around 25% in total for these three in value ). I think this is a smart ETF for adventurous investors looking to make a bet on the security (or otherwise) of big bank balance sheets. My feeling is that these balance sheets are in pretty good shape heading into a recession and overall, the fund has an average rating of BB+ from its 144 constituent securities. The yield to maturity is currently 5.15% and the yield to call is 6.44% with the average coupon running at 6.3%. Again, that 3 to 4% uplift on investment grade bonds and deposits is I think a sensible reward for the risk. You can find out more about this ETF here – http://axiom-ai.com/web/data/rapports/ENG/20200430_Monthly%20report_ETF_USD%20hedged.pdf?version=2020-6-25
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