The Lemon Fool

OldBoyReturns wrote:The terms of the Invested Perpetual Preference Shares (INVR) are in the Investec plc Articles of Association which are online (page 65) at:

https://www.investec.com/content/dam/in ... 202020.pdf

At the current price (I have managed to buy decent chunks at 573 to reinvest some of the BOI tender offer proceeds) they look decent value with the dividend accruing at a rate of 6.5% (current BoE Base Rate + 1%) on face value of £10 per share.

I too have recently dipped my toe in here, also with funds freed up by the BOI call (it would be remiss to not thank you for all your efforts there back in the day, thank you!). Without meaning to be pedantic, isn't the current base rate 5.25%, so the current rate of accrual is 6.25% of face value is it not?

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%

Padders72 wrote:I too have recently dipped my toe in here, also with funds freed up by the BOI call (it would be remiss to not thank you for all your efforts there back in the day, thank you!). Without meaning to be pedantic, isn't the current base rate 5.25%, so the current rate of accrual is 6.25% of face value is it not?

Yes, I meant 5.25%. I must have been pre-empting the next BoE decision although, of course, now that I have a rate tracking pref you can be sure rates will stop rising

It is curious how the market in pricing INVR as though interest rates will fall significantly in short order whereas it is pricing long dated gilts as though higher interest rates are here for a while longer. As a result you can currently reinvest BOI tender proceeds in a combination of INVR and long dated gilts (such as TR60) while achieving an overall yield (and so income) uplift.

I agree that the pricing is anomalous when compared to gilts. Last August, when interest rates were at 1.75%, INVR was priced at 600. I picked some up at 570 last week. Surely we are due a price correction soon (or interest rates are due to plummet?), somewhere around 750 would be nearer the mark. I think the market has these wrong but perhaps we need a longer period at higher interest rates for the market to believe that we will not be returning to ultra low rates soon. In the meantime enjoy the yield.

On another note AV.A has traded below AV.B at times during the last few days. I picked up a few during one such period.

I suspect (as happens with various prefs and PIBS from time to time) a large holding being liquidated is a factor behind the current price of INVR.

In general the relative movements between preference share and long term gilt yields recently have been odd. With the price of many prefs ticking up steadily while gilts have moved in the opposite direction.

OldBoyReturns wrote:I suspect (as happens with various prefs and PIBS from time to time) a large holding being liquidated is a factor behind the current price of INVR.

More likely a sizeable accumulation surely? Why would a large, presumably savvy seller want the MM's to keep the price DOWN when they are busy selling???? I know that I prefer to sell into a strong price, not a weak one.

In general the relative movements between preference share and long term gilt yields recently have been odd. With the price of many prefs ticking up steadily while gilts have moved in the opposite direction.

Is this narrowing credit spread a sign of increasing confidence in the banks (who are making excellent profits) and decreasing confidence in gilts given the large issuance and soaring interest payments?


GS

GS - I don't think large holders are necessarily savvy, they may be forced sellers due to redemptions etc. As an ex MM I don't see how a MM can keep the price down with a large buyer in the wings. MM's try to run a fairly flat book matching buyers with sellers so more likely as OBR says a large seller is keeping the price down.

GoSeigen wrote:Is this narrowing credit spread a sign of increasing confidence in the banks (who are making excellent profits) and decreasing confidence in gilts given the large issuance and soaring interest payments?
GS

It is an interesting subject at the moment especially with the supply side issues with gilts you identify. Maybe needs its own thread. The Gov't paying 6.25% on a NSI 1 year fixed rate saving account has also sent a curious message.

Surerera wrote:GS - I don't think large holders are necessarily savvy, they may be forced sellers due to redemptions etc. As an ex MM I don't see how a MM can keep the price down with a large buyer in the wings. MM's try to run a fairly flat book matching buyers with sellers so more likely as OBR says a large seller is keeping the price down.

To be clearer when I wrote savvy I was trying to avoid the phrase smart money but that is what I meant.

I'd value your perspective as a former MM. Let's assume that there is a large seller of MBSR then -- could you talk us through what is happening? If they are NOT smart money, as you seem to suggest (they are just a forced seller and presumably selling at least some of their bonds to smart money), then we infer that the price will be somewhat higher in the forseeable future? The MM is also smart money and is presumably long or building his book?

Or perhaps this is the middle of a very long phase of level trading / redistribution?

What's your take?

I happen to be a large but slow forced seller, reluctantly letting go of a few from time to time when I need cash. There are only £5m of these, so I must be one of the larger holders. Am I the dumb-money seller here?


GS

GS - Firstly the MM's are definitely not smart money, they simply try to match buyers and sellers and keep a fairly flat book. The MM may have a proprietary trading desk but that would be completely separate from the MM, although I think most banks have much smaller prop trading desks since the GFC than back in my day. When I was a MM I rarely knew (and didn't care) what our prop desk were doing - they could be just as wrong as anyone.

If there was a large seller of MBSR, it would depend entirely on how desperate he was to get rid of his position. If he wanted out immediately he would approach a MM and ask for a bid for x number of bonds. If the MM didn't know of anyone likely to want them - he might get his salesforce to ask selective clients - he would probably give a lousy bid a number of points below the prevailing market price and if the client accepts he would then gently drip feed them back into the market always making sure he was the cheapest offer (and lowest bid to avoid buying more). If the client was not in a hurry he would probably tell one MM to show him any good bids or leave a limit order so that MM would always be the cheapest offer in the market knowing that he can get the bonds back if he finds a buyer or lots of small buyers.

As for smart/dumb money, I'm not sure there is such a thing. I've never heard of a trader who hasn't lost money so on something. Sometimes we've all been smart and we've all been dumb (I certainly have!).

I hope that answers your question.

Surerera

It is now at 558.50 to buy. I bought some at 560.95 this morning.

air04 wrote:It is now at 558.50 to buy. I bought some at 560.95 this morning.

That's very good. Not ex until December, I think?

V8

air04 wrote:It is now at 558.50 to buy. I bought some at 560.95 this morning.

Remarkable price. By my maths, at that price, INVR is currently accumulating interest at 11.2% a day. This would rise to 11.6% if the BoE increases base to 5.5% next week as expected.

OldBoyReturns wrote:Remarkable price. By my maths, at that price, INVR is currently accumulating interest at 11.2% a day. This would rise to 11.6% if the BoE increases base to 5.5% next week as expected.

The numbers get even better if I add accrued dividend to it!!! I will get at least 29p dividend(assuming no change to 5.25% this month) in December. When I add accrued from 23/6/23(previous pay date) until today(15/9/23), it is still around 14.2p accrued in the price

air04 wrote:

OldBoyReturns wrote:Remarkable price. By my maths, at that price, INVR is currently accumulating interest at 11.2% a day. This would rise to 11.6% if the BoE increases base to 5.5% next week as expected.

The numbers get even better if I add accrued dividend to it!!! I will get at least 29p dividend(assuming no change to 5.25% this month) in December. When I add accrued from 23/6/23(previous pay date) until today(15/9/23), it is still around 14.2p accrued in the price

What's the catch? The numbers sound like they're too good to be true. I really do not know much about preference shares and this one seems an outlier in both price and yield? Thanks.

BullDog wrote:

air04 wrote:
The numbers get even better if I add accrued dividend to it!!! I will get at least 29p dividend(assuming no change to 5.25% this month) in December. When I add accrued from 23/6/23(previous pay date) until today(15/9/23), it is still around 14.2p accrued in the price

What's the catch? The numbers sound like they're too good to be true. I really do not know much about preference shares and this one seems an outlier in both price and yield? Thanks.

Ah no, if you want outliers BD then follow REA Prefs (RE.B) !

(long suffering holder)

moorfield wrote:

BullDog wrote:What's the catch? The numbers sound like they're too good to be true. I really do not know much about preference shares and this one seems an outlier in both price and yield? Thanks.

Ah no, if you want outliers BD then follow REA Prefs (RE.B) !

(long suffering holder)

HL reports 25.9% yield at RE.B. Not for me, paying your capital back to you as income I suppose?

OldBoyReturns wrote:

air04 wrote:It is now at 558.50 to buy. I bought some at 560.95 this morning.

Remarkable price. By my maths, at that price, INVR is currently accumulating interest at 11.2% a day. This would rise to 11.6% if the BoE increases base to 5.5% next week as expected.

Being pedantic, it's 11.2% a year, not a day!! But yes, if the yield narrows relative to other preference shares there's also some capital growth to look forward to.

Surerera wrote:If there was a large seller of MBSR

Sorry for any confusion, I meant INVR of course, not MBSR (though the logic would equally apply).

Surerera wrote:As for smart/dumb money, I'm not sure there is such a thing. I've never heard of a trader who hasn't lost money so on something. Sometimes we've all been smart and we've all been dumb (I certainly have!).

Point taken, but I'd say they are smart/dumb by definition, no? Smart money buys low, sells high with dumb money the other way round. Of course everyone has disasters (multiple in my case: sold practically all AAPL shares in 2005, all ARM shares in 2007/8, bought AFREN bonds 3 months before bankruptcy, etc) but I think there are people who have the trading psychology basically right and those who consistently get it wrong.

BullDog wrote:What's the catch?

What was the catch with Costain, BullDog? You never did tell me...

The catch with INVR is fairly obvious: if interest rates fall then the coupon also falls (as it is tied to BoE base rate) so to maintain the same yield the price would also have to fall. So falling income and falling capital value simultaneously.



Bought a few below 560 today. Nice price and the spread is tight.

GS

GoSeigen wrote:

BullDog wrote:What's the catch?

What was the catch with Costain, BullDog? You never did tell me...

The catch with INVR is fairly obvious: if interest rates fall then the coupon also falls (as it is tied to BoE base rate) so to maintain the same yield the price would also have to fall. So falling income and falling capital value simultaneously.



Bought a few below 560 today. Nice price and the spread is tight.

GS

Thanks for the explanation about INVR. I hadn't thought about that.

Costain? I thought it was quite obvious what the catch is with that company. But good luck to you all the same.

BullDog wrote:Costain? I thought it was quite obvious what the catch is with that company. But good luck to you all the same.

No it wasn't obvious top me, which is why I asked for an explanation when you first commented and why I've mentioned it again when you made a similar query about this share.

I'm a long-standing investor in Costain and really am scratching my head here given the business's ongoing profitability and newly declared dividends.


GS