BondSquared wrote: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.