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Junk Bonds

Gilts, bonds, and interest-bearing shares
Newroad
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Re: Junk Bonds

#453605

Postby Newroad » October 27th, 2021, 2:46 pm

Hi All.

Here is what seems the relevant page for BIPS (then CMHY, later merged with IPE) from its 2020 Annual Report.

Image

I would be interested in anyone who is both capable and might be inclined to translate this information into layman's terms in the context of the preceding discussion?

Regards, Newroad

hiriskpaul
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Re: Junk Bonds

#453640

Postby hiriskpaul » October 27th, 2021, 4:36 pm

Newroad wrote:Hi All.

Here is what seems the relevant page for BIPS (then CMHY, later merged with IPE) from its 2020 Annual Report.

Image

I would be interested in anyone who is both capable and might be inclined to translate this information into layman's terms in the context of the preceding discussion?

Regards, Newroad

The final figure is useful 4.6p reduction in NAV. NAV was 194.29 at the time. This implies a modified duration of about 4.6/194.24*100 = 2.4. Not exactly that as convesxity comes into it as well, but close enough. It would be really helpful if they told you the weighted average effective yield to maturity, but they don't appear to as far as I can see in the accounts. That NAV reduction could come about from interest rate changes or widening credit spreads, or a combination of the 2. The nightmare scenario would be increasing interest rates, widening spreads and increased defaults. I see far more downside risk than up with this IT.

Ongoing charges will lop 1% off NAV each year as well, which is a hefty amount considering the likely ytm, which I would guess at being somewhere between 3 and 4%.

Depends why you want to hold it, but if you want a bond fund to reduce risk from equities tanking, I would be more inclined to go with a short dated investment grade corporate bond tracker fund at a fraction of that OCF. Or better better still bung your money into a high interest deposit account. You will not keep up with inflation, but this IT is not going to gain you much, but might lose you 10% or more over the next year in nominal terms if credit spreads widen, interest rates climb and you get increased defaults.

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Re: Junk Bonds

#453644

Postby Aminatidi » October 27th, 2021, 4:43 pm

I wonder if Junk Bonds was the wrong title.

Specifically I was looking at:

* TwentyFour Dynamic Bond
* Royal London Global Bond Opportunities
* Royal London Sterling Extra Yield Bond

Again to stress I don't need income so it would be the ACC units.

hiriskpaul
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Re: Junk Bonds

#453649

Postby hiriskpaul » October 27th, 2021, 4:57 pm

Aminatidi wrote:I wonder if Junk Bonds was the wrong title.

Specifically I was looking at:

* TwentyFour Dynamic Bond
* Royal London Global Bond Opportunities
* Royal London Sterling Extra Yield Bond

Again to stress I don't need income so it would be the ACC units.

I have always thought highly of TwentyFour. The trouble is though there are no "Global Bond Opportunities" to be had unless you really want to push the boat out on risk, which none of these funds will do.

Co-op Group 11% 2025 would be my suggestion for a reasonably high yield, but fairly safe short duration bond. YTM about 3.7%. (Disclusure: I am talking my own book here!)

Alaric
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Re: Junk Bonds

#453651

Postby Alaric » October 27th, 2021, 5:04 pm

Aminatidi wrote:I wonder if Junk Bonds was the wrong title.


Bond OEIC funds would cover them.

The usual OIEC disclosures would tell you how and where they are invested and a look at OEIC comparison sites will tell you how they and rivals have performed.

It appears that funds with holdings in the murkier waters at the "junk" end of the fixed interest and bond markets prefer to use an IT structure.

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Re: Junk Bonds

#453655

Postby Aminatidi » October 27th, 2021, 5:16 pm

Alaric wrote:
Aminatidi wrote:I wonder if Junk Bonds was the wrong title.


Bond OEIC funds would cover them.

The usual OIEC disclosures would tell you how and where they are invested and a look at OEIC comparison sites will tell you how they and rivals have performed.

It appears that funds with holdings in the murkier waters at the "junk" end of the fixed interest and bond markets prefer to use an IT structure.


Yes it's more that's looking in the rear view mirror.

I don't think I know nearly enough about how future inflation and possible rate change could influence them.

Which might be an argument to leave it to the managers or might be an argument to leave well alone (all my current bond exposure is via RICA and CGT).

The hope was to get a reasonably guaranteed return for some allocation with hopefully a less volatile ride than equities.

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Re: Junk Bonds

#453681

Postby Newroad » October 27th, 2021, 6:26 pm

Thanks HiRiskPaul.

I was also wondering do "Exposure to Floating Interest Rates" and "Exposure to Fixed Interest Rates" mean what they say on the tin - and if so and the proportions are accurate, then the IT holds c30% floating rate instruments and c70% fixed rate instruments. Or have I got the wrong end of the stick?

As to why I hold it, yes, diversification. This type of holding represents half that diversification, the other half is VAGP. Instinctively, I have always felt that active management is relatively likely to add more value in the "murkier" (to quote Alaric) end of the bond market, with passive management more suited to the other end.

But who knows - time will tell.

Regards, Newroad

Newroad
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Re: Junk Bonds

#453685

Postby Newroad » October 27th, 2021, 6:42 pm

Hi All.

On a related note, here is the similar page for HDIV.

Image

In this case, the Modified Duration is provided, at c6.07 years.

Regards, Newroad

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Re: Junk Bonds

#453796

Postby Gan020 » October 28th, 2021, 9:58 am

To add two more to the picture. I'm afraid I don't have Newroad's skills at cutting and pasting the accounts into an image.

NBMI. The accounts say little on interest rate sensitivity, but the factsheet does, about 2/3rs the way down on page 2
The overall Fund exposure to floating rate assets is at 68% leading to an average duration of 1.14 years. YTM 5.94%

AXI. Page 82 of the accounts. They kindly net off both assets and liabilities so you see a net position.
Variable 75%, Fixed 9%, Non-interest bearing 16%.
Also from page 17, duration 4.5 years, running yield 5.76%, yield to perpetuity 6.67%, yield to call 8.51%


So, we have in some sort of order although not comparable as BIPS is assets only, HDIV and AXI are assets and liabilities and I don't know what NBMI is
HDIV Floating -2%
BIPS Floating 32%
NBMI Floating 68%
AXI Floating 75%

However, percentage floating is only one factor in the decicsion making process. Others might be for example the dividend, whether it's covered and the discount to NAV

Discounts are:
HDIV 8.6% buying at 83.6p
BIPS 2.8% buying at 188p
NBMI 5.5% buying at 89.9p (it's XD today)
AXI 10.2% buying at 95.5p (I added at 92.8 two days ago :D )

Note NBMI credit quality is poor. AXI mostly invests in bank and insurance regulatory capital.

Newroad
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Re: Junk Bonds

#453849

Postby Newroad » October 28th, 2021, 12:44 pm

Hi Gan020.

Here are the relevant screenshots for your convenience

NBMI Interim Report (end of June 2021):

Image

NBMI Latest Fact Sheet:

Image

AXI Interim Report (end of June 2021):

Image

Perhaps the relative direction of modified duration (and credit quality) of each of the four is of interest?

Regards, Newroad

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Re: Junk Bonds

#453866

Postby Alaric » October 28th, 2021, 1:54 pm

[quote="Gan020"]
Discounts are:
HDIV 8.6% buying at 83.6p
BIPS 2.8% buying at 188p
NBMI 5.5% buying at 89.9p (it's XD today)
AXI 10.2% buying at 95.5p (I added at 92.8 two days ago :D )/quote]

A couple of mundane practical points for investments outside tax shelters.

Are distributions taxed as interest, as dividends or a mixture both?
presumably any capital gain or loss on disposal comes within the scope of CGT?

Gan020
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Re: Junk Bonds

#453899

Postby Gan020 » October 28th, 2021, 3:49 pm

Alaric wrote:
A couple of mundane practical points for investments outside tax shelters.

Are distributions taxed as interest, as dividends or a mixture both?
presumably any capital gain or loss on disposal comes within the scope of CGT?


BIPS,NBMI and AXI pay dividends. No stamp duty on purchase
HDIV pays interest and stamp duty is applicable on purchase.

CGT applies outside of a tax shelter. I assume the point being that if you buy something like NCYF which deliberately pays a dividend that's not covered and you lose 45% of your capital over 20 years then you end up with a very inefficient tax situation.

Please don't remove the £20k ISA allowance Mr. Sunak.

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Re: Junk Bonds

#453944

Postby Newroad » October 28th, 2021, 6:26 pm

That's very interesting, Gan020.

I had no idea that HDIV paid as interest rather than dividends - I had perhaps naively assumed all companies paid dividends on equity and interest on bonds. After checking my own purchases for the stamp duty angle, I can confirm you are correct.

To the best of your knowledge, do many companies pay interest rather than dividends and if so, is some form of tax consideration the only reason?

Regards, Newroad

Alaric
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Re: Junk Bonds

#453950

Postby Alaric » October 28th, 2021, 7:05 pm

Newroad wrote:To the best of your knowledge, do many companies pay interest rather than dividends and if so, is some form of tax consideration the only reason?


Some of these funds are legally based in Jersey which can explains the absence of Stamp Duty. I think this also correlates with making payments as dividends. If the funds are UK based, they can elect or are required to adopt what is termed a "streaming" regime for part or all of their distributions, If they do, the "interest" component would be liable to tax alongside bank and deposit interest, Thus it would be gross up to £ 1000 for basic rate taxpayers, and £ 500 for higher rate ones.

https://www.theaic.co.uk/financial-advi ... -companies

aic Guide wrote:Income streaming

A small number of UK-based investment trusts that invest in bonds, loans or other forms of interest-producing assets distribute income under ‘income streaming’ rules introduced by HMRC in 2009.

These rules allow income that derives from interest (as opposed to dividends) to be distributed to investors without the investment company needing to pay corporation tax on that income. Investors who receive those distributions must pay income tax (not dividend tax) on them at their marginal rate, unless the shares are held in a tax wrapper such as an ISA or pension.

Not all investment companies that hold interest-producing assets make use of the income streaming regime. This may be because they are not tax-resident in the UK and not subject to UK corporation tax, or because they hold only a small part of their portfolio in interest-producing assets.

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Re: Junk Bonds

#453952

Postby Newroad » October 28th, 2021, 7:13 pm

Cheers, Alaric.

That makes sense in context.

I would have perhaps (needed to) figure it out myself in due course had all relevant IT's for me not been held in zero tax wrappers.

Regards, Newroad

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Re: Junk Bonds

#457138

Postby 88V8 » November 10th, 2021, 6:40 pm

Gan020 wrote:I agree some of the funds hold sizeable quantities of floating rate bonds. NBMI being the one with the highest imho at 66%.

NBMI's SP has really lagged its asset value of late.
No gearing.
Yield 5.2%.
Slight discount.
Might be a good parking place for the cash from the Lloyds prefs that have just been tendered.

V8


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