Investec prefs

[GoSeigen]

They're attractive for people like me who think interest rates can go higher.

GS

[Laughton]

Yes, I'm not convinced that we're done with inflation just yet. It's just pausing for breath.

[OldBoyReturns]

For those who see INVR as a UK Base Rate play, or are just generally interested in monetary policy, here are the current market implied (from SONIA futures/swaps) BoE base rates. Make what you want of it.

Current 5.25
3M 5.31
6M 5.27
1Y 4.89
2Y 4.18
3Y 3.98

Thanks for sharing. If BoE base is 3.98% (say 4%) in 3 years time the INVR dividend would be 50p per annum. Current 'clean' price to buy is about 560 so still a 8.9% yield on current price which is well ahead of the 7-7.5% fixed rate financial prefs are yielding at current prices.

[PrefInvestor]

Thanks for sharing. If BoE base is 3.98% (say 4%) in 3 years time the INVR dividend would be 50p per annum. Current 'clean' price to buy is about 560 so still a 8.9% yield on current price which is well ahead of the 7-7.5% fixed rate financial prefs are yielding at current prices.

Yes but what will the INVR share price be in those circumstances ?, also less than it is today I suspect. If rates come down I'd expect the share price of fixed rate prefs to benefit significantly. I know which I prefer, speaking from a total return perspective.

ATB

Pref

[OldBoyReturns]

Thanks for sharing. If BoE base is 3.98% (say 4%) in 3 years time the INVR dividend would be 50p per annum. Current 'clean' price to buy is about 560 so still a 8.9% yield on current price which is well ahead of the 7-7.5% fixed rate financial prefs are yielding at current prices.

Yes but what will the INVR share price be in those circumstances ?, also less than it is today I suspect. If rates come down I'd expect the share price of fixed rate prefs to benefit significantly. I know which I prefer, speaking from a total return perspective.

ATB

Pref

Re the share price - I do not know or particularly care. Although in theory the market price of a floater should be less volatile with changes in interest rates than that of a fixed coupon pref. I invest solely for long term / 'perpetual' income these days. Market prices of fixed income stuff will fart about up and down around some fixed point over time constrained by a fixed coupon on a fixed amount of capital as interest rates change etc. But you can't have the market value and the income and it is the income I want. Ironically I have managed to grow income much more while prices have fallen since 2021 than I did while they were rising.

[PrefInvestor]

Well from my perspective I have already fixed the income from my financial prefs on a perpetual basis. I now look forward to a significant uprating of their share prices when interest rates fall. Of course if rates rise then INVR might do better, but I am expecting rates to fall – though it might take some time. But I am being paid to wait.

For me the capital value of my investments is just as important as the income.

ATB

Pref

[BondSquared]

For those who see INVR as a UK Base Rate play, or are just generally interested in monetary policy, here are the current market implied (from SONIA futures/swaps) BoE base rates. Make what you want of it.

Current 5.25
3M 5.31
6M 5.27
1Y 4.89
2Y 4.18
3Y 3.98

Thanks for sharing. If BoE base is 3.98% (say 4%) in 3 years time the INVR dividend would be 50p per annum. Current 'clean' price to buy is about 560 so still a 8.9% yield on current price which is well ahead of the 7-7.5% fixed rate financial prefs are yielding at current prices.

Yes indeed, and that doesn't look too bad at all.
I would still want to see some - maybe not full, given the dual listing/ringfencing between SA and UK Investec legal entity - RSA country risk premium.

As a comparison, the 6.75% (resetting to 5Y Gilts+5.749% from Dec24 call date) Investec Plc (same entity as INVR, and I believe pari passu, via a "notional preference share" concept) CoCo/AT1 is trading ~19.6% IRR to the (unlikely) Dec24 call date / ~11.3% to perpetuity (according to, gulp, the market implied forward curve) (XS1692045864), Not the same animal obviously (e.g. issuer calls and AT1 triggers), and it's not uncommon in a post-CS world for AT1s to trade (sometimes much) wider than pref shares by the same issuer, even for rock-solid issuers such as Nationwide (vs CCDS).

[OldBoyReturns]

Well from my perspective I have already fixed the income from my financial prefs on a perpetual basis. I now look forward to a significant uprating of their share prices when interest rates fall. Of course if rates rise then INVR might do better, but I am expecting rates to fall – though it might take some time. But I am being paid to wait.

For me the capital value of my investments is just as important as the income.

ATB

Pref

Apologies for labouring the point but what is your rationale in attaching importance to capital value of perps you hold for perpetual income? By definition, absent a distressed situation or default, the capital value will fluctuate around a fixed point over time so if you hold for perpetual income sometimes the capital value will be higher and others lower neither of which make any difference if you hold for income and not to sell.

[PrefInvestor]

Apologies for labouring the point but what is your rationale in attaching importance to capital value of perps you hold for perpetual income? By definition, absent a distressed situation or default, the capital value will fluctuate around a fixed point over time so if you hold for perpetual income sometimes the capital value will be higher and others lower neither of which make any difference if you hold for income and not to sell.

I measure the performance of my portfolio in total return terms, by which I mean the sum of the capital values plus all dividends received and re-invested. For me increasing my dividend income by 20% is not a success if in the process the capital value of the portfolio falls by 30% and so overall there is a negative portfolio total return.

My financial Pref investments will deliver a steady high income and if rates fall then the capital value of those Pref investments will rise, delivering a positive portfolio total return. A return to pre-pandemic prices could deliver 25-30% share price gains, and while I am not counting on such extreme performance but I am expecting a positive result.

By contrast investing in INVR will deliver a higher income (all of the while interest rates are high) but the capital value is likely to fall if rates fall (as I expect they will) and the overall result may easily not deliver a positive total return. The share price looks to be pretty volatile at the best of times and does not deliver the insulation from market shocks that I want from my Prefs.

But each to their own I guess.

ATB

Pref

[GoSeigen]

My financial Pref investments will deliver a steady high income and if rates fall then the capital value of those Pref investments will rise, delivering a positive portfolio total return. A return to pre-pandemic prices could deliver 25-30% share price gains, and while I am not counting on such extreme performance but I am expecting a positive result.

By contrast investing in INVR will deliver a higher income (all of the while interest rates are high) but the capital value is likely to fall if rates fall (as I expect they will) and the overall result may easily not deliver a positive total return. The share price looks to be pretty volatile at the best of times and does not deliver the insulation from market shocks that I want from my Prefs.

I don't think any of the assumptions here are safe. Rates can fall, yet perpetual yields may not follow, so no price gain. Not only that, risk spreads are still relatively tight for FI. If the junk bond market barfs perp yields could even go the opposite direction to interest rates.

Similarly, the capital value of INVR might but doesn't have to follow interest rates. The risk spread for these is at the opposite end of the spectrum for some reason, currently about 6-7% above gilts. Posters have already speculated as to the reasons for that. Looking at these versus fixed dividend shares, the reason seems to be that everyone expects interest rates AND long yields to track each other down. When everyone believes the same thing it's a heroic assumption isn't it?

So my rationale for holding these is that, like other investors, I kind of hope that rates and yields will fall. But they are a pretty good hedge if that doesn't happen. They might benefit from both rising interest rates and narrowing spreads (the "Oh sh*t!" realisation).


GS

[PrefInvestor]

Well GS in truth no set of assumptions regarding market behaviour are safe are they. But I am content to run with those that I have outlined. But everyone must DYOR and proceed accordingly. I won’t be investing in INVR myself for the reasons that I have given , but for any who do I hope it delivers what you want from it,

ATB

Pref

[Zebedee71]

Interesting discussion on interest rate risk, INVR and its "unusual" floating rate characteristics. For me I see this combination at attractive. Why

I historically have been and was
- Overweight in bank/BS pibs/subs/bonds call them what you want, and becoming uncomfortable given 2026 and the likes of BOI
- Underweight (i.e 0% prior to July) in UK GILTS due to low interest rate environment vs need for income
- Have not really traded actively for several years merely accumulating divis/interest and living

Once UK interest rate reached >5% and gilts approached approx 5% across many durations, I have begun the slow but active switching process of 40-50% of my portfolio into gilts to rebalance and recognise that my risk/circumstances have changed (called ageing!) and begun buying various duration gilts out to the 2060's (& no I wont make it to the 2060's but that is another investment choice), both low and high coupon - somewhere in the mix I have to live on chunks of the interest generated

This in where I view INVR is an opportunity - So, subject to some nuclear fallout similar to 2008/9 GFA, (which helped create the bank/BS pibs/subs (false) crisis in the first place and may materially affect this trade), I have ventured into my second ever paired trade but I will treat as a single trade for now, namely

Buy long dated ultra low coupon GILT
Buy INVR

The gilt ultimately delivers >4.5% but with a shorter term partial but likely positive exit if interest rates reduce considerably
INVR delivers (subject to it remaining alive) interest based upon (broadly) the UK interest rate ++

the combination is a win for me
- an interest stream equal to or greater than the PIBS/Sub sold (OBR's theme)
- a reduction in risk for what might happen to some of these PIBS/Subs - calls / 2026 etc
- an opportunity if there is a material crash in interest rates in 1-5 years to cash in some of the paired low coupon GILTS at hoped for big gain and derisk the overall trade

I guess my main point I am trying to make is that I was negative on INVR as I did not particularly like its floating rate and business exposure characteristics, and was negative on (say) TG61 Gilt for its long dated ultra low coupon route.

Right now however, Two negatives can sometimes make positive sense to me

My personal hope (for this trade only) is interest rates migrate back to 2-3% sometime in the next 2-4 years (at which point I sell some of the paired Gilts) and will then sit back, fat, happy, older and even lower risk. If that does not happen, at the minimum I just need INVR to survive several years or so to be a better trade than doing nothing (and I will sleep better) - interested in some counter thinking or better/risk management as a small/medium retail player

Z71

[PrefInvestor]

Personally I was not unhappy with the BOI & BWSA tender situation, I was holding both and took a significant capital gain and invested it in other Prefs at 7%+ and said "thanks very much".

I suspect that the likes of NWBD, LLPC and maybe the Aviva Prefs will also try further tenders at some point, more than happy to do the same – if they don’t offer a decent price then holders wont surrender them (as happened in part with BWSA and certainly with LLPC & NWBD on their last attempt).

Have looked hard at Gilts but really cant see them as attractive unless you can hold to maturity, which in most cases isn’t feasible. And 5% return isn’t enough right now IMHO, I am getting about 7.5% ATM plus some capital growth too.

ATB

Pref

[OldBoyReturns]

Dividend declared at 29.08904 pence per preference share to be paid on 12 Dec with an ex-div date of 30 Nov:

https://www.londonstockexchange.com/new ... n/16209579

[Paul147]

Hi to everybody , long time lurker and first post!

I hold a few of these and have been thinking of adding a few more , my question is does anyone think these have a possibility of being called ?
It would seem a reasonable buy with the current yield and a potential call at 10.00

PD

[Seasider]

Hi to everybody , long time lurker and first post!

I hold a few of these and have been thinking of adding a few more , my question is does anyone think these have a possibility of being called ?
It would seem a reasonable buy with the current yield and a potential call at 10.00

PD

Someone will be along to correct me but these are called Non-Redeemable so doesn't that mean they can't be called? They could do a tender offer instead of course.

[88V8]

I hold a few of these and have been thinking of adding a few more , my question is does anyone think these have a possibility of being called ?
It would seem a reasonable buy with the current yield and a potential call at 10.00

Someone will be along to correct me but these are called Non-Redeemable so doesn't that mean they can't be called? They could do a tender offer instead of course.

With the SP so far below par the chance of a call is zero.
If you were so minded, you could plough through the issue terms here but I think that Art 150 onwards refers, and other than capital reorganisation makes no provision for redemption.

Given that there will imv be no further rate rises, the SP must surely be on a downslide now so, far from adding, I will be considering an exit to avoid losing capital value.

V8

[Paul147]

Thanks for the swift replies , that has helped me make up my mind.

Paul

[hind]

Personally think with INVR, best way is to work out the breakeven base rate
At the present 550p and 7.5% in perpetual pib world, then get 3.1% base rate as breakeven

[Laughton]

Nice chunky divis received today (iWeb and iDealing) so many thanks to all those above who intially drew my attention to these.