Monday, November 02, 2015

Real investor (in pref shares), real returns!

Real investors, real returns!

I had the honour of handling my parent's retirement portfolio, otherwise known as LP bond fund 1, 2 and 3, starting from around 2013 to the most recent early 2015. In it, I bought several lots of preference shares by OCBC. It's the perp that I blogged about earlier here, paying a coupon yield of 4.2% pa and they are going to be redeemed soon in 2nd December 2015.

One good thing about investing in bonds is that you know the returns and the price before you plonk in your money. In the case of preference shares or perps, it's a little trickier because you don't know when they are going to redeem it back. In other words, unlike bonds with a stated and clear maturity date, perps technically only have an optional first callable date. It happens that for this OCBC pref shares, the first callable date is on 14th July 2013, and thereafter on every dividend payment date, they can choose to redeem it back at a par value of $1.00 per share.

With that, I can calculate exactly how much returns I extracted from the preference shares while holding it. So here's the result:

A few key points:

1. The earliest first batch, invested since 27 Dec 2013 gets the most returns. I got in at a price above par of 1.025, and averaged out over the entire holding period, it gives me an average of 2.80% per year. Very similar to the singapore savings bond, except that the instrument is not out yet in 2013. Back then, it was pretty hard to find a decent retail bond!

2. The second batch, about 1 month later, gets 2.73% pa on average over the holding period. Still okay. I got in at a slightly higher price of 1.029 though. That probably accounted for all the difference in the final total returns.

3. The third batch is the one that I just broke even excluding commissions, and slightly negative after comms. Who would have thought that the issuer will redeem back the preference shares less than 1 yr after I got in? It would minimally need 1.5 yrs before I can make a positive return, and I bet that it wouldn't redeem back within that time. And I lost that bet. The good thing is that it's only a small part of my parent's portfolio, consisting between 17% to 27% in each tranche of the portfolio (I've LP bond 1, 2 and 3). In absolute amount, the loss is $20.30, thankfully. I think the relevant lesson learnt here is that if you want to have a portfolio of preference shares or bonds, it's wise not to put the entire sum into the one with the highest yield, even after accounting for the safety of the issuer company. The reason is that even the safest company may fail. History shows a lot of such blue chips quality company turning blue black. The other reason is that if they redeem it back, then you might have to reinvest again at a point at a point where it's not conducive to do so. That might eat into your returns as well.

So, when they redeemed back the preference shares, I can only hope they will reissue another preference shares. A good quality preference shares by a bank is something that would be suitable for my parents, since their holding period is really just forever.

Now I've to crack my brains to think of where to put in the capital to generate cashflow again. Or maybe I can return back to my parents, haha


blimxx said...

hello.. just wondering.. why nt consider the remaining OCBC 5.1% and DBS pref shares? i am holding some lots for my parents portfolio. collected during the black monday.. giving me 4.25% avg YTM ..

xxx said...

im the guy above.. cant edit my comment.. i meant YTC of 4.25% for Ocbc 5.1% instead of YTM.

la papillion said...

Hi Blim,

I am holding shares of both for my parents. It's just my nature not to overconcentrate on any one counter in case of default or early redemption. I couldn't put all 100% into the same me it represent a certain risk.

Anonymous said...

Which bond would you recommend to buy for long term as retirement fund.