Calling it quits!

[whizzard]

Originally Posted by Unregistered

As for cash, I keep about $1m around. Keeping 20% would be nuts. The rest is invested. I don't see any need to keep that much cash when the banks will lend me large amounts should I ever need it.

This is for sharing only, no other agenda. Like I mentioned earlier, I have sold off some properties and am now sitting on a very high proportion of cash vs the value of my total investment portfolio, something like 45%.

I need to redeploy and lower my cash component but am facing a dilemma. Shall I time the market? Wait for asset prices to correct or redeploy now?

For every dollar I redeploy into the equity or bond market, I think I can get at least 6% yield, with some leveraging of between 30% - 50%.

Hmm, maybe I should get the bankers to do some work. Have them run various yield simulations for equity and bond portfolios with different levels of leverage and margin call scenarios whilst I figure out what to do.

If you have some spare cash lying around that you don't need to fund your lifestyle, what would you plan to do with it? Will you invest it immediately? If so, on what asset class?

[whizzard]

Happy National Day 2013 folks!

http://youtu.be/QjU1zKYZsHk

Issuer will call bond only if bond price is above 100 generally. Then they reissue at 100 mah. I think what u mean is that the perp bonds have variable reset coupons. For eg, santande gbp, mapletree logistics perp have coupon resets every 5 years. The yield calculation u are using works only if they call, which is not likely if interest rates go up. Rate up, bond price fall below 100, no call. So your duration is much higher. People who hold >5 year bonds and perps this year all Kena hit bad in June. As your banker. Most bond portfolios are down up to 5% or flat.

I would avoid bonds now not because I think they will fall lower but because I am fully allocated and I think better opportunity in equities. I had 40% bonds last year in a mainly 6 year bond ladder, now it is 35% and I will let it fall to 33.5%. The amt which matures going into Asian equity and alternatives. I am slightly contrarian, so I am ok with entering commodities and Asian equities next few mths when everyone thinks otherwise. Now people are all entering us and Japan. Former I am already in. Latter don't mind adding slightly.

As for cash, I have cash position that is 20% of asset. Reason is for flexibility to buy big if I need to and for new business possibility. I leverage up 35%, so I still have 100% invested. The other 15% is primary home. I treat the 0.8% loan interest as fee for flexibility. Not sure if overpaying... But if interest rates rise, I will buy longer dated bonds and maybe reduce leverage if it makes sense.

Just sharing and I hope it helps u. Be very careful and don't waste your hard earned money. Bankers do have some good advice but depends how your relationship as some poster pointed out. And also your banker experience. My experience is that best is learn from own experiments and from peers or betters who share.

Originally Posted by whizzard

I have been mulling over a potential portfolio of perps, mainly investment grade rated banks which are callable over the next 2+ years i.e. the duration is short if they are called. I must qualify that I have not examined their individual bond structure hence the details has yet to be worked out.

Bank perps work a little differently from what 38yrold described. Banks don't typically issue senior debt because they can always take in cheap deposits. However, they have to maintain a Basle capital adequacy ratio and two hybrid instruments qualify for capital - sub debt and perps. Perps have a higher yield than any debt because they rank lower if a company fails and are perpetual i.e., you may never see your money back. However, in the case of bank perps, the Basle rules are such that they stop qualifying for capital after a period of time, like 5-10 yrs, which is why banks typically redeem them and investors expect banks to redeem them. There is also typically a interest step-up clause to convince investors that their money won't be tied up forever. However, if the bank is in trouble, it can choose to take the higher interest rate and not redeem.

Recently UOB issued a 4.9% S$ perp which qualifies for the new Basle III rules. I expect the other Singapore banks to follow suite. With long-term rates rising, I didn't bite on the UOB perp. I'll wait until they hit 6% as long-term rates rise. There is good history of banks redeeming their perps. In fact, OCBC just redeemed their 5.1% perp they issued about 5 years ago.

So, I would hold off on buying perps and bonds for a little while or until long-term rates stop rising, then I would buy and hold until maturity or redemption. If you like short term instruments, there are always a series of Credit Link Notes or CLNs available. They are used a lot by banks who lend to a corporate and want to offload the risk to investors. They are typically medium duration, about 2 years. But you have to evaluate the credit yourself and don't forget the credit of the bank issuing the notes, especially European banks. I don't touch bond ladders with a 10ft pole. The private banks make too much money off them. For bonds, I buy direct, but it's $250K to $1m minimum investment. Picked up some Capitaland bonds in 2009 for 10% yield!

BTW a little tip for dealing with bankers. I take mine to expensive lunches all the time and I choose the restaurant and pay even though they always offer. You want to be the first guy they call when a good investment opportunity arises.

[whizzard]

Originally Posted by Unregistered

Bank perps work a little differently from what 38yrold described. Banks don't typically issue senior debt because they can always take in cheap deposits. However, they have to maintain a Basle capital adequacy ratio and two hybrid instruments qualify for capital - sub debt and perps. Perps have a higher yield than any debt because they rank lower if a company fails and are perpetual i.e., you may never see your money back. However, in the case of bank perps, the Basle rules are such that they stop qualifying for capital after a period of time, like 5-10 yrs, which is why banks typically redeem them and investors expect banks to redeem them. There is also typically a interest step-up clause to convince investors that their money won't be tied up forever. However, if the bank is in trouble, it can choose to take the higher interest rate and not redeem.

Yeah, thanks for your post. That is also my understanding of how perps work for the banks too. However, under Basle III, the old perp structures as we know it would not qualify as Tier I capital anymore. Thus, I am attracted to pick up some of the old structures, with short durations before they disappear from the market. The new ones (called BCCS or something similar) are much more equity-like and less bond-like. They are quite different animals. Some are already in the market. Not good for investors unless they pay substantially higher yields for the risks the investors are taking.

That is why I specifically chose the earlier perps issued by
(1) investment grade Asian banks;
(2) which generally have higher loan-to-deposit ratios ("LDRs"); and
(3) which are also systemically important institutions in their own countries.

In any case, the Asian banks are generally not so adventurous in terms of their trading books so the main issue you have to look out for in assessing an Asian bank's risk is mainly the credit risk of its loan portfolio, regulatory risks of their home regulators and liquidity risks (alleviated by their low LDRs).

What I am most afraid of and can't really analyse is the timing and speed of interest rate hikes. I have read various research and economic forecasts and you know what they are worth right? Logical arguments aside, at the end of the day, there are always qualifiers to those forecasts. But, a punt on short and mid term rates not rising more than 4% within a 2-3 year duration seems fairly safe to me at the moment. Hence, in my view, such a short duration, investment grade rated portfolio should be safe enough for a buy-and-hold strategy to generate a 8%+ return on capital. Everyone knows and expects interest rates to rise, the issue is when and how sharp. Since no one can tell, we will need to have a strategy to protect or at least mitigate such risks when it happens and that is why I chose investment grade banks (generally credit spread would rise less compared to high yield names) and deliberately kept the duration short.

Also, I am not aware of any banks not redeeming their perps at their respective call dates. I must confess that I don't follow the perps market closely and hence may have missed out on some which may not have called in the past, so I asked the bankers and they said they were also unaware of any who have not redeemed thus far. The key issue to me hinges on issuers redeeming their perps at their call dates because all you need is one joker who doesn't call and the rest of the perps would fall in a knee jerk reaction. The other factor supporting this is that banks have a reputation to protect and they will need to make the call when due because if they do not make the call, it signals that the banks are in some sort of trouble. For an institution that runs their business premised upon reputational risks and consumer confidence, that is the last thing they would want to signal.

Hence, the more I think about it, the more inclined I am to plunge into it. Based on my current circumstances, I will still be very much overweight cash even after I invest into this. Furthermore, I probably won't have the guts to invest 100% of my investable cash into equities should a correction happen.

[whizzard]

Originally Posted by Unregistered

BTW a little tip for dealing with bankers. I take mine to expensive lunches all the time and I choose the restaurant and pay even though they always offer. You want to be the first guy they call when a good investment opportunity arises.

Wah, you are spoiling the market! Don't worry about them not showing you attractive opportunities. As long as you make clear your investment objectives and show them your dry gun powder, they will continue to tempt you with goodies!

Remember, they only make when they sell you something. Whenever you buy any securities, they also charge you custody fees.

I think dealing with them politely and portraying yourself as a humble person plus develop a good rapport should be adequate.

Originally Posted by Unregistered

Bank perps work a little differently from what 38yrold described. Banks don't typically issue senior debt because they can always take in cheap deposits. However, they have to maintain a Basle capital adequacy ratio and two hybrid instruments qualify for capital - sub debt and perps. Perps have a higher yield than any debt because they rank lower if a company fails and are perpetual i.e., you may never see your money back. However, in the case of bank perps, the Basle rules are such that they stop qualifying for capital after a period of time, like 5-10 yrs, which is why banks typically redeem them and investors expect banks to redeem them. There is also typically a interest step-up clause to convince investors that their money won't be tied up forever. However, if the bank is in trouble, it can choose to take the higher interest rate and not redeem.

Recently UOB issued a 4.9% S$ perp which qualifies for the new Basle III rules. I expect the other Singapore banks to follow suite. With long-term rates rising, I didn't bite on the UOB perp. I'll wait until they hit 6% as long-term rates rise. There is good history of banks redeeming their perps. In fact, OCBC just redeemed their 5.1% perp they issued about 5 years ago.

So, I would hold off on buying perps and bonds for a little while or until long-term rates stop rising, then I would buy and hold until maturity or redemption. If you like short term instruments, there are always a series of Credit Link Notes or CLNs available. They are used a lot by banks who lend to a corporate and want to offload the risk to investors. They are typically medium duration, about 2 years. But you have to evaluate the credit yourself and don't forget the credit of the bank issuing the notes, especially European banks. I don't touch bond ladders with a 10ft pole. The private banks make too much money off them. For bonds, I buy direct, but it's $250K to $1m minimum investment. Picked up some Capitaland bonds in 2009 for 10% yield!

Yes! I learned something new today. I was not aware of this additional factor that incentivises banks to redeem even if current perp price below 100. But I agree on duration for sure. Now is the time for low duration and when lt rates stabilize then can extend it.

Originally Posted by Unregistered

I don't touch bond ladders with a 10ft pole. The private banks make too much money off them. For bonds, I buy direct, but it's $250K to $1m minimum investment. Picked up some Capitaland bonds in 2009 for 10% yield!

Don't quite understand this? What u mean by pb make money off ladders? They make the same right? I construct my own ladder of individual bonds expiring in various years and pay them the normal spread and commission. What I do to make sure they don't make too much is to get 2 pb to quote and buy from cheaper one. I usually pay 0.2 commission for each bond bought. Have about 30+ individual bonds now with about 4-5 maturing per year.

Originally Posted by whizzard

Wah, you are spoiling the market! Don't worry about them not showing you attractive opportunities. As long as you make clear your investment objectives and show them your dry gun powder, they will continue to tempt you with goodies!

Remember, they only make when they sell you something. Whenever you buy any securities, they also charge you custody fees.

I think dealing with them politely and portraying yourself as a humble person plus develop a good rapport should be adequate.

Whizzard, custodian fees can be waived, just ask. Yes being normal and nice always helps.