Ishrc � Discussion Threads

[alun rm] 05/2/2009 11:54

Kiwi,

I think that you are right, the proportion of financials appears to be falling in the fund. I note that the Barclays bond has fallen from over 3.5% to under 3% in recent weeks.

I have never quite got my head around how the fund adjusts its constituents. But I assume that as banks like Barclays are downgraded by the ratings agencies and the bonds make up a smaller proportion of the bond market, so SLXX reflects this with a smaller proportion of Barclays bonds being held. (please correct me, or add to this understanding if you can).

Bill,

You are dead right that the corporate bonds in this fund are strongly influenced by government bonds. The large amount of issuance now taking place is driving down the price of the longer term bonds, and hence pushing up yields. If the appetite for all this government debt is shrinking, then prices will fall and the corporate bonds will suffer.

It is a difficult time for investors in every asset class. I calculated that the yields from corporate bonds would attract buyers, and the appetite for SLXX itself is strong. However, the bonds themselves are being sold off and so the underlying value of this fund is falling. The income is there to enjoy whilst waiting for the bonds market to settle down.

My main fear now is that some of the banks in the fund may fail and the bond holders get kicked in the nuts, or that the pound collapses and so we are forced to push up interest rates to attract gilt buyers. Either scenario is bad news for SLXX.

In the meantime, a small cut in rates any minute now may help to attract some hot money towards the high yields now on offer in this sector.

[jonwig] 05/2/2009 09:30

Thanks Kiwi - I didn't spot that on the ishares site. Note the drop-down at the top, where you can view holdings for earlier dates.

Bill - you may have a good point, there.

I see it's still about £2 over NAV.

[borderbill] 05/2/2009 09:17

The recent falls are down to the the weakness of the longer end of the gilt market, remember the duration of SLXX is quite long. For SLXX to do well you need both a contraction in spreads and a stable gilt market.

[kiwi2007] 05/2/2009 08:58

jonwig.. maybe this link will work?



if not go to ishires SLXX and holdings, it then offers a 'view all holdings' tab.

Using a calculator and adding up the ones I recognise as financials I now get 54.13% ...

[jonwig] 05/2/2009 07:57

Kiwi, the latest I have is 74% financials:



though I can't find a link to current constituents - can you help?

The NAV is now down to ~£103.7 - quite a drop since last week, though the number of shares in issue is rising, which suggests to me that there is buying pressure on SLXX but not on the underlying CBs.

[kiwi2007] 04/2/2009 23:14

"the bank of england buy in of corporate bonds was due to come in to action yesterday, it will be interesting to see if it happens"

SLXX has around 25% of constituents that possibly could qualify - that is bonds that are issued by UK companies... the rest are stirling bonds issued by overseas companies.

Also the make up of holdings is changing and financials now seem to comprise of around 60%... wasn't it nearer 80% not long back?

[wolstencroft] 03/2/2009 14:19

...and we all thought the Chinese were fools for buying all those treasuries from the US - now the dollar is strong and the price of treasuries has risen, perhaps a good time for them to start selling?

[jonwig] 03/2/2009 14:14

wolstencroft ... interesting comments and arguments. You didn't raise the fact of competition for funds: HMG vs Private Sector which might crowd out the latter.

However, the tightening of spreads could only be good for the time being: whilst some UK companies are testing the market for rights issues, the bond market may well become an attractive alternative, given the dilution some are experiencing.

[wolstencroft] 03/2/2009 12:21

As I think has been pointed out elsewhere and perhaps here, the central bank buying corporate bonds is a much better fix to the economy than buying gov't debt, as hopefully it will reduce the yields and thus make raising debt easier for companies. Of course eventually the central bank may have to buy government debt because no one else will at low yields and thus to keep the cost of debt low for the governments to inflate us out of this mess.

Rather interestingly, if the central bank buys treasuries they may well just end up effectively paying money to the sellers whcih might be the Chinese and other foreigners and thus stimulate a foreign enomony rather then their own! This might have the (desirable) effect of weakening the currency though.

[flyfisher] 03/2/2009 09:53

the bank of england buy in of corporate bonds was due to come in to action yesterday, it will be interesting to see if it happens, or whether it was just talk.

[borderbill] 03/2/2009 09:04

A good post thanks, the retail interest is a worry, as I recall the last best sellers were commercial property funds ! I remain a holder of SLXX, albeit a nervous one. Bill

[jonwig] 26/1/2009 16:31

Today's FT.
The fears here have been remarked on a few times.

Bond 'hype' causing concern

By Steve Johnson

Published: January 25 2009 19:25 | Last updated: January 25 2009 19:25

Standard Life Investments, one of the UK's biggest fixed income houses, has said it is becoming "concerned" about a flood of retail money entering its corporate bond funds.

Andrew Sutherland, head of credit, said the Edinburgh-based house had been witnessing net inflows from retail investors of £5m ($6.9m, €5.3m) to £10m a week, about 10 times the usual rate, since the most recent Bank of England base rate cut on January 8.

But Mr Sutherland feared some investors were being lured in by false hopes of significant short-term capital gains, emboldened by the expectation that the spread between the yield on investment grade corporate bonds and sovereign debt – which has surged to its highest level since the 1930s – would narrow rapidly.

"In common with other houses, we have certainly seen a lot of money coming in from the retail side. We are a wee bit concerned about the level of hype," said Mr Sutherland.

"Some people are saying it's a real opportunity because spreads are going to fall dramatically. But rather than a golden goose we think it's more of a curate's egg at the moment."

While describing investment grade corporate bonds as a "great investment opportunity", Mr Sutherland feared yields would remain elevated for some time, delivering investors a solid income but not the windfall gains many appear to be expecting.

"We would caution against expectations of significant capital gains."

Mr Sutherland feared that default rates would be above those of the 1930s, due to the higher levels of leverage in place this time around, and that recovery rates would be below the 40 per cent being priced in to the market.

Further, the number of active market makers had fallen from about 10 to four, he said, with the resulting illiquidity helping prevent yields from normalising.

"Investors want an extra risk premium if they have to hold to redemption, keeping yields higher. It's something that needs to be sorted before the corporate bond market can really recover."

Mr Sutherland foresaw little chance of yields softening until the "shadow banking system", created in the boom years, was fully unwound.

Standard Life's caution comes as some rivals houses have lauded the investment opportunities being thrown up by the asset class.

Jamie Stuttard, head of European and UK fixed income at Schroders, last week described investment grade corporate bonds as a "once in a generation" investment opportunity.

The most recent figures from the UK Investment Management Association indicate retail investors poured a net £479m into bond funds in November.

[jonwig] 26/1/2009 14:09

Alun - it may be that we have to wait on the next reported NAV ... ? NAV has been falling for some days (obviously!!) but demand for SLXX hasn't (hence the no. of shares in issue hasn't fallen). This may be an opportunity?

Ptolemy - the Wiki article is typical of what searches throw up - an incomplete picture which doesn't really help with making money!
My own naive view is that Tier 1 capital should be equity ... period!
Prefs? Possibly.
Debt should not be counted as capital.

However, I may need to bone up a bit!

[ptolemy] 26/1/2009 13:29

Jonwig, thanks for ref to Tier 1. Sadly it doesn't clarify.

It says tier 1 includes non-cum irredeemable debt but what about cumulative irredeemable debt?

It doesn't mention bonds, so one then looks at the deinition of tier 2. This talks about tier 2 debt being subordinate to senior bonds, implying that junior bonds exist. All very confusing.

[alun rm] 26/1/2009 13:16

I am a little surprised that the recovery in the bank equities is not being reflected in the value of SLXX so far. Any opinions?

[ptolemy] 26/1/2009 13:14

Morgs,
Depends what you want. fixedincomeinvestor doesn't show daily price change or bid/ask apread. And is the yield shown the income yield or the redemption yield?

[morgs] 26/1/2009 12:28

I prefer
Same site without the premium access stuff.

[ptolemy] 23/1/2009 14:20

mog,
go to www.bondscape.net and press closing prices.

jonwig, if your comment about par, sovereign default, IMF refers to me, I don't think we disagree. I was merely suggesting the two broad options going forward but I don't have a crystal ball. A pure guess is a muddle on and subsidise, building up equity and dilluting the ordinaries and, if tipped by some event, full out nationalisation.

[mog] 23/1/2009 13:18

Well it's interesting to read all your comments but I've been spending too much time thinking about what's going to happen to the financial sector and their bonds, so I've sold my SLXX for a small loss. But at least I can relax now, apart from having to look for a new home for the cash!

I'm thinking of some individual bonds as at least then there's some certainty of yield and capital if I hold to redemption. Like borderbill, one concern I have is that if a bond in SLXX that has fallen in value is replaced by another bond and let's say the new bond yields the same as the rest of the fund, then the fund yield doesn't change but the capital has gone down. In a falling bond market this could go on and on with the yield staying the same and the capital eroding.

Ptolemy or others, where do you get your bond price info? advfn has some bonds but I haven't been able to find the bank bonds that are in SLXX e.g.
BARCLAYS BK PLC 8.25% DEC 15 2049
LLOYDS TSB BANK 6.9625% May 29 2020
etc

Thanks, mog

PS hodgins, any fund with "high yield" in the title means the riskier end of fixed interest so more chance of default, as opposed to investment grade bonds which are rated BBB and above by the ratings agencies.

[hodginsjkp] 23/1/2009 11:08

Not a lot of knowledge in these areas but hold some SLXX which I managed to purchase just before the recent bank rout began.
I am only trying to get a bit more exposure in a SIPP to the corporate bond sector so we are talking long term hold.
Does anyone have any opinion on
AEGON High Yield Bond
AEGON Global Bond
Aegon Strategic Global Bond and in fact what are the differences between the latter two of these.

Any thoughts or information would be greatly appreciated

[jonwig] 23/1/2009 10:54

Ptolemy, is this any use?



We'll have to differ on the likelihood that bank bondholders (NRK, BB., RBS, etc) will not be honoured at par.
My own view is that it would amount to sovereign default, and we'd have approached the IMF before that stage.

[ptolemy] 23/1/2009 10:46

Scatty,
I was quoting FT directly when I said "tier 1 bondholder were wiped out." Does anyone have a definition of what exactly is meant by Tier 1? Most things I've googled are quite vague.

Re your comment "if a big clearing bank was nationalised without value being given to bondholders by HMT, there would be a huge markdown across the sector etc,"

Isn't that exactly what happened on 21/1 when financial bonds fell 10%? The market is begining to recognise that HMG has a choice between nationalising the banks and risking insurance/pension write downs but perhaps limiting the impact on sterling. Versus a slow drip feed of huge sums to prop them up which reduces pain for insurers/pensions but probably causes a run on sterling because of the paper issuance?

[borderbill] 23/1/2009 09:30

I am about 3% down on my SLXX now on average (thankfully a good bit more up on my ILG purchases).I just had a largeish term deposit mature with a semi nationalised clearer and was offered just 0.74% to roll it forward another month - I dont think so -and will be buying more SLXX and medium ILG's.

Recent SLXX falls are not a great concern in the context of a 2% divi every quarter but what is worrying me a bit about SLXX is that the current poorer performers will be dropped out when it is rebalanced, presumably preventing the fund from benefitting when they recover. I will have to think about this.

[jonwig] 23/1/2009 08:38

Scatty, with an index what usually happens is that the smallest constituents (in terms of total value outstanding) drop out and are replaced.
If financial CBs are weakest, some of those are likely to drop out.
However, more CBs are from financial companies than any other sector so you can't help them being a big part of the index.

I strongly agree with you that CBs will be honoured by HMG because of possible wider repercussions. Once a company is 'nationalised' (eg. NRK) its bonds are regarded by onlookers as part of the national debt.