Forum Archive Index - February 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Paddy,
 
>
>
>I was interested in your comments on Capital Notes and while I agree
>with what you say, in general, I consider there is a place in
>everyones portfolio for some Capital Notes.  My comments on Capital
>notes are as follows: - they can provide a good yield in times of
>low interest returns and low or negative share returns(such as at
>present); 
>


Yes, but high yielding shares can also provide a good return during 
those times.  I made 20% overall (after tax) on my portfolio of high 
yield shares (my substitute for capital notes) last year.   The idea 
that there are times that *all* share returns are low or negative is 
a myth.


>
>
>- you need to diversify your portfolio so that a
>particular note is no more than 5-10% of a portfolio because there
>may be a payment default(but this rarely occurs); 
>
>


I guess that if you go into capital notes with the idea that one in 
ten of your investments may go bad, and this is your trade off for 
getting higher interest than putting your money in term deposits, 
then that is a rational approach.


>
>
>- the returns once purchased are steady 
>(attractive to those who do not like the
>volatility of share returns); 
>
>


Actually that's not quite so.  The *payments* on capital notes are 
steady.  But the value of the capital notes *do* go up and down with 
the market.  These aren't all printed in the paper each day like 
share prices.   But if you ring your broker you will find the 
value of the capital notes does indeed go up and down.  Because the 
value of the note varies, even with a constant payment, your return 
will also vary.   Granted this variation in value of capital notes is 
usually less than you might expect from shares though.


>
>- you need to investigate each note
>before purchase to ensure that your notes yield is commensurate with
>the risk taken; - there is a good secondary market for all the major
>Capital Note issuers; - many Capital Note issuers, such as BIL, will
>provide cash rather than shares if this option is chosen at the end
>of a notes term.
> 
>

I think in the case of BIL notes the company has the discretion as to 
whether they pay you back in cash or shares.   I went into this 
when I considered buying some last year.  My broker thinks that the 
notes maturing this year will be paid back in cash, but this is not 
guaranteed.   Actually I wouldn't have minded getting a few more BIL 
shares at below asset backing.  But in the end, I had the chance to 
buy some more WRI shares at that attractive 15% yield.  So I didn't 
buy the notes.

SNOOPY



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