Zero Dividend Preference Shares, Corporate Bonds vs Cash

If you have read my investment ramblings before you will know that I have been keen on Zero Dividend Preference Shares (the lower-risk type of share issued by certain Split Capital Investment Trust Companies) for a long time and more recently corporate bonds. The former had become very unpopular after a "miss-selling scandal", making them extremely cheap and an excellent investment over the last few years, but they have suddenly become popular again now the new proposed 50% income higher tax rate is on the horizon; ZDP profits are capital gains and are therefore taxed at just 18% making them far more tax efficient for high-earners. Corporate bonds have also enjoyed a huge boom in popularity because of their comparatively high coupons (interest rates) when compared to deposit rates. Both of these asset classes have increased in value, reducing the possible future rates of return. Both react positively to the reduction in bank base-rates and are becoming less attractive to buy now, although there may be some value left.

The case for both Zero Dividend Preference Shares and corporate bonds is complicated by the unknown future interest rates; Will rates stay low for years or start rising soon? As soon as the base rates start rising both asset classes will look less attractive, but even before that how attractive are they now anyway? Zero Dividend Preference Shares are best held to maturity, to avoid being exposed twice to large bid-offer spreads and the further away the maturity date, the more uncertainty there is over the bank base rates. Short dated zeros are hampered by very significant bid-offer spreads and charges eating into the profit.

The best short dated Zero Dividend Preference Shares currently available are perhaps Premier Renewable Energy and Premier Energy and Water (PEWZ) which are currently yielding less than 4% and 5% if held to maturity in December 2010 (excluding dealing costs and bid-offer spreads), but both have good share cover and hurdle rates (see this article for more about how to analyse these numbers). Another slightly longer-dated zero is Edinburgh New Income ZDP which matures in 2011, but still yields less than 4% and Utilico maturing in 2012 yielding a little over 4%. Longer dated zeros from JZ Capital Partners maturing in 2016 and Utilico maturing in 2014 and 2016 offer about 6% to 8%. The best way to compare these returns is against government bonds of the same maturity or "savings bonds" of the same or similar maturity. These look particularly attractive if you are a 40% or 50% tax-payer, but for other people a savings bond may prove a better (and safer) bet.

The case for corporate bonds is actually rather similar, although the tax situation is different: when base rates go up the fixed income return from bonds will look less attractive, causing a potential drop in prices and given the huge recovery in price over recent months taking some profit before this happens looks like a good strategy. It is always good however to have some bonds in a balanced investment portfolio.

Will The Equity Rally Run Out of Steam?

Time for an investment update. I may have reduced my equity exposure a little early, but the corporate bonds have performed extremely well.

I bought iShares Corp Bond ETF (SLXX) a few months ago. There aren't a huge variety of UK bond ETFs, but SLXX has performed extremely well (up over 20% and a good yield) SLXX still looks good and the yield is still reasonable at over 6%, but the yields on gilts have gone up too as have the best interest rates on long-term savings accounts, so I'm not sure how much more capital gain is available from corporate bonds. The yield however should be safe, so as a long term investment it should do better than even the best cash account, until bank base rates start going up again, which could be a while yet.

SLXX just tracks the Sterling denominated investment grade corporate bond market and therefore has a huge exposure to financials (almost 60%) which proved to be beneficial, but does make it perhaps a little unbalanced. For a bit of diversification I also, reluctantly, bought some bond unit trusts and one high yield bond investment trust, Invesco Leveraged High Yield Fund (ILH) I try to avoid using managed funds, but they have actually, mostly, done just as well as the SLXX ETF, but over the longer term I imagine the annual management fees will eat into the returns. ILH has more than doubled in just a few months and paid a yield of well over 20% (although the percentage yield has obviously dropped now) Invesco Perp Corp Bond, M&G Strategic Corp Bond, Artemis Strategic (and several others in my ISAs) all seem to be doing rather well: up 15 to 20% and are still yielding between 4.7% and 6.5% (and closer to 10% for high yield funds)

After the recent share-price rally, taking profits and moving into corporate bonds could be a good idea, although the return from bonds will probably be much lower than over the last few months and I intend to reduce my holdings as soon as normal savings accounts start looking attractive again. Government bonds don't look good at the moment. I think that the equity market rally looks like it will run out soon and probably drop back. I shall pile back in if the FTSE gets close to 4000 again. I won't sell all of my share holdings in the mean-time though, but I will probably short the market with covered put warrants if it looks precarious.

I have been a big fan of gold for ages. I even have a little pile of gold sovereigns for insurance against a complete market meltdown. I have traded ETFS Silver and Gold Bullion Securities and ETFS Physical PM Basket, precious metals (PHPM) ETFs. I try to trade the volatility in gold and silver, but I also have some for the long term as an inflation insurance. I have a few mining shares too which are very volatile. Gold will do well in times of uncertainty and inflation etc. so it is generally uncorrelated to other asset classes and there is an old saying that you should have 5% of your assets in gold and hope it doesn't go up in value. I think there is a very good chance it will go above $1000 soon and then might rocket even higher, but it does have the annoying habit of dropping back for ages and of course doesn't pay a dividend. It should be a good inflation hedge as the dollar collapses.

Is It Possible to Make a Living on the Internet?

How to Make Money Working From Home on The Internet

When I resigned from my job to "spend more time with my money" I starting researching the many claims I had read, about how easy it is to make money from the internet. Not because I needed to, but if there really is easy money to be had, then I wanted some of it. Here are the results of several months research into the subjects:

These are ways to earn money on the internet, that I have tried:

Publishing your travel photos or sell them via Zazzle.com

Answering surveys

Writing product and travel reviews

Writing in general

Trading Shares, Bonds, Gold Coins or Spread Betting.

Blogging

and, Squidoo

For details about all of these options and the relative merits please see the full article here...

These are all viable ways to supplement your income and can even be fun, but some of them really are a lot of work for not much reward. I have tried quite a few of these various internet sites and also a few riskier, internet trading strategies (which I have found to be much more lucrative per hour).

Make Money From Writing

There are many web-sitse that allow you to publish your creative writing, product or travel reviews (see details of all of these in the full article) but generally you will need to do a lot of social networking to get people to read your work and hence earn you money. Helium is an internet writing community where the emphasis is on enjoying writing good quality articles, getting them published and read.

Here are a few examples of articles written by me on Helium:

Rio de Janeiro: A Travel Diary

Classic Car Review: Ferrari 308 GTS

Car Review: Jaguar XJ12

Car Review: Jaguar XKR

Brazil Vacation

Savings and Investment Article

Bangkok (during a military coup)

Tiger Safari in India

Marrakech Morocco

Vacation in Cuba

African Safari: Namibia

Investing in National Savings Premium Bonds

How to Reduce Risk of Your Investment Portfolio

Investing in Corporate Bonds

For good earnings you will need to write a lot of articles, but they then keep earning royalties and you don't need to do anything (apart from rate a few other articles every 90 days to remain eligible for payment).

See my separate article about creative writing for money

The minimum payout is $25 (approximately £18)

Publishing Photos

Zazzle allows you to create a gallery of products (T-Shirts, mugs, stamps, mousepads, postcards, shoes, bags etc.) featuring your photographs or artwork. The products are created on demand, so there is no set-up cost, just profit when an item is ordered.

Conclusion

Giving up a well-paid job to try to make more money from interacting with web-sites, is a very risky thing to do and even achieving minimum-wage is quite hard, unless you really are taking a risk, such as share or commodity trading/spread-betting.

From the methods described in this article, the best guaranteed payment, per hour of time actually logged into the various sites, comes from some of the survey sites. Generally this is rarely much more than minimum wage (e.g about £6 per hour in the U.K) although avoiding low-paying surveys improves returns and with practice they can be completed more quickly than the specified amount of time.

Writing and publishing on an internet community and review sites can result in reasonable payments per hour of writing, if you discount the time spent reviewing other peoples' work and interacting with the community, which is more time consuming than the writing; if you enjoy the community aspect these can be a good way to earn some extra money and have some fun, but including the time spent reading and reviewing other peoples' work they pay a very low hourly rate.

If you want to make big money on the internet then you either need some money to invest and you need to take some risk. My compromise, is I trade shares, bonds and commodities (gold coins) over the internet and spend most of my time monitoring the markets, but simultaneously, during the breaks and when the markets have no obvious direction, I make a bit of extra cash from these other methods.

Bonds and Convertibles, Zeros and Gold. What shall I buy?

Another exciting week of investing/trading is coming to an end. I am still struggling to find any definite direction in most of the markets that I am monitoring. Opinion seems divided more than ever: Are we in a bull market or is this just a bear-market rally? Should we worry about deflation or hyperinflation?

My opinion is that this is probably a bear-market rally, that will stop abruptly, but I hope that it will go on a bit longer and I expect that we will have deflation for several more months followed by inflation and possibly hyperinflation. So what am I doing about it?

I'm still very keen on Gold and Silver, both in the form of coins and Exchange Traded Funds (ETFs) Gold and Silver prices are quite volatile, so I buy on the dips in price (or when sterling is strong versus the dollar) and via Black Rock Gold and General fund (gold and gold mining shares) inside my ISAs (Individual Savings Account)

Corporate Bonds have had a very good run, since I invested heavily in them, both in terms of income and capital gain. I expect (and hope) this will continue for some time, because the yields are high compared to cash, but interest rates are creeping up, so I am keeping a close eye on that, so I can get out if necessary. I didn't avoid banking bonds, unlike many fund-managers, which has been beneficial too. They weren't as risky as many people thought and paid a very good yield. The same seems to be true of high yield bonds too. I bought Invesco Leveraged High Yield Fund (ILH) which is one of the few Investment trusts that invests in bonds (due to unfair taxation of ITs, although this has been changed in the last budget) ILH has performed extremely well.

Zero Dividend Preference Shares (ZDPs) have been in the news rather more than usual recently, because they are very tax efficient (they don't pay a dividend, so all return is in capital gains) and the new 50% income tax rate for high earners in the UK makes them more attractive than ever. For a full article about how split capital investment trusts work See my article here

JZ Capital Partners Zero Dividend Share winds up next week after making me a nice steady 8% APR since I bought them a couple of years ago. New JZ Capital Partners zeros will be issued
, also paying about 8% until maturity in 7 years time. Ecofin are also launching new zero dividend shares at £1.00 each with a life-time of 7 years and a gross redemption yield of 7% (i.e. £1.60 will be paid to each zero share holder on expiry) They have a cover ratio of 4.5 and a hurdle rate of about -20%, so these are relatively safe.

Another interesting alternative to zeros and bonds is convertibles. M&G Global Convertible fund looks good: probably a fairly low return, but good protection against all eventualities. If stock markets continue to rise the convertibles can be conveted to shares and if they don't they continue behaving like bonds.

Le Mans 24 Hour Motor Race, 2009

It is less than a week to the Le Mans 24 Hour Race: The best motor race in the world. It starts on Saturday 13th June at 2pm Central European Time.

Le Mans, in France, is famous for the 24-hour race, which is a favourite of many British car racing and classic car enthusiasts. Various classes of sports car compete in a battle of reliability, attrition, fuel efficiency and speed during one weekend a year in mid June (13-14 June 2009). It is a full weekend event; the race starts on the Saturday afternoon at 2pm and runs continuously for 24 hours, but for the average British person the fun begins some days before at the start of the road trip to France. And there are some races and testing in the days leading up to the race weekend. The race is organized by Automobile Club de l'Ouest and the official web site is www.lemans.org and is held at the Circuit de la Sarthe starting at 14:00

I have been to this event several times, in a variety of classic and not so classic cars: the last few times I took my old Ferrari 308 (the Magnum car) or Alfa Spider (similar to the one Dustin Hoffman drove in The Graduate), but the majority of the British contingent have classic British sports cars.

Here is an article about the event and some photographs from previous years...

Tuscany, Italy: Beautiful Countryside, Art, History and Wine

I recently returned from a very enjoyable trip to Tuscany in Italy (or "Chianti-shire", the favourite holiday destination of many english tourists) A well deserved break: a few days away from the gyrations of the stock-markets.

Tuscany is beautiful part of Italy with many picturesque medieval hill towns, which are relatively close together, separated by beautiful countyside, rolling hills, olive groves and the vinyards of the Chianti making the region and neighbouring Umbria ideal for a driving holiday. 

Our route was: Pisa, San Giminignano, Montepulciano, Cortona, a vinyard on the "Chianti Road", Volterra, Lucca, then back to Pisa. We rented a small car; a Fiat 500 - a modern version of the classic 1960s Italian Car Driving in Italy is relatively easy on the main Autostrade roads, although is more difficult on the small road. A small car is a good idea for some of the medieval towns. Driving in cities is more difficult.

The "Chianti Road" runs between Siena and Florence and is an excellent route to take through the Chianti vineyards of this famouse wine region. Greve In Chianti is the biggest town en route, but staying at a vineyard could be a more pleasant experience: great food and of course wine straight from its source.

For Hotel recommendations and reviews: See this European Hotel Review Article...

Investment Dilemma

I have been a big fan of Zero Dividend Preference Shares, (the safest share class of Split Capital Investment Trust Companies) for several years now, after the mis-selling scandal in which these shares were sold as a guaranteed return product to risk-averse investors. The prices of even the safest ZDPs dropped after a few risky ones collapsed. No one else would buy them, so I bought lots of them, making a very nice return. There are few left and the ones that do remain are only returning about the same as Corporate Bonds, but they still represent a good value and have the advantage of all profits being capital gains (i.e. useful for tax-planning)

I have some which are about to mature: *JZ Capital Partners, but I also own the riskier Highly Geared Ordinary Shares.

*JZ Capital Partners is an interesting case. The ZDP shares wind-up on 24/06/2009. The company does not have adequate cash to pay the ZDP (JZCZ) shares, on this date, although more than enough assets. The Highly Geared Ordinary Shares (JZCP) of the company have no defined end-date and a rights issue has been proposed (7 shares issued for each 3 shares held) in order to fund the cash payment of the JZCZ ZDP shares.

The Dilemma is: Should I buy the newly created shares in the rights issue? If I buy them and the company fails after the ZDPs are paid off I will lose my money, but if I don't buy them and the company survives I miss out on potentially huge profits.

I have a few days to decide...