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Aggressive Fixed Income Strategy

When you read or discuss fixed income investments there are a number of words that routinely get tossed around in conversation such as “safe”, “reliable”, “income”, “stable” and “predictable”; the usual that someone would expect.  Rarely are words such as “aggressive” or “risky” used in a positive way with investors openly conveying their low appetite for risk when investing in fixed income investments and alternatives.

I received a handful of E-Mails last week from readers related to my admission on the Financial Webring Forum (FWF) that I had bought more shares of a recently new positions the ADR preferred shares of the National Bank of Greece (NBG.PR.A).  To many this went outside my normal disciplined and conservative value investing approach and with all the perceived risks in the Greek economy at this present time the move was to many “out of character.”

To be honest I make these moves from time to time as a sort of quasi-contrarian value approach when fear is built into the price of an otherwise valuable company and I’m being compensated appropriately for the risk I’m taking on.  If an investor knows the risk they’re taking, can identify or quantify that risk and is still willing to take a chance on the investment then doing so poses no greater risk to a diversified portfolio than investing all of one’s assets into only 2-3 individual investments.

Fixed income doesn’t have to be about safe, boring and expected returns when the majority of one’s portfolio (such as the fixed income component of my RSP) is invested in very conservative and safe bonds.  Placing 5-10% of a portfolio into a more risky strategy could mean you lose a little of your return when investments don’t pan out but for an young investor (I am currently 29) that additional risk may provide additional return that can be then used to continue buying conservative fixed income investments.

In the case of NBG.PR.A I’m being paid in excess of 12.5% on a preferred share in a company that I don’t believe holds any more default risk than any other european bank.  I might lose my entire investment (4.2% of my fixed income portfolio) but for 13% dividend plus potential capital appreciation I’m willing to take on additional risk for potential return.

As I outlined last year in my Fixed Income Alternatives strategy (including STD.PR.A & REP.PR.A) there are times when fixed income investments (or hybrids) are very attractive, underlooked or not even on the radar of most mainstream investors.  My average return on the stocks I’ve purchased since has been just over 60% (average return – not total return) without any substantial losses.  If I lost my entire initial investment in 1-2 of these CorTS or alternatives the income paid by the others plus their gains would continue to justify the strategy.

Thinking outside the box isn’t easy and certainly with all the anxiety in Europe on bailouts, ecomonic assistance packages and political posturing an investor has to look for opportunities because the Greek economy, while possibly in trouble, isn’t going away forever.  There will be defaults, debt down grades and other issues presenting in the future months but an investor needs to find a comfort zone and 1-2 risky investments in my fixed income strategy is something I can live with when the majority of what I own continues to be held in more conservative positions

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{ 8 comments… add one }
  • Mariusz Skonieczny May 31, 2010, 2:06 pm

    Not many investors are knowledgeable about preferred stocks. I found your article interesting because today I was writing an article, Common versus Preferred Stock: What's the Difference. I didn't post it yet but I will sometime this week.

    It doesn't really matter whether you invest in common stocks, preferred stocks, bonds, or real estate, as long as you are getting a good deal and you know what you are doing. I like common stocks because I understand them and I can still find good values.

    What type of preferred is it that you bought (cumulative, participating, convertible)?

  • Nurseb911 May 31, 2010, 8:14 pm

    The NBG.PR.A's are ADR's and non-cumulative preferreds. Nothing overly special about them other than how they trade on the North American exchange.

  • Mariusz Skonieczny June 1, 2010, 12:20 am

    Thanks.

  • Financial Uproar June 5, 2010, 2:12 am

    I personally dabble in some individual preferred shares, however the bulk of my fixed income portfolio is made up of ETFs and closed end funds. While I'm a contrarian investor who loves looking at beaten up stocks like the National Bank of Greece, I like to keep the fixed income part of my portfolio into safer assets. I'd recommend you view your position as an equity, since it easily has the risk profile of a common stock.

  • valueinvestor2010 June 6, 2010, 7:45 pm

    Hi , what a smart move. Please accept my congrats ,if not yet for the returns but at least for following the maxim of be greedy when others are fearful.Your move to take preferrd's is also a good one.
    Obviously you are already well informed but if it helps google for Baupost and Klarman's post's on investing in such securities. They specialize in investing in senior tranches of distressed debt. There is also a great blog called distressed debt investing I think by a guy called hunter, it is an absolute treasure.
    Finally, the only macro risk I think in this is if Greeks change their currency very suddenly, it would cause a bank run so check on that
    All the best

  • Older Investor June 9, 2010, 10:03 am

    Good move. I am an older investor and have moved into several "distressed" debt issuers (and preferred shares of financial and asset holding conglomerates like BPO,PWF etc.) I take small positions and consider the higher yield and risk to be equivalent to equities in my portfolios "risks profile". I am very overweight Manulife (~7% including common, preferred, bonds) but believe it has been seriously oversold.

    BTW to all young people. If you are 29 any fixed income (even GICs) is a good move since you have time on your side (3.5% return for 35 years in a tax sheltered account is like getting 6-7% but with no capital risk for the same period). Choose compounding GICs. My view is you should start by building a fixed income zero risk core for your long term retirement savings by putting 75-100% of your savings in 30 year government bonds and GIC ladders. Educate yourself and start to expand into dividend paying equities after this core is established (in your late 30s say) and continue to carefully build your positions in the equity portion until your fixed portion is down to around 20-30% or your portfolio.

  • Nurseb911 June 9, 2010, 12:07 pm

    Great comment Older Investor. If possible could you send me an email through my contact page; I have a question or two for you.

  • Mike July 11, 2010, 7:27 pm

    Did you do your usual situational analysis on NBG? I was looking at their financial statements on their website and they look a little different then the statements I am used to in Canada. For example they don't break out current liabilities and current assets on the balance sheet. Also note 12 in the financial satements indicates that there is a threat that a government representative on their board could reduce or eliminate the dividend (I am not sure if this applies to preferred dividends):

    "In accordance with Law 3723/2008 regarding the Hellenic
    Republic’s Liquidity Support Plan, banks participating in the plan
    are allowed to distribute dividends of up to 35% of distributable
    profits, in accordance with article 3, par. 1 of Law 148/1967. The
    Greek State representative in the Board of Directors of the
    participating banks has veto right in any decision that relates to
    dividend distribution"

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