Question of the Week

Questions of the Week

Co-founder of the Switzer Report
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Question 1: What are your thoughts on the upcoming NAB hybrid?

Answer: I think that the new issue (NAB Capital Notes 4) will be keenly sought. The margin of 2.95% over the 90-day bank bill will be attractive to investors seeking relatively secure income. You can read what I had to say in Switzer Daily here.

One note of caution – hybrid securities are complex securities. Remember the old adage – if you don’t understand something, don’t invest in it.

Question 2: I bought 1,000 CSL many years ago at $22 and then they did a share split 1:1 (from memory around the $100 share price), which gave me 2,000 shares. Now that they are $330 each share, do you think they will be repeating the share split to make them more marketable at $165 per share?

Answer: CSL did a 3 for 1 share split in 2007. I don’t think there has ever been a 2 for 1 share split. I think it is a possibility, rather than a probability. CSL didn’t announce a split at their half-year results briefing last week, so it is probably not on the company’s immediate agenda. Remember – share splits create absolutely no value – they are just book entries –  and because you can now buy two CSL shares to get on the register (minimum $500), and sell a single CSL share (no minimum lot size to sell), the argument to do a share split is not particularly strong.

Question 3: Do you have a view on the MCP Master Income Trust Shortfall Offer? Investment in corporate loans seems unique but the returns look very good.

Answer: The MCP Master Income Trust (ASX: MXT) invests in corporate loans from investment and non-investment grade borrowers. It targets a diversified mix of borrowers from different sectors, industries, investment terms and credit profiles. Most of the loans are to Australian borrowers. Currently, the portfolio comprises 140 loans.

The portfolio is actively managed. It targets a return to investors of the RBA cash rate plus 3.25% (current total 4.0%), with distributions paid monthly.

I would categorise an investment in this listed Trust as part of my “risky fixed interest” portfolio. Provided you understand the risks, I am OK with investing in this type of product, with the following important caveats. Firstly, it wouldn’t be my only investment in this category (there is in Manager risk); and secondly; be cognisant that spreads between non-investment grade bonds/loans relative to government bonds are at record lows due to investors chasing yield.

In relation to the particular offer, it is a 1 for 2 entitlement offer (plus a shortfall offer) to raise approx. $638m. It is at $2 per unit – the most recent NTA (net tangible asset value) was very fractionally higher at $2.007. The offer closes on 6 March.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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