Preference shares/capital notes

Discussion in 'Other Asset Classes' started by Lizzie, 23rd May, 2018.

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  1. Lizzie

    Lizzie Well-Known Member

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    Met with the SMSF financial adviser today (attached to the SMSF specialist accountant firm) and had a long discussion about "where to from now"

    Short version - as part of the portfolio we will have between $3-500,000 to invest for no longer than 2 years. Monies that we want to remain liquid for release in 2020 and cannot risk losing or having a share price slump at that 2 year marker.

    So, the adviser discussed various options but recommended preference shares/capital notes with one of the big 4 banks- preferably CBA or WBC - that would mature in around 18-24 months - and pay a regular interest payment into the SMSF of around 4.5-5%

    The rates are not as high as the less secure options and would avoid these less secure options with a very long barge pole (ie, PowerCo)

    Apparently the bank would have to go completely belly up for them to reneg on paybacks - and that, if things did go crook with the world - they have to pay back the preference notes before paying shareholders ...

    ... thoughts?

    Currently reading up on the risks
     
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  2. Zenith Chaos

    Zenith Chaos Well-Known Member

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    They're quite a reasonable alternative between shares and cash in terms of risk and return. Very unlikely to lose the capital and/or not receive the payments.

    Not licensed to give advice
     
  3. OscarBravo

    OscarBravo Well-Known Member

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    No no no no no no


    Preference Notes or Capital notes, particularly of newer issue, are bail in capital. Banks do not need to go belly up for them to stop paying dividends, and in the event that they do go belly up these notes are designed to be mandatorily converted into equity; there has been a lot of discussion as to whether some of these would actually be bailed in before common.


    If you want it for two years and you want no drawdowns then go for term deposits or other risk frees. Don’t reach for yield.


    Financial advisors are literally awful when it comes to understanding these instruments. They don’t look past the yield and they never will – I can almost guarantee they haven’t read the prospectuses for these instruments.
     
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  4. The Falcon

    The Falcon Well-Known Member

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    Great post.

    @Lizzie you need to read this to understand hybrids ;

    Hybrid securities and notes | ASIC's MoneySmart

    Typical advisor who has no idea what he/she is talking about and charging for it. Unbelievable.
     
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  5. Nodrog

    Nodrog Well-Known Member

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    100% agree.

    Not worth getting greedy chasing yield (as in advisor) with money you can’t afford to lose. Gov’t Guaranteed Term Deposits best suited for this.
     
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  6. willair

    willair Well-Known Member Premium Member

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    I dont know Lizzie,but in the market over the next 1-5 ##2-5 years going foward i would not risk the downside with any of the big 7 AU Banks ..Walked past a few NZ Banks a few hours ago and the offer for fixed 12 months was above 3-5% and 50/50 safe on the front door ,even before we walk in the front door..What investors will see over the next few months with AU banks will be cold water on a white hot bbq plate..imho..
     
  7. Lizzie

    Lizzie Well-Known Member

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    Thanks guys ... and that's exactly why I asked here :)

    I was doing a lot of reading and it was rather negative, warning of the potential for the term to be extended, or dividends/interest not paid, at the discretion of the bank - and no comeback - which had me wondering if I would be better off with TD's or buying bluechip shares or simply leaving it as cash in our high interested account.

    The FA is a senior in the accounting firm, doesn't get paid via kickbacks and quite happy to say "do nothing" if you're on course, so thought his advice would be more reliable than most ... but this simply reinforces the need to always second check and understand your investments ... gotta love PC

    My higher interest SMSF operating account would pay (currently) 1.5% on the figures given above ... which is half a percent below reliable bank TD rates. The 0.5% makes a difference of $1500-2500/pa less earning ... and might be worth forgoing in exchange of total liquidity. And, if interest rates go up, which is anticipated, then we're not locked in at a lower rate.
     
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  8. Nodrog

    Nodrog Well-Known Member

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    Our SMSF is getting around 2.75% for 6 month Term Deposits. I use the following TD Platform. Choice of about a dozen banks offering term deposits. Of course you can choose your term. I spread TDs across multiple banks to get the full Govt Guarantee. Paperwork only required once.

    Australian Money Market | Online term deposit platform
     
    Last edited: 23rd May, 2018
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  9. hash_investor

    hash_investor Well-Known Member

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    Did you consider high interest account by RAMS? They pay 3%.
     
  10. Nodrog

    Nodrog Well-Known Member

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    Does that also apply to SMSF? I’ve generally found it much harder to get higher rates in SMSF compared to personal names for online saving accounts. Unless I misunderstood I thought she was referring to her SMSF.
     

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