Brompton Life & Banc Split Corp. has released its Semi-Annual Report to June 30, 2012, with updated performance numbers which allow construction of the following table in conjunction with the Annual Report to December 31, 2011.
| LBS / LBS.PR.A Performance | ||||
| Instrument | Six Months to 2012-6-30 |
Periods to 2011-12-31 | ||
| One Year |
Three Years |
Five Years |
||
| Whole Unit | +3.9% | -11.1% | +12.3% | -2.5% |
| LBS | +5.9% | -32.4% | +24.8% | -10.7% |
| LBS.PR.A | +2.6% | +5.4% | +5.4% | +5.4% |
| S&P/TSX Capped Financial Index | +4.2% | -3.8% | +15.0% | -0.6% |
Note that according to the implementation by iShares, the capped financial index is about 76% banks and 19% insurance, so the fund is by design overweight insurers relative to this benchmark – and insurers have underperformed over the past few years.
Figures of interest are:
MER: 0.98% of the whole unit value, “excluding the cost of leverage and issuance costs.”
Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $204.4-million, and 203.8-million at June 30. Easy enough (no interim warrant offerings this time!) so call the average net assets 204.2-million.
Underlying Portfolio Yield: Investment income of $4.79-million received divided by average net assets of $204.2-million is 2.35% for the six months, or 4.70% annualized.
Income Coverage: Net investment income after expenses of $3.758-million, to cover preferred dividends of 3.582-million is about 105%.
LBS.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-3(low) by DBRS. LBS.PR.A is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.
The theoretical model of a split share seems brilliant with one party getting capital leverage and the other getting steady dividends for a fixed term. With bank dividends in the 4-5% range it should be easy to structure this with a 5% fee to the issuer up front and a 1% operating fee. The reality gets mired in option sales, “distributions” on the capital shares and warrants issued to keep the scheme spinning in favour of more fees and management expenses.
Yes, it’s a nice structure. One problem with many split share corporations is that they have a negative cash flow, even when dividends to capital unitholders are suspended (i.e., Income Coverage less than 100%). This problem is grossly exacerbated when distributions to the capital units are being paid.
This problem leads to Sequence of Return Risk, which has a major effect on the expected return of the Whole Units.