Fresh from silencing criticism of FTU.PR.A’s credit quality, Quadravest has issued an extraordinary press release:
Fueled by the intensification of the ongoing credit crisis, world financial markets reached a level of “panic” during the last several weeks which arguably has never been seen by investors on such a global scale.
…
The impact of the broad based selling has adversely impacted the portfolios of Dividend 15 Split Corp. (“Dividend 15”) and Dividend 15 Split Corp. II (“Dividend 15 II”). The net asset values have declined by approximately 21% from August 31, 2008 to October 16, 2008.
…
The portfolio manager continues to view the underlying holdings of Dividend 15 and Dividend 15 II as among the lowest risk companies in Canada. When capital market liquidation slows or ceases and investors return to fundamentals of the underlying companies, we believe the portfolios will be fairly rewarded. High dividend yields, low valuations and significant option premiums available in the market place all bode well for the Dividend 15 and Dividend 15 II portfolios.
Normally it would be up to the brokers to shriek for calm … :
The Manager will pay the Service Fee to each dealer whose clients hold Class A Shares. The Service Fee will be calculated and paid at the end of each calendar quarter and will be equal to 0.50% annually of the value of the Class A Shares held by clients of the dealer. For these purposes, the value of a Class A Share is the Net Asset Value per Unit less $10.00. No Service Fee will be paid in any calendar quarter if regular dividends are not paid to holders of Class A Shares in respect of each month in such calendar quarter.
… but with the NAV down as much as it is, I guess 50bp doesn’t buy what it used to … especially if the dividends for the Class A shareholders are at risk:
No regular monthly dividends will be paid in any year on the Class A Shares so long as any dividends on the Preferred Shares are then in arrears or so long as the Net Asset Value per Unit is equal to or less than $15.00
Oddly, today’s press release did not contain NAV information, but applying the 21% figure to the August month end valuations for DFN and for DF we can derived the following table:
| DF & DFN unit values October 16, 2008 |
|||
| Capital Shares Quote |
Preferred Shares Quote |
NAV (Estimated) |
|
| DF | 7.40-65 | 7.80-94 | 16.04 |
| DFN | 9.81-95 | 8.60-77 | 19.06 |
… so the numbers aren’t really all that bad … but with the recent preciptuous decline in the market price of the capital units:
… I suppose they had to do something!
“The portfolio manager continues to view the underlying holdings of Dividend 15 and Dividend 15 II as among the LOWEST RISK companies in Canada…. low valuations and SIGNIFICANT OPTION premiums available in the market place all bode well for the Dividend 15 and Dividend 15 II portfolios.” EMPHASIS ADDED
Concentrating one’s investments in a single industry — financials — is NOT low risk as many investors are finding. It amazes me that people think a 22% compounded annual return for 20 years for Canadian banks will continue (or at least be safe). When financials blow up, the leverage ensures spectacular losses on all securities — common shares eliminating dividends and not much left for pref or bond holders. So far we have been lucky in Canada, but we’ll see how long that lasts if the rest of the world doesn’t patch itself up.
I have discussed call option writing before — it adds ZERO expected value to a portfolio of stocks because the stock can be called away on the upside or fall below the option premium income on the downside. Option premiums are high because volatility is high. If Quadravest gets aggressive selling call options in this market the capital unit holders may never get the bounce back should underlying shares recover. If you want to know how this strategy works, look to the Triax tech funds writing call options in the last boom/bust. Even the prefs got hit hard, eventually.
Concentrating one’s investments in a single industry
Holdings are about 2/3 financials, which is pretty concentrated.
If Quadravest gets aggressive selling call options in this market the capital unit holders may never get the bounce back should underlying shares recover.
This part may well be a problem – I’ve complained about inadequate disclosure of the portfolio managers.
[…] their plea for calm last week Quadravest has begged holders of FTN & FFN not to panic – please, don’t panic! we […]