Many thanks to John Heinzl for quoting me in his piece A case study in how not to invest in bank stocks:
BK and BK.PR.A are two different classes of shares issued by Canadian Banc Corp., an investment vehicle known as a “split share” corporation. Canadian Banc Corp. holds a portfolio of the six biggest Canadian bank stocks, and while BK and BK.PR.A both provide exposure to those underlying stocks, they do so in different ways and with dramatically different results.
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You may be wondering how BK can pay a 10-per-cent dividend when the preferred shares are already yielding 5 per cent. According to the prospectus, “to supplement the dividends received on the portfolio and to reduce risk, the company will from time to time write covered call options in respect of some or all of the common shares in the portfolio.”But many split share corporations also resort to selling stocks in the underlying portfolio to generate cash required to pay dividends on their class A shares, said James Hymas, president of Hymas Investment Management. “It is my belief that, if people understood class A split shares, they wouldn’t buy them.”
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What’s more, your adviser should have known that, although BK and BK.PR.A have different characteristics on their own, they are complementary pieces of the same underlying portfolio. When you put them together you’re essentially buying a portfolio of bank stocks – just in two different wrappers that add unnecessary layers of complexity and fees. Canadian Banc Corp.’s management expense ratio of 1.35 per cent is more than double ZEB’s MER of 0.62 per cent.“Your reader was given really stupid advice by the adviser, because when you own the class A shares and preferred shares in equal proportions, all you own is a fund with a lot of bells and whistles that owns bank stocks,” Mr. Hymas said. “You can do that a whole lot easier by buying an ETF that owns bank stocks. And it’s much cheaper.”
Neither Mr. Heizl nor I can be faulted for any lack of consistency, since nine years ago he quoted me as saying:
For those reasons, Mr. Hymas says the capital shares are only appropriate for “suckers.”
That sparked a certain amount of debate. I look forward to receiving a lot of angry mail from everyone who’s ever made a nickel on their Capital Unit investments!