The way I see it, there are three different types of stocks.
Any investor knows about the first one, the standard blue chips – they make up the guts of most investment portfolios.
Next, you’ve got the more speculative stuff, stocks that add a little spice (not unlike my recent lithium play, which is up nearly three times in just a matter of months!)
But there’s a third, less well-known type of equity. It’s a solid, blue chip type of stock, and yet it’s way off the beaten track for most investors. Stocks like this one are found in areas where mostly only professional investors go.
I’m talking about specialist investment vehicles: tradable stocks which are set up to achieve specific aims. They’re not regular listed companies, and if you choose correctly, they offer you the security of a bigger blue-chip with returns you’ll only find ‘off the beaten track’.
When I find a good one, I’m always sure to tell you about it – like the Close Brothers Commodities Trust I recommended a few years ago. That one did well.
Well today, I want to revisit just one of those types of stocks.
It’s called the CATCo Reinsurance Opportunities Fund (LON:CAT), and I first covered it back in November last year. It’s a fund which is traded on the London stock market.
Since I first wrote about it, it’s been doing really rather well. It’s consistently stuck to its mandate to pay out Libor plus 5%, and I expect things to continue that way. Here’s why.
Funds like this don’t come along too often
Catco is an investment trust that’s quoted in London which you can buy through your normal broker. For a fuller picture, here’s another link to the introductory article I published in November.
The trust makes its money in the reinsurance market. Reinsurance is essentially about insuring the insurers… especially in areas like catastrophe, where the size and nature of claims could bust any single insurance company.
Reinsurance is big business, and as you can imagine, floods and hurricanes aren’t much correlated with the financial markets.
The fund floated in 2010, and 2011 and 2012 were awful years for catastrophes and catastrophe insurers. We had earthquakes in New Zealand and Japan, together with a deadly tsunami; there was major flooding in Thailand and Australia, as well as hurricanes Sandy and Irene in and around the USA. Even the running aground of the ferry Costa Concordia cost Catco a packet!
But despite these freakishly high claims, Catco’s reinsurance book was strong enough to stick to its mandate throughout – the one I mentioned a moment ago, to pay shareholders a yield of Libor (the – low – rate at which banks lend to one another) plus 5%. In fact, that target has been maintained every year since the fund floated.
Anyway, after bad years in 2011 and 2012, 2013 proved far less catastrophic. And now that things have normalised, this stock is really starting to come into its own…
Given that I suggested looking at the stock in November, most of the year was safely in the bag.
And come January, management made a fantastic decision – to not only continue paying the standard dividend (about a 5% yield), but to pay out a special dividend too.
To put that special dividend in perspective, it’s an extra return (on top of the dividend) of just under 20%. Not bad in these yield-free times!
Is now a good time to buy?
Now that we’re half way through this year, without any significant claims on the horizon, I’m happy to stick with this fund and hope for more of the same.
This is not a standard sort of stock market investment. The company is not about capital growth. It’s not like all the weird and wonderful companies you’ll normally read about. Here the objective is to achieve 12-15% above Libor.
Yes, of course there’s risk involved. This is no bank deposit paying a fixed 2% for three years. If you want 5% plus, then you’re going to be taking on some risk.
But at least you get the upside if the risks turn out in your favour. It’s not all gobbled up by a greedy financial industry. Yes, the managers of this fund get paid well. But at least it’s transparent and it’s a normal fee for a job done well.
When I first mentioned the fund in November, it was trading at $1.12. Right now, the stock is about $1.09 to buy. Given that the company has paid out around 23 cents in the meantime, returns are looking very solid.
This isn’t the most exciting stock in the world. It’s an income play. But for a decent income, with a powerful bonus potential, it’s a smart bet.
Look at it that way, and I don’t think you’ll be disappointed… you might even get a pleasant post-Christmas bonus too.