Why I look to the secondhand market for the best deals

Here at The Right Side, I am always on the hunt for the next big undiscovered opportunity. I had hoped to let you in on all the best new bond issues coming to the market. And there have been many. But I am yet to find an opportunity I want to share to with you. The problem? They’re all rubbish.

I’ve trawled through loads of prospectuses for businesses raising cash via the bond market over the last year. Yet none of them give me what I want.

I am looking for a bond that offers a decent yield – and has a bit of security – like the Enterprise Inns bonds I discussed back in November, where  your loan is secured on a load of pubs. And if not secured, I at least want an interesting feature. Like the Co-operative bonds that offer an inflation hedge, or even the Balfour Beatty preference shares that I mentioned a couple of weeks ago. With those you get around 8% and you can even convert them into equity if that turns out to be the best option.

But the sad truth is, the bond market is getting very crowded – and that means there are no good offers about. One of the top corporate bond funds has even turned its back on new investors - they fear they won’t be able to manoeuvre in these markets.

All of this doesn’t mean we just give up though. There are always fixed interest opportunities out there. The place I like to  look at is in the secondhand market.

Today I want to give you four good reasons why, when it comes to the markets, you’re nearly always better off buying secondhand.

Don’t trust bond salesmen

Whenever the money men sense there’s a wall of money looking for a home, they’ll issue new products to tap into it. As they say, “A fool and his money are easily parted.”

And right now, it’s the bond market they’ve got in their sights. Today, most issues coming to market offer investors a home for their cash for something like 5% fixed interest. And while that may look OK compared to what’s available on the high street – it’s generally not as good as the deals you’ll get in the secondhand market.

Take insurer group Beazley. Last week it closed its new seven-year 5.375% bond issue early – there was too much demand. But Beazley’s bonds offer no security and no ‘interesting’ feature that would make me a buyer.

What usually happens is there’ll be a grand marketing initiative. The financial press will run the story – and the punters eagerly put their money down. It’s the same for new investment trusts, or even equity flotations. Of course equity flotations are difficult to get-away in this climate, so the City-boys launch bonds instead.  The point is, once these bonds are trading in the secondhand market, and the marketing initiative has died down, any over-priced new issues will struggle.

Be alert. Be patient. Be ready to act

There will always be a seller. Who knows why? Some investors may just need the cash – they may have lost their job, or just fancy a new kitchen. Sometimes investors switch their fund manager – they move their portfolio to a new manager – and perhaps the new lot don’t like or understand the bonds that have arrived with their new client, so they sell them.

And when there’s a seller in the market – that’s the time to step up and do your buying. In the past I’ve shown you how to use Bollinger bands to pick your entry points.

A patient investor is a successful investor. I prefer to trawl around last year’s new issues – or any issue that’s already in the market. And there’s good reason for that.

The importance of having a watch list

When I read a tip, or even if I find something through my own research, I’ll always keep the stock on a watch list before I buy. I want to understand the stock, the management and how the investment reacts to market events.

I know it sounds boring. And it can leave me with an awfully big watch list – but at the same time, this method has kept me from investing in loads of duds.

Remember, the marketing initiative can be compelling, but only time will tell whether it’s worth the paper it’s written on. In the same way that you want to get to know somebody before you marry them,  you want to get to know a stock. Patiently waiting and watching allows you to discover a stock’s flaws as well as find its wonder. Then you can decide whether or not to go through with the deal.

Investors used to have clout

The last, but possibly the strongest reason why I prefer the secondhand market is simply because, in the past, investors were offered better deal.

Today money is practically free. As savers, we know that. In a world where central banks offer cash to favoured borrowers (banks!) at half a percent interest, you’re going to have a tough time finding a place to invest your cash and get a reasonable return. You have to find a quiet spot to fish… somewhere away from the big boys.

And as private investors in the fixed income area, we have a massive advantage. We can trawl around some of the more illiquid bonds and preference shares that were issued in the good old days when money was worth something.

As I mentioned before, we can get security on our loans, we can get interesting options like convertibility into equity, and most importantly we can still get a decent return.

As I said at the start, fixed interest investing is getting more and more popular. Yields on the Enterprise Inns bonds, Co-op bonds and even the Russian warehouse provider I have written about before, have come down. But hey, they are still offering decent returns – I mean, we’re talking about 8% – 10% here.

I will keep a close eye on the new issues, but I’m not holding my breath. I know that as a private investor, I can do better than most of the stuff offered in the mainstream.

I think it is still possible to find some quiet little places to fish… away from the City sharks. And if you’ve seen anything useful, please let me know. I’ll add it to my watch list!

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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Managing Editor: Frank Hemsley. The Right Side is an unregulated product published by Fleet Street Publications Ltd.

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8 Responses

  1. 01/10/2012, msh wrote

    I have bought some Beazley bonds at the issue price of £1. In my mind this beats buying bonds which are already trading, where the bid-offer spread is 3%. This means that it costs you almost half the annual coupon just to buy them.

  2. 01/10/2012, pierotlunaire wrote

    The Enterprise Inns and Balfour Beatty trades seem good (and I’ve done them). EI is a straight bond with 2x income cover and 1.7x capital cover, so the yield and security are fine. The BBYB is a bit more tricky, standing at 127% of par and an underlying conversion value of 77p, so one needs to see 50p of excess income on the convert relative to the ords to make this work. With divs growing at 5% this works. Not so sure about the Coop trade. Fixing into LIBOR plus 2.05% in 2015 doesn’t seem very attractive although a call would be highly attractive, but the market seems to be pricing a non-call. If I were the Coop, paying LIBOR plus 2.05% on the basis of current LIBOR is OK, but they are locking into 3 month LIBOR plus 2.05% forever, and this seems to me to be too much of a risk for an issuer. This would lead me to blieve that a responsible issuer would call in 2015, but the market, as I said, isn’t pricing this. So I’m sitting on my hands until I understand what might happen here,

  3. 01/10/2012, Fufflevalve wrote

    Any comments on the forth coming launch for Direct Line? My thoughts are there could be a hidden palm off of debt in the deal.

  4. 02/10/2012, Shylock wrote

    Why can’t you just give us a written article, rather than all these videos?
    I do not have the time or inclination to watch a video that takes 20 minutes to watch when I can read the damn thing in 20 seconds.
    By all means make the videos but please make sure we can read the article as well/instead.
    Thank you

  5. 02/10/2012, 4caster wrote

    I agree with Shylock. I can’t be bothered watching time-consuming videos when I could read the words much faster. Also, living in a rural village, my broadband connection is not good enough to watch them unless a “buffer and replay” facility is provided.
    But this complaint is levelled against the wrong writer. If you click on the link to one of Bengt’s videos, wait a few seconds and then try to close the window or tab, you get a message “Are you sure you want to navigate away from this page? ….. Press OK to continue, or Cancel to stay on the current page”. Press Cancel and the video is replaced by the entire text!
    But this option is not available for Tim Price’s videos. Hence I never watch them.

  6. 02/10/2012, JW wrote

    Thanks Bengt, good article, as always. I was just wondering though, what are your thoughts on PIBs?

  7. 03/10/2012, bengt wrote

    JW
    I have to confess, I have in the past steered clear of PIBs as I’m generally disdainful of the banking sector.
    That said, there’s no doubt that the way the economy is being run is generally helping to put the banking industry back on its fee (at the expense of savers, might I add).
    Maybe it’s time to look at PIBs. I know there are some good yields on offer. My only concern remains a banking blow-out caused (probably) by the eurozone debacle, or some unkown event that may cause rates to rise.

    I’m torn!

    Bengt

  8. 03/10/2012, novice wrote

    Other than Bloomberg & Bondscape what platform can be used inexpensively for a complete porfolio/watchlist of over the counter corp bonds from all sources in one place. Similar to LSE Orb but more extensive or Digital Look for equities.
    Thanks Bengt. I find your articles very thought provoking.

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