The fund has a target yield of 7 to 9 per cent a year, which will be achieved without gearing, and will also have the potential for capital growth. It will invest in a diverse portfolio of Pibs and similar shares.
Pibs are issued to enable the building societies to raise capital. They are listed and traded on the London Stock Exchange, regulated by the FSA but are not protected by the Financial Services Compensation Scheme. They pay interest on a fixed date twice a year and have no fixed redemption date, but the issuer often has the right, not the obligation, to redeem the shares at face value at a fixed point in time.
The lack of a fixed redemption date is why the interest paid by Pibs is higher than corporate bonds.The fund can also invest in perpetual subordinated bonds, the equivalent of Pibs that are issued by demutualised building societies that are now banks,and the new profit participating deferred shares.
PPDs are similar to Pibs but instead of paying a fixed coupon, they may pay up to a fixed percentage of profits as a dividend, depending on whether the society makes a profit. Guardian Managers has identified 25 Pibs, with net yields of 6 per cent to 20 per cent which reflect the perceived financial strength of the societies.
The fund will take advantage of the depressed prices of some Pibs that have occurred because the rating agencies have downgraded the sector and some institutional holders of Pibs have been forced to sell their holdings.
The fund’s investment process is based on a filter system that considersfactors such as the size of the Pibs issue and the credit rating of the issuer to select the best Pibs to provide a balance between income and capital security. The portfolio will be monitored and adjustments will be made in response to news or market moves.
Derivates may also be used to reduce exposure to Pibs when fund manager Paul Gleeson wants to reduce risk. A lack of liquidity has been a problem for investors in this market, so afund which can provide a spread of Pibs and monthly dealing could be welcomed by some high-net-worth clients and IFAs.
The financial crisis has meant that some building societies are cutting or deferring coupons on Pibs but low prices and high yields reflect this and are creating the opportunities that Guardian Managers have identified.