Low yields.

[Snoopy]

I invite any budding Sherlocks out there to prove me wrong. I hope you can!

I am putting my paw up to claim my own prize. I found the following statement(s) on p32 of the NZB/NZC/NZG fund prospectus, with the piece on derivatives of particular interest.

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Interest Rate Risk

All of the Smartshares Funds will invest in some products that pay a return based on interest rates. In some cases the products that a Smartshares Fund has invested in will have floating interest rates. Floating interest rates can change due to general market conditions or conditions specific to a particular industry sector or issuer, and such changes could affect the returns on such products and thereby affect the value of the relevant Smartshares Units.

In other cases the products that a Smartshares Fund has invested in will have fixed interest rates. Although the returns paid on such products stay fixed, the value of an investment in fixed interest products is not fixed, and will fluctuate as a result of movements in market interest rates. For example, if market interest rates rise, an existing fixed interest rate investment may become less valuable (or in the case of declining market interest rates; more valuable). This is because a fixed interest product becomes less desirable (and therefore less valuable) when other products with higher interest rates become available.
Factors that affect market interest rates include global and domestic governments’ economic, monetary and fiscal policies (including decisions made by the Reserve Bank of New Zealand, or another jurisdiction’s central bank), inflation, economic expansion or contraction, liquidity and crises including political and banking.

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I have to be careful in my interpretation of what is being said here. The above excerpt certainly says that the fund managers are aware of how changes in market interest rates can affect the capital value of the underlying bonds held by NZB. But it does stop short of saying that any wider market interest rate movement will automatically be adjusted at market close. In fairness NZB may just be 'covering themselves'. Because it is likely that not every bond they hold trades every day. And that means the price of the NZB units as traded my not reflect the change of the interest rate shadow on all of the fund constituents immediately. Nevertheless I have learned to read these prospectuses carefully concentrating on what was actually said, rather than extrapolating to what *I* think is a logical conclusion to what was said. Given this, I don't think this information rules out my conjecture from post 35.

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Derivatives Risk

Derivatives are contracts between two parties that usually derive their value from the amount or value of an underlying asset, rate or index. Derivatives may be used by a Smartshares Fund to gain, reduce or modify exposure to foreign currency, interest rates or credit. The use of such products to gain exposure is often a leveraged investment, and may cause a Smartshares Fund to incur significant gains or losses in proportion to the value of the investment, thereby causing Returns to become more volatile and increasing the risk of any loss.

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That information on derivatives sounds pretty scary. But could it be the manger at NZB knew interest rates had fallen to an historic low and hedged against the effects of interest rates rising again? That would be a pretty big call as fund managers typically do not go 'all in' over such bets. But in theory this is a fourth way that NZB could have constrained their losses. Well done Sherlock.

SNOOPY