Low yields.

[Nor]

Why are the Smartshares bond funds GBF and NZB paying such low dividend yields, about 1% and 1.6%? I would have thought their price should have gone down and yield up to approximate current rates.

[Snoopy]

Why are the Smartshares bond funds GBF and NZB paying such low dividend yields, about 1% and 1.6%? I would have thought their price should have gone down and yield up to approximate current rates.

Excellent question Nor. Here is the link to the information page on the NZ Bond trust

https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzbondtrust

(Edit 15/08/2023): The above web-page reference is dynamic and appears to be updated daily. This means that some of the numbers referenced in this post will no longer correspond to the numbers on that page).

If you go down to the 'portfolio characteristics' section, that shows a Bond Yield of 5.66%, for an average yield duration of 3.44 years. Fund charges at the top of the page indicate the 'annual fee' is 0.54%. So I would expect the gross return to unit holders to be something like:

5.66% - 0.54%= 5.12%

Yet historical gross dividend yield is a pitiful 1.66% ('Fund Details' top of page). Something is not adding up here! (Edit: see post 5 for the answer to this)

Returns for the year, after fees but before tax, were 1.78% over the last twelve months (as listed under NTA unit performance graph). According to the one year interactive chart, the unit price on 8th August 2022 (Actually the price for the trading day before the weekend which was 5th August 2022) was $2.99272. That means the value to unit holders one year later including distributions as at 8th August 2023 must be:

$2.99272 x 1.0178= $3.05055

The unit price on the interactive chart dated 8th August 2023 (actually the figure for the NTA on 7th August 2023) was $2.86737. The difference, which must be the distributions over the last 12 months, must therefore have been:

$3.05055-$2.86737=$0.183180, or 18.3c.

18.3c gives an historical gross yield based on the 7th August 2023 unit price of: 18.3c/$2.86737= 6.38%

That is very different to the 1.78% gross return declared. Would appreciate if you could double check my maths Nor. But I agree with your sentiment and expectations which do not appear to have been met.

SNOOPY

[Nor]

Will do when I'm sure I have my head around it.
Possibly there is some expectation that some of their bonds will mature and pay back at par, ie more than current worth? er just thinking.

[GTM 3442]

I'm picking that there is some buying and selling to cover new money in and withdrawals, which will affect the NAV and thus unit price and thus yield. There are still a whole bunch of bonds out there with low coupon rates (ie LGF120 1.50%) trading at good discounts to issue price, which will muddy the waters.

I think the worst investment you could make would be a bond fund held inside a custody platform.

[JeffW]

Excellent question Nor. Here is the link to the information page on the NZ Bond trust

https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzbondtrust

If you go down to the 'portfolio characteristics' section, that shows a Bond Yield of 5.66%, for an average yield duration of 3.44 years. Fund charges at the top of the page indicate the 'annual fee' is 0.54%. So I would expect the gross return to unit holders to be something like:

5.66% - 0.54%= 5.12%

Yet historical gross dividend yield is a pitiful 1.66% ('Fund Details' top of page). Something is not adding up here!

Returns for the year , after fees but before tax were 1.78% over the last twelve months (as listed under NTA unit performance graph). According to the one year chart, the unit price on 8th August 2022 was $2.99272. That means the value to unit holders one year later including distributions as at 8th August 2023 must be:

$2.99272 x 1.0178= $3.05055

The unit price on 8th August 2023 was $2.86737. The difference, which must be the distributions over the last 12 months, must therefore have been:

$3.05055-$2.86737=$0.183180, or 18.3c.

18.3c gives an historical gross yield based on the 8th August 2023 unit price of: 18.3c/$2.26737= 8.08%

That is very different to the 1.78% gross return declared. Would appreciate if you could double check my maths Nor. But I agree with your sentiment and expectations which do not appear to have been met.

SNOOPY

The calculation is much easier than that - it's just the dividends paid in the last 12 months - from NZX (1.202+1.218+1.09+1.239) = $.0475 / $2.869 share price to give 1.658% yield with is the same as on the NZX site. It is of course a 12-month historic yield, not a forward looking yield.

[Snoopy]

The calculation is much easier than that - it's just the dividends paid in the last 12 months - from NZX (1.202+1.218+1.09+1.239) = $.0475 / $2.869 share price to give 1.658% yield with is the same as on the NZX site. It is of course a 12-month historic yield, not a forward looking yield.


O I C. NZB historical dividends are here.
https://www.nzx.com/instruments/NZB/dividends

There is something very strange with that dividend record though. Why have the imputation credits of those last four dividends, -and only those last four-, shrunk to zero?

SNOOPY

[Snoopy]

I'm picking that there is some buying and selling to cover new money in and withdrawals, which will affect the NAV and thus unit price and thus yield.


You might be on to something there GTM. For a start, there is definitely a DRP operating as evidenced by the following NZX news releases:

14/06/2023: "NZ Bond ETF advises that the strike price for units, issued in lieu of dividend in respect of the distribution to be paid on 20th June 2023, is $2.866 per unit."

The number of units on the books on 20th June 2023 was 144,167,077
But the next entry where the number of units on issue changes is on 3rd July 2023, where the number of shares on issue drops by 50,000 to 144,117,077.

Since there was no increase prior to this and the 14th June announcement, I guess we can conclude that there were no new units issued as a result of the DRP?

It would seem the fund is open ended and the number of units change as people get in and out of the fund.

On my first live trading reference date of Monday 8th August 2022, after the reference date of Sunday 7th August 2022, the number of units on issue reduced from 103,151,618 to 103,111,618 - a drop of 140,000.
Compare this to my second reference date of 7th August 2023 with 145,717,077 units on issue

That means over my reference year: 145,717,077-103,151,618= 42,565,459 new fund units were created.

In terms of number of units, the fund has increased in size by 42,565,459/103,151,618 = 41.3% (!) This also means that all of those additional units were purchased in the 07/08/2022 to 07/08/2023 calendar year. Given the number of units on issue at the date 08-02-2023 (the half year points) was a mere 116,977,077 (which means an increment of 116,977,077-103,151,618= 13,825,459 in the first six months of my reference year), this indicates nearly 3/4 of those incremental purchases were made in the second six month period of my reference year.

SNOOPY

[JeffW]

O I C. NZB historical dividends are here.
https://www.nzx.com/instruments/NZB/dividends

There is something very strange with that dividend record though. Why have the imputation credits of those last four dividends, -and only those last four-, shrunk to zero?

SNOOPY

Potentially there is zero taxable income, if there's been the sale of bonds at a loss, so no tax payable, but they're still distributed the cash interest received. Not sure, but a possibility

[Nor]

Seems very dodgy to me. What applies to a single bond of yields up price down and vv must also apply to a collection of bonds eg a fund. How can people really be investing in these funds for 1% when they could get several times more at call in the bank?

[Snoopy]

Potentially there is zero taxable income, if there's been the sale of bonds at a loss, so no tax payable, but they're still distributed the cash interest received. Not sure, but a possibility


The managers of NZB cannot control when individual members want to sell out of this fund. That means as a 'default assumption', all bonds purchased must be assumed to be held to maturity (thinking about this, individuals purchasing the bonds have the same assumptions applied to them). But if a unit holder 'wants out', that means that a daily sale price that very likely does not match the maturity price is crystallized. And in a climate of rapidly climbing interest rates, such as we have had, that can mean a loss is crystallized. So what money was pulled out of NZB during the year in question (07-08-2022 to 07-08-2023)?



Withdrawal dateUnit Price]Withdrawal amount


08-08-20222.92000](140,000)



09-08-20222.92559](60,000)


-----------------------------------------------]------------------------



18-08-20222.90950](800,000)


02-09-20222.87028](50,000)


15-09-20222.87317](700,000)



20-09-20222.87227](100,000)


03-10-20222.84814](700,000)



07-10-20222.85347](250,000)



12-10-20222.84121](50,000)


14-10-20222.83791](30,000)


12-10-20222.84121](50,000)


18-10-20222.82811](30,000)


19-10-20222.81931](50,000)


01-11-20222.83887](580,000)


09-11-20222.82308](100,000)


21-11-20222.86125](100,000)


24-11-20222.85705](100,000)


30-11-20222.85239](50,000)


07-12-20222.86209](50,000)


16-12-20222.84635](350,000)


19-12-20222.84862](150,000)


23-12-20222.84395](50,000)


28-12-20222.83352](50,000)


29-12-20222.83391](50,000)


04-01-20232.84582](50,000)


06-01-20232.85102](90,000)


09-01-20232.85597](150,000)


24-01-20232.87520](50,000)


23-02-20232.85254](500,000)


15-03-20232.85707](150,000)


20-03-20232.87276](200,000)


22-03-20232.86806](50,000)


31-03-20232.87115](300,000)


03-04-20232.87603](160,000)


04-04-20232.87712](90,000)


06-04-20232.88227](150,000)


13-04-20232.88218](100,000)


26-04-20232.88285](170,000)


01-05-20232.88764](240,000)


10-05-20232.88715](50,000)


16-05-20232.88898](100,000)


29-05-20232.87757](50,000)


30-06-20232.86463](50,000)


04-07-20232.86428](60,000)


13-07-20232.86642](50,000)


20-07-20232.86878](50,000)


25-07-20232.88285](170,000)


26-07-20232.86890](300,000)


27-07-20232.87185](50,000)


02-08-20232.86651](100,000)


03-08-20232.86580](100,000)


07-08-20232.86737](50,000)


Yearly Total to 10-08-2023](8,020,000)



SNOOPY

[Nor]

Nor do the managers disclose any information from which the value they assign to the bonds they hold can be worked out. One can only work out the total value of each bond that they hold.
Some Bonds have no maturity Snoopy.
Well I'm assuming spec prefs count as Bonds but maybe wrong must check.

[GTM 3442]

You should be able to get a list of holdings from the Companies Office Disclose Register website.

https://disclose-register.companiesoffice.govt.nz/

[Nor]

Thanks G. I have just downloaded

https://smartinvestor.sorted.org.nz/assets/disclose-documents/d0/be/e3/Smartshares-Exchange-Traded-Funds-Fund-portfolio-holdings_Smartshares_NZ_Bond_ETF.csv

but can't open a .csv

[Snoopy]

Thanks G. I have just downloaded

https://smartinvestor.sorted.org.nz/assets/disclose-documents/d0/be/e3/Smartshares-Exchange-Traded-Funds-Fund-portfolio-holdings_Smartshares_NZ_Bond_ETF.csv

but can't open a .csv

Here is the csv link opened. I count 105 bond constituents.

DISCLOSE REGISTER - FULL PORTFOLIO HOLDINGS 1
Offer name Smartshares Exchange Traded Funds Offer number OFR10865
Fund name Smartshares NZ Bond ETF (NZB) Fund number FND1103
Period disclosure applies [dd/mm/yyyy] 31/05/2023




Asset name% of fund net assetsSecurity code


New Zealand Government 0.50% 15/05/20246.9373NZGOVDT524C5


Housing New Zealand Ltd 4.422% 15/10/20274.8895NZHNZD0008L2


Nz Local Govt Fund Agenc 1.50% 15/04/20263.2985NZLGFDT014C0


Nz Local Govt Fund Agenc 3.50% 14/04/20333.1681NZLGFDT009C0


Housing New Zealand Ltd 2.247% 5/10/2026 3.0352 NZHNZD0001L7


Housing New Zealand Ltd 1.534% 10/09/2035 3.0312 NZHNZD0935L6


Housing New Zealand Ltd 3.42% 18/10/2028 3.012 NZHNZD0628L7


Housing New Zealand Ltd 2.183% 24/04/2030 2.9979 NZHNZD0230L2


Kommunalbanken As 4.00% 20/08/2025 2.7749 NZKBNDT009C6


Bank Of New Zealand 5.536% 25/05/2028 2.4483 NZBNZDT402C6


Genesis Energy Ltd 5.00% 3/04/2025 2.1255 NZGNEDT007C3


ANZ NZD Current Account 1.8554


Transpower New Zealand 1.735% 4/09/2025 1.7288 NZTRPD0070L9


Fonterra Cooperative Grp 5.08% 19/06/2025 1.6924 NZFCGDT310C3


NZ Local Govt Fund Agenc 4.50% 15/05/2030 1.6559 NZLGFDT020C7


Tr Group Ltd 4.533% 7/03/2024 1.4554 NZTRGD0324L9


Kiwibank Ltd 2.635% 5/10/2026 1.4396 NZKIWD1026L4


Chorus Ltd 4.35% 6/12/2028 1.4369 NZCNUDT003C6


Kiwibank Ltd 2.155% 20/09/2024 1.3629 NZKIWD0924L1


Kfw 1.75% 19/05/2028 1.3602 NZKFZDT004C9


Asian Development Bank 2.125% 19/05/2031 1.2932 NZADBDT013C2


NZ Local Govt Fund Agenc 2.25% 15/05/2028 1.2865 NZLGFDT018C1


NZ Local Govt Fund Agenc 4.50% 15/04/2027 1.2855 NZLGFDT007C4


Asian Development Bank 4.00% 27/05/2027 1.2565 NZADBDT016C5


Dunedin City Treasury 1.93% 18/04/2028 1.2552 NZDCTDT199C7


Vector Ltd 1.575% 6/10/2026 1.2276 NZVCTDT011C2


Christchurch City Hldgs 5.043% 6/04/2028 1.2108 NZCCHDT901C1


Vector Ltd 4.996% 14/03/2024 1.2073 NZVCTDT009C6


Intl Bk Recon & Develop 4.25% 29/07/2027 1.1978 NZIBDDT020C9


Intl Finance Corp 4.375% 13/09/2027 1.1971 NZIFCDT014C9


Asian Development Bank 3.75% 18/08/2025 1.1847 NZADBDT017C3


Anz Bank New Zealand Ltd 5.22% 16/02/2028 1.175 NZANBDT025C4


ASB Bank Limited 1.83% 19/08/2024 1.157 NZABBDG004C8


Kiwibank Ltd 5.737% 19/10/2027 1.1297 NZKIWD1027L2


European Investment Bank 1.875% 16/06/2028 1.0576 NZEIBDT006C7


Powerco Limited 4.67% 15/11/2024 0.9807 NZPWCDT009C9


ASB Bank Limited 1.646% 4/05/2026 0.9301 NZABBDG005C5


Net Current Assets 0.9167


NZ Local Govt Fund Agenc 2.75% 15/04/2025 0.8814 NZLGFDT008C2


Auckland Council 3.338% 27/07/2026 0.8403 NZAKCDT410C0


Mtfnz P21 A 6.50% 15/06/2029 0.836 NZPANTFAT019


Asian Development Bank 1.50% 6/08/2026 0.7645 NZADBDT014C0


Auckland Intl Airport 5.67% 9/05/2028 0.7619 NZAIAD0250L8


Bank Of New Zealand 1.884% 8/06/2026 0.7592 NZBNZDT397C8


Intl Finance Corp 4.875% 13/12/2029 0.7446 NZIFCDT015C6


Westpac New Zealand Ltd 1.439% 24/02/2026 0.7403 NZWNZD0226L9


Inter-American Devel Bk 4.75% 25/01/2030 0.733 NZIDBDT010C0


Intl Bk Recon & Develop 4.625% 2/02/2028 0.7302 NZIBDDT021C7


Wellington Intl Airport 4.00% 1/04/2030 0.722 NZWIAD0060L5


Dunedin City Treasury 3.79% 16/10/2024 0.7082 NZDCTDT135C1


Auckland Council 4.176% 24/03/2025 0.6539 NZAKCDT363C1


GMT Bond Issuer Ltd 3.656% 20/12/2027 0.6424 NZGMBDT008C5


Intl Bk Recon & Develop 0.75% 10/06/2026 0.6281 NZIBDDT016C7


Heartland Bank Ltd 3.55% 12/04/2024 0.6113 NZHBLD0020L2


Bank Of New Zealand 2.16% 29/01/2025 0.5724 NZBNZDT396C0


Auckland Intl Airport 3.97% 2/11/2023 0.5631 NZAIADT210L1


Intl Bk Recon & Develop 2.875% 30/11/2026 0.5187 NZIBDDT019C1


Wellington Intl Airport 2.50% 14/08/2026 0.4937 NZWIAD0070L4


Kiwi Property Group Ltd 4.06% 12/11/2025 0.4917 NZKPGD0040L4


Mtfnz O23 A 7.25% 16/09/2030 0.4851 NZOPATFAT017


Nordic Investment Bank 4.375% 21/02/2030 0.4774 NZNIBDT013C2


Westpac New Zealand Ltd 2.22% 29/07/2024 0.4762 NZWNZD0724L3


L-Bank Bw Foerderbank 4.00% 15/04/2027 0.4689 NZLBKDT003C1


New Zealand Government 2.75% 15/05/2051 0.4665 NZGOVDT551C8


Blunz 2022-2 A1L 7.45% 16/02/2054 0.463 NZBSNC1002R1


New Zealand Government 4.50% 15/04/2027 0.4578 NZGOVDT427C1


Toyota Fin New Zealand 1.73% 6/09/2024 0.4471 NZTFSDT727C5


New Zealand Government 2.75% 15/04/2025 0.4408 NZGOVDT425C5


New Zealand Government 0.25% 15/05/2028 0.4375 NZGOVDT528C6


Wellington Intl Airport 3.32% 24/09/2031 0.4276 NZWIAD0080L3


Dunedin City Treasury 0.676% 16/11/2026 0.4148 NZDCTDT191C4


New Zealand Government 3.00% 20/04/2029 0.4142 NZGOVDT429C7


Bank New Zealand Ltd 2.999% 17/09/2031 0.4098 NZANBDT024C7


Meridian Energy Limited 5.91% 20/09/2028 0.398 NZMELDT096C0


Kiwi Property Group Ltd 4.33% 19/12/2024 0.3775 NZKPGD0030L5


Resnz 2022-1 A1 7.65% 16/06/2054 0.3729 NZRVGA1035R9


Auckland Council 2.013% 10/07/2025 0.3635 NZAKCDT484C5


Contact Energy Ltd 3.55% 15/08/2024 0.352 NZCEND0050L0


Udcau 2022-1 A 7.50% 20/12/2029 0.3471 NZUDCDB001R0


Dunedin City Treasury 3.22% 27/11/2028 0.3355 NZDCTDT211C0


Dunedin City Treasury 2.09% 15/11/2026 0.3274 NZDCTDT173C2


Port Of Tauranga Ltd 1.02% 29/09/2025 0.3262 NZPOTD0925L1


New Zealand Government 0.50% 15/05/2026 0.324 NZGOVDT526C0


Chorus Ltd 2.51% 2/12/2030 0.3153 NZCNUDT005C1


Christchurch City Hldgs 3.58% 27/11/2024 0.3057 NZCCHDT853C4


Auckland Council 2.95% 28/09/2050 0.3011 NZAKCDT520C6


NZ Local Govt Fund Agenc 2.00% 15/04/2037 0.2669 NZLGFDT016C5


Christchurch Intl Airpor 4.13% 24/05/2024 0.2635 NZCHCDT004C4


NZ Local Govt Fund Agenc 2.25% 15/05/2031 0.2564 NZLGFDT017C3


Insurance Australia Grp 5.32% 15/06/2038 0.2396 NZIAGDT004C1


Dunedin City Treasury 3.98% 15/04/2026 0.2344 NZDCTDT109C6


Westpac New Zealand Ltd 2.083% 20/02/2025 0.2334 NZWNZD0225L1


GMT Bond Issuer Ltd 4.74% 14/04/2027 0.2309 NZGMBDT009C3


AvANZ 2022-1 A1 7.30% 15/07/2054 0.2079 NZAVGA1001R7


GMT Bond Issuer Ltd 4.00% 1/09/2023 0.206 NZGMBDT005C1


NZ Local Govt Fund Agenc 2.25% 15/04/2024 0.1996 NZLGFDT011C6


Kiwi Property Group Ltd 4.00% 7/09/2023 0.1936 NZKPGD0020L6


GMT Bond Issuer Ltd 4.54% 31/05/2024 0.1868 NZGMBDT004C4


Westpac New Zealand Ltd 3.696% 16/02/2027 0.1701 NZWNZD0227L7


SBS Bank 4.32% 18/03/2027 0.1625 NZSBBDT297C3


Fonterra Cooperative Grp 4.15% 14/11/2025 0.1616 NZFCGDG005C4


Tr Group Ltd 3.532% 5/10/2026 0.1528 NZTRGD1026L9


NZ Local Govt Fund Agenc 1.50% 20/04/2029 0.1348 NZLGFDT012C4


Bank New Zealand Ltd 3.03% 20/03/2024 0.0998 NZANBDT023C9


Bank Of New Zealand 4.985% 7/06/2027 0.0752 NZBNZDT401C8


NZ Local Govt Fund Agenc 3.00% 15/05/2035 0.0461 NZLGFDT019C9


Outstanding settlements-1.5066



SNOOPY

[Snoopy]

Nor do the managers disclose any information from which the value they assign to the bonds they hold can be worked out. One can only work out the total value of each bond that they hold.


For post 10 (uncompleted as I write this), I envisaged taking the 'fund yield' and comparing that to the 'market yield' to get an indication of the capital losses realized by selling down the bond portfolio. It would be an approximate result. But I wouldn't need to know the details of the bond portfolio to calculate a figure.



Some Bonds have no maturity Snoopy.
Well I'm assuming spec prefs count as Bonds but maybe wrong must check.


Check out the total portfolio holding in post 14. All the bonds held seem to have maturity dates.

SNOOPY

[Nor]

But it only shows the percentage of their total value in each bond. Can't work out what value they assume for any bond with the information.

[Snoopy]

But it only shows the percentage of their total value in each bond. Can't work out what value they assume for any bond with the information.


Yes. But if you look at the NZX 'daily NTA' announcement for this fund on 31st May 2023 (issued on 1st June 2023) , NZB discloses that there were 144,077,077 units on issue on that day valued at $2.87196 dollar per unit. So the total value of the fund on that date was:

$2.87196 x 144,077,077 = $413,783,602

Using that as the 100% figure, you can work out the dollar value of the individual constituents because you know the percentage value that each constituent makes, as a part of the total value of the fund. For example the cash balance in the ANZ bank on that day was:

0.018554 x $413,783,602 = $7.677m

SNOOPY

[GTM 3442]

At its simplest and crudest, the basic equation of bond funds is a pre-tax yield of 4%, with a management fee of 1%.

This is factually inaccurate but emotionally correct.

[Nor]

Yes I know that, but you can't see how many of each bond they have, which means you have nothing to divide 'the dollar value of the individual constituent' by to find out what they consider to be its unit worth.
So it is unknown if they are 'marking to market' or still valuing them at face value. The low yield would be explained by not marking to market.

Intended reply to Snoopy one above

[Snoopy]

It is unknown if they are 'marking to market' or still valuing them at face value. The low yield would be explained by not marking to market.


If you look at the 31st July 2023 monthly report here
https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzbondtrust

Under 'Portfolio Characteristics', the fund yield is listed as 5.59%. If I look at the portfolio constituents from post 14, there is only one bond with a coupon rate greater than that: Meridian Energy's 5.91% bond. This indicates to me that the capital value of those lower interest rate bonds must have been marked down.

There is no other way to achieve a 5.59% current portfolio yield, unless these mark downs were done.



You can't see how many of each bond they have, which means you have nothing to divide 'the dollar value of the individual constituent' by to find out what they consider to be its unit worth.


I am wondering if you need to know that? We don't know which constituents NZB are buying or selling either - as unitholders opt to put more money into NZB or take it out.

But if we know:
a/ The weighted average interest rate of the entire NZB portfolio and, as an example,
b/ A reference government stock rate which is changing but can be pinpointed on a particular day (say the five year rate),

THEN we can work out the average capital loss carried by the whole NZB fixed interest portfolio. This was the way I was considering tackling the valuation problem.

SNOOPY

[Snoopy]

It is unknown if they are 'marking to market' or still valuing them at face value. The low yield would be explained by not marking to market.



If you look at the 31st July 2023 monthly report here
https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzbondtrust

Under 'Portfolio Characteristics', the fund yield is listed as 5.59%. If I look at the portfolio constituents from post 14, there is only one bond with a coupon rate greater than that: Meridian Energy's 5.91% bond. This indicates to me that the capital value of those lower interest rate bonds must have been marked down.

There is no other way to achieve a 5.59% current portfolio yield, unless these mark downs were done.


I should add that there is a third option which sits between 'the NZB portfolio was marked down' and 'the NZB portfolio was not marked down'. Perhaps the portfolio was only partially marked down, triggered by the fall in capital value of bonds actually sold at a loss, while the remainder of the bonds -still on the books- are held at purchase value?

SNOOPY

[Snoopy]

Excellent question Nor. Here is the link to the information page on the NZ Bond trust

https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzbondtrust

(Edit 15/08/2023): The above web-page reference is dynamic and appears to be updated daily. (This means that some of the numbers referenced in this post will no longer correspond to the numbers on that page).

If you go down to the 'portfolio characteristics' section, that shows a Bond Yield of 5.66%, for an average yield duration of 3.44 years. Fund charges at the top of the page indicate the 'annual fee' is 0.54%. So I would expect the gross return to unit holders to be something like:

5.66% - 0.54%= 5.12%

Yet historical gross dividend yield is a pitiful 1.66% ('Fund Details' top of page). Something is not adding up here! (Edit: see post 5 for the answer to this)

Returns for the year, after fees but before tax, were 1.78% over the last twelve months (as listed under NTA unit performance graph). According to the one year interactive chart, the unit price on 8th August 2022 (Actually the price for the trading day before the weekend which was 5th August 2022) was $2.99272. That means the value to unit holders one year later including distributions as at 8th August 2023 must be:

$2.99272 x 1.0178= $3.05055

The unit price on the interactive chart dated 8th August 2023 (actually the figure for the NTA on 7th August 2023) was $2.86737. The difference, which must be the distributions over the last 12 months, must therefore have been:

$3.05055-$2.86737=$0.183180, or 18.3c.

18.3c gives an historical gross yield based on the 7th August 2023 unit price of: 18.3c/$2.86737= 6.38%

That is very different to the 1.78% gross return declared. Would appreciate if you could double check my maths Nor. But I agree with your sentiment and expectations which do not appear to have been met.


The link to the information page on the NZ Bond trust

https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzbondtrust

The above web-page reference is dynamic and appears to be updated daily. This means that some of the numbers referenced in this post will no longer correspond to the numbers on that page). The numbers have changed a lot since I did these calculations four days ago. So I am redoing the calculations using 'today's' values.

If you go down to the 'portfolio characteristics' section, that shows a Bond Yield of 5.59%, for an average yield duration of 3.31 years. Fund charges at the top of the page indicate the 'annual fee' is 0.54%. So I would expect the gross return to unit holders to be something like:

5.59% - 0.54%= 5.05%

Yet historical gross dividend yield is a pitiful 1.66% ('Fund Details' top of page). Something is not adding up here! (Edit: JeffW has since answered this in post 5. The 1.66% represents four months of gross historical 'dividends in 'cpu'', divided by the current unit price. So no capital movements are included in this unit holder 'rear vision mirror' return).

Annual Return Reconciliation

Returns for the year, after fees but before tax, were -0.02% over the last twelve months (this statistic may be found under the NTA unit performance graph header). According to the one year interactive chart, the unit price on 11th August 2022 (Actually the price for the preceding trading day, 10th August 2022) was $2.99205. That means the projected value (using the benefit of hindsight because we know what the one year return to unit holders after fees but before tax turned out to be) one year later including distributions as at 10th August 2023 must have been:

$2.99205 x (1-0.0002)= $2.99145

Note that I am assuming that all quoted returns are 'before tax'. Why is that? Because a bond is a 'financial arrangement' for NZ income tax department purposes. That means an individual's tax bill depends on the timing between when that individual bought the bond and when they sold it. And the market value of these bonds fluctuates on the secondary market with time. Since these two dates are liable to be different for each individual investor, it would be misleading for a fund like this to publish a chart on 'after tax returns', while even hinting that is useful from the perspective of an individual holder. The only 'after tax return' the likes of Smartshares and their NZB fund could usefully chart, would be to assume that all bonds purchased were held to maturity.

The unit price (declared NTA) on the (linked url above) interactive chart dated 11th August 2023 (actually the figure for the NTA on 10th August 2023) was $2.86666.

a/ The difference between this figure $2.86666 AND
b/ the (with hindsight) projected and therefore actual fund balance after one year ($2.99145 as calculated above),

MUST BE the distributions paid out over the 12 month period under review. So comparing the projected return as measured by projected NTA (calculated with the benefit of hindsight) @10th August 2023, and the actual NTA (which is after the preceding twelve months of dividends has already been taken out) -also @10th August 2023- we see a difference:

$2.99145-$2.86666=$0.12479, or 12.5c.

Given what I have discussed in the paragraphs above, this figure is the likely gross return 'after fees' but 'before tax', which for a PIE entity would be levied at a rate of 28%. So the net income over the year would be 12.5c x (1-0.28) = 9c

12.5c gives an historical gross yield based on the 10th August 2023 unit price of: 12.5c/$2.86666= 4.36%

This doesn't tie in with the 1.66% after tax historical dividend yield quoted above. Could this mean that an extra charge that I have not identified is being deducted from the fund? In case you were wondering 'if I had 'got it wrong' and the 0.54% management fee had not been deducted from the graphed figures after all.....

0.0054 x $2.86666 = 1.5c

If I take 1.5c off my calculated distribution (12.5c-1.5c=11.0c) that is nowhere near enough to reduce my calculated yield down to the reported 1.66%. So this fund looks to have incurred some other loss which I am yet to identify.

The overall gross return after fees and before tax, (a loss in this case), was declared after one year to be -0.02%. But after tax this 'declared loss' reduced to 0.0%. This indicates that there must have been a tax refund at the NZB fund level.

The graph immediately above where all of these statistics are presented is labelled 'Net Tangible Assets per Unit'. IF this graph was showing an 'annual return' net of all fees after tax, THEN this would imply the unit price exactly one year prior and the unit price of 10th August 2023 would be the same number. But the numbers aren't the same ($2.99205 does not equal $2.86666). This is another hint that tax has NOT been deducted (or refunded) from the unit price chart.

SNOOPY

[Nor]

Snoopy said
"Under 'Portfolio Characteristics', the fund yield is listed as 5.59%. If I look at the portfolio constituents from post 14, there is only one bond with a coupon rate greater than that: Meridian Energy's 5.91% bond. This indicates to me that the capital value of those lower interest rate bonds must have been marked down."

I agree and it is very perceptive of you to have thought of it.

Still a problem of why the div yield which they actually pay is so much below the fund yield which is anything they choose to say it is. Perhaps div yield is so low because they've cleverly had a lot of money mature at just the right time to catch the higher rates and the next dividend is going to be ENORMOUS, only hardly anybody knows. Seems to me to be a lack of information about this. I thought markets were supposed to be informed. Haven't digested the rest, anything over an inch and a half takes me a while.

[Snoopy]

Still a problem of why the div yield which they actually pay is so much below the fund yield which is anything they choose to say it is. Perhaps div yield is so low because they've cleverly had a lot of money mature at just the right time to catch the higher rates and the next dividend is going to be ENORMOUS, only hardly anybody knows. Seems to me to be a lack of information about this. I thought markets were supposed to be informed. Haven't digested the rest, anything over an inch and a half takes me a while.


I remember Buffett once said: "Don't invest in anything that you do not understand.'

Perhaps this explains why I have only dipped my little toe into the bond investment pond up to now. The problem is with bond returns now becoming meaningful (except for NZB that is), I can't continue to ignore the bond market.

How is this for a revelation on NZB. I thought it was the 'NZ Bond Fund', but apparently the official name is the 'NZ cash fund'. Now look at the fund objective from the link below:
https://www.nzx.com/companies/NZB/analysis

"The NZ Cash Fund's investment objective is to provide a return (before tax, fees and other expenses) that outperforms the S&P/NZX Bank Bill 90-Day Index over rolling one-year periods. The S&P/NZX Bank Bill 90-Day Index is made up of a portfolio of bank bills with a maturity of 31 days to 90 days."

So let me get this straight. The NZB fund has bought a plethora of multi year bonds with the grand ambition of outperforming short term bank bills with a maximum duration of 90 days!?! Unless short term interest rates really spike, this seems a very low bar these NZB fund managers have set themselves. Do the NZB fund managers even have to get out of bed in the morning?

SNOOPY

PS Have re-edited my post 22 several times, and corrected some errors. I hope it is now easier to follow

[Snoopy]

Potentially there is zero taxable income, if there's been the sale of bonds at a loss, so no tax payable, but they're still distributed the cash interest received. Not sure, but a possibility


I am interested in investigating this theory further.

If I had my figures right, the annual return on the NZB fund (after fees but before tax) dropped from a miserable 1.78% (07-08-2023) to an absolutely pitiful -0.02% (10-08-2023) over three days. That three days was in the run up to the RB governor Adrian Orr's outlook for interest rate statement (on 16-08-2023) admittedly. 'The market' took that to mean interest rates would remain at an elevated level for longer. That could have caused some of the longer dated commercial bonds that NZB holds to fall in value. But there is another possibility that JeffW has mentioned above. That being sales of bonds at a loss to meet fund redemptions. So did that happen?

Looking at the daily statements on movements in the NZB fund, it did. On 10th August there were 145,647,077 NZB units on issue. On 7th August 145,717,077 NZB units on issue. That represents a drop of:

145,717,077 - 145,647,077 = 70,000 units

Sure enough on the 9th August 2023, a sale of 70,000 NZB units at a price of $2.86779 was reported. That represents:

70,000 x $2.86779 = $200,745.30

in dollar terms removed from the fund.

As at 31st July 2023, we were told that the NZB fund had a yield of 5.59% and a duration of 3.31 years. The five year government bond rate is the closest match to the 3.31 year duration of NZB bonds. Five year government bond rates rose from 5.37% (07-08-2023) to 5.42% (10-08-2023) over the three days period of concern. (Source https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/wholesale-interest-rates). That kind of interest rate raise should reduce 5 year bond values on an annual basis to:

5.37/5.42= 0.9908

of what they were before the interest rate rise. However, the NZB fund had an average 3.31 year duration. So the reduction in value over the whole fund due to that interest rate rise I estimate as:

0.09908^3.31 = 0.9698

Leaving aside the question of bond sales for the moment, this is the 'capital hit' I would expect the NZB fund to take as a result of interest rate rises. But what was the capital reduction that actually took place over those three days?

2.86665/2.86732 = 0.9998 (the capital loss was lower than expected. I will discuss this result in a later post)

Did the sale of 70,000 bonds, probably at a loss, to meet redemption requirements affect this? 70,000/145,717,077 = 0.05% of the portfolio. What was the coupon value these bonds were sold at? My rule of thumb is that company bond rates are a couple of percentage points above government stock rates. So I am saying these company bond rates probably sold for 5.42%+2%= 7.42%. The portfolio interest rate was 5.59% and average bond duration 3.31 years. I can therefore estimate the capital loss (actually fractional capital retained) on these bond sales to be:

(5.59/7.42)^3.31= 0.3916 =0.4

That means in round figures, 60% of the capital value of those bonds sold to meet repayments may have been lost. That sounds a lot. But for this one transaction, once you relate that to the capital value of the whole fund, it is not.

70,000 x $2.86779 x 0.6 = $120,447 (unit bond sales loss to meet redemption)
145,647,077 x $2.86779 = $417,685,230 (fund size)

=> Percentage of fund lost through selling at a loss = $120.447/$417,685,230= 0.028% (i.e. not material)

We have calculated that the sale of bonds over a three day period was not material to the fund value under the much larger downward value shadow of rising interest rates. But this was only considering a period of 3 days. Over 365 days, it might well be a different story.

SNOOPY

[Snoopy]

As at 31st July 2023, we were told that the NZB fund had a yield of 5.59% and a duration of 3.31 years. The five year government bond rate is the closest match to the 3.31 year duration of NZB bonds. Five year government bond rates rose from 5.37% (07-08-2023) to 5.42% (10-08-2023) over the three days period of concern. (Source https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/wholesale-interest-rates). That kind of interest rate raise should reduce 5 year bond values on an annual basis to:

5.37/5.42= 0.9908

of what they were before the interest rate rise. However, the NZB fund had an average 3.31 year duration. So the reduction in value over the whole fund due to that interest rate rise I estimate as:

0.09908^3.31 = 0.9698

Leaving aside the question of bond sales for the moment, this is the 'capital hit' I would expect the NZB fund to take as a result of interest rate rises. But what was the capital reduction that actually took place over those three days?

2.86665/2.86732 = 0.9998 (the capital loss was lower than expected. I will discuss this result in a later post)


Why is my 'expected' diminution in unit price greater than what actually happened? There are several possibilities to help explain this.

a/ The NZB fund has in the past run a cash balance that might be used to repay smaller withdrawals, without the fund having to resort to selling any bonds.

b/ If bonds were sold, I do not know which bonds were sold. All I can do is base my calculation on the published 'average' yield. I had assumed that the bonds sold were at this 'average' yield. But the chances are the actual yield of the bonds sold were not sold at the average yield, as I had assumed. If the bonds that were sold had an above average yield, then this would impact the value of the remainder of the fund less.

c/ Bonds tend to be less liquid than shares. So the raising of interest rates may have taken a few days to flow through to changes in market prices for the underlying bonds. Thus many of the bonds on the 10th August 2023 may have been valued when interest rate expectations were lower.

d/ I based my 'interest rate rise expectations' on what happened to 5 year government bonds. But the average duration for bonds in the fund was 3.31 years.. If the rise of indicative interest rates in the 'nearer term maturity bonds' of the fund was less than my five year comparative marker, then that would flow through to a lower 'asset reduction factor' than I had calculated.

Thus the real reason(s) my calculation was not accurate could be one or more of the above four. Unfortunately the information in the public domain to make my calculations more accurate is not available. I nevertheless stand by my results from post 25, given the data I have access to.

SNOOPY

[Nor]

"How is this for a revelation on NZB. I thought it was the 'NZ Bond Fund', but apparently the official name is the 'NZ cash fund'."

Could it be a mistake? There is also an NZ Cash Fund ETF NZC listed.

Luckily there is no company whose performance will be affected either way by my understanding or lack thereof.

[Snoopy]

"How is this for a revelation on NZB. I thought it was the 'NZ Bond Fund', but apparently the official name is the 'NZ cash fund'."

Could it be a mistake? There is also an NZ Cash Fund ETF NZC listed.


Looks like you are right Nor
https://www.nzx.com/companies/NZC/analysis

The description for the NZC fund exactly matches that of the NZB fund. It looks like somebody has just taken the NZC information and copied and pasted it under the NZB header. If I was the owner of that NZB fund, I would be furious to have my fund misrepresented like that. I might even think about suing for gross misrepresentation and resultant loss of business, So who is the owner of that Smartshares NZB fund anyway? Oh wait, it is the NZX itself!!! Gross professional incompetence?

SNOOPY

[Snoopy]

We have calculated that the sale of bonds over a three day period was not material to the fund value under the much larger downward value shadow of rising interest rates. But this was only considering a period of 3 days. Over 365 days, it might well be a different story.


I have been working my way through a whole year of NZB unit redemptions as laid out in post 10, and finally this exercise is finished: Result 8,020,000 units withdrawn.

The annual single year return for the NZB fund (after fees but before tax) was -0.02% (year to 10-08-2023). I now want to re-examine JeffW's idea of a possible explanation for this poor return: That being, sales of bonds are being made at a loss to meet fund redemptions. But this time I will look at data covering 365 days, not just 3.

On 10th August 2023 there were 145,647,077 NZB units on issue. On 10th August 2022 there were 102,951,618 NZB units on issue. That means overall there was a large inflow of money into the NZB fund over the year under consideration. Nevertheless that 'net increase' masks the fact that 8.02m units were withdrawn from the NZB fund during the year (for time line details of the withdrawals see post 10).

The underlying theory I am working on is that if a fund manager receives an inflow of new funds, then they can use their judgement as to when is the best time to invest those new funds. But if a unit-holder wants their money back, then the fund manager has no choice. They have to sell down immediately, whether the market timing is advantageous or not, to reimburse the unit holder.

For the purpose of this exercise I am assuming a 'worst case' scenario: Each and every one of those 8.02m units returned were sold at a disadvantageous price (a loss). In practice the NZB fund does run an ANZ 'NZ dollar current account'. That 'ANZ cash balance' may have offset the need for some of those disadvantageous price point sales that i am speculating exist. But bear with me. The idea is not to calculate an 'exact dollar value' of money lost. Rather, we want a ballpark figure of 'the possible money lost', just to see if such an amount comes anywhere near explaining why the NZB fund 'had a zero return' over the 10th August 2022 to 10th August 2023 year under examination.

As at 31st July 2023 (the latest available reporting record date as I write this), we were told that the NZB fund had a yield of 5.59% and a duration of 3.31 years. The five year government bond rate is the closest match to the 3.31 year duration of the total NZB bond weighted average portfolio. So I am using the five year government bond rate as a comparator. The five year government bond rates rose from 3.26% (10-08-2022) to 5.42% (10-08-2023) over the 365 days period of concern. (Source https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/wholesale-interest-rates). That kind of interest rate raise should reduce 5 year bond market spot capital values -on an annual basis- to:
3.26/5.42= 0.6015

of what they were before the interest rate rise. However, the NZB fund had an average 3.31 year duration. So the reduction in residual value over the whole fund due to that interest rate rise I estimate as:

0.6015^3.31 = 0.1859

Leaving aside the question of bond sales for the moment, this is the 'capital hit' I would expect the NZB fund to take as a result of interest rate rises. But what was the capital reduction per unit that actually took place over that year in question?

2.86665/2.92205 = 0.9810 (i.e. the actual capital loss was lower than expected, given my assumptions above.)

Did the sale of 8,020,000 NZB units, probably at a loss, -to meet redemption requirements- affect this? Well, 8,020,000/145,647,077 = 5.5% of the NZB portfolio. So I think the sale of those bonds potentially really does matter.

What was the coupon value these bonds were sold at? My rule of thumb is that company bond rates are a couple of percentage points above government stock rates. So I am saying the capital of these company bond rates probably sold on the secondary market for a yield of 5.42%+2%= 7.42%. The portfolio interest rate was 5.59% and average bond duration 3.31 years. I can therefore estimate the capital loss (actually fractional capital retained) on the residual capital from these bond sales to be:

(5.59/7.42)^3.31= 0.3916 =0.4

That means in round figures, 60% of the capital value of those bonds sold to meet repayments may have been lost. That sounds a lot. But how does this amount of cash relate to the total value of the fund? (Note that I have cast my eye over the unit values for the August 2023 year and settled on a unit value of $2.86 as typical, to use in this exercise).

8,020,000 x $2.86 x 0.6 = $13.762m (unit bond sales loss to meet redemption)
145,647,077 x $2.86779 = $417,685,230 (fund size, 10th August 2023)

=> Percentage of fund lost through selling at a loss = $13.762m/$417.685m = 3.29% (i.e. this is material)

Now go and have a look at the yields of the fund constituents 'as issued' (post 14). I haven't done a weighted analysis of those. But it does look conceivable that the weighted average interest rate received during the year (unadjusted for subsequent interest rate movements) was in the ball park of 3.29%. If that were true, we now have a credible explanation as to why this fund made a near zero return over the whole year ended 10th August 2023. I am not saying this is definitely the complete explanation. But it is at least a partial possible explanation that I intend to ruminate on overnight!

SNOOPY

[Snoopy]

As at 31st July 2023 (the latest available reporting record date as I write this), we were told that the NZB fund had a yield of 5.59% and a duration of 3.31 years. The five year government bond rate is the closest match to the 3.31 year duration of the total NZB bond weighted average portfolio. So I am using the five year government bond rate as a comparator. The five year government bond rates rose from 3.26% (10-08-2022) to 5.42% (10-08-2023) over the 365 days period of concern. (Source https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/wholesale-interest-rates). That kind of interest rate raise should reduce 5 year bond market spot capital values -on an annual basis- to:
3.26/5.42= 0.6015


The yield and average duration of the NZB fund, as quoted above, are a collective weighted average of the fund constituents. I was wondering if there was any single bond out there that would mimic this funds duration (3 years and 4 months from the 31st July 2023, meaning a maturity date of 30th November 2026). I figure a 'comparative study' of such bonds, over the year ended 10th August 2023 period, might provide a comparative template to what happened to NZB over that period. There will be a key difference though. Unlike NZB, when these comparative bonds are traded nothing is redeemed. The ownership of the bond simply passes from one owner to another. So there would be no 'redemption effect' on the bond price. That means by comparing the chart performance of such bonds with the chart performance of NZB, I can get a visual picture of whether the 'redemption effect' that I am hypothesizing is happening is real.

Here is a complete list of the 'fixed rate binds' available to be traded on the NZX
https://www.interest.co.nz/bonds-data/issues

Useful 'comparator bonds' are as follows:



Company & Bond
Maturity Date
Coupon Issue Rate
Rating



Argosy Property ARG02029-10-20262.90%Not rated


ASB Bank ABB11016-11-20265.52%AA-


Auckland International Airport AIA24017-11-20263.29%A-


Christchurch City Holdings Limited CCH03005-11-20263.01%AA-


Contact Energy CEN06019-11-20264.33%BB+


Kiwibank KWBHA02-11-20264.93%Ba1



If you put any of these bond tickers into an investment charting tool like 'Stocknessmonster', the plot produced will have a vertical scale marked 'interest rate'. This is counterintuitive to those used to looking at share prices. Becasue the higher the interest rate goes, the lower the market value of the underlying bond. To preserve capital a consistently low interest rate, somewhere near the coupon issue rate of the bond is what an investor wants to see in their 'bond investment charts'.

Thus these bond charts are plotted in the opposite way to the collective NZB fund, which is priced on 'unit value'. For an NZB investor, they want the unit value as high as possible.

As a starting point I am looking at ABB110. With a coupon yield of 5.52%, it is close to the quoted yield of NZB at 5.59%. One interpretation of those two numbers is that Mr Market has assigned a similar 'risk profile' to the AAB110 bonds and NZB. The link to an ABB110 chart is here:
https://stocknessmonster.com/charts/abb110.nzx/

And the link to the comparative NZB chart is here:
https://stocknessmonster.com/charts/nzb.nzx/

This is the point where you have to twist you investment head a bit. For consistency, we are looking for the NZB chart and the ABB110 charts to behave in opposite ways. Both entities exist in the same NZ interest rate space. The chosen metrics that are quoted means that if you see the NZB chart going up, you would expect the ABB110 chart to be going down, and vice versa. That is what we expect. But what is actually happening?

Before I answer that question I need to draw attention to another 'comparator problem'. The range on each of those 'Stocknessmonster' charts is different:

i/ For NZB (in the last year it oscillates between $2.89 and $2.82, a variation of about 2.5%)
ii/ For ABB110 (in the last year it oscillates between 4.9% and 5.9%, a variation of about 17%)

This means if you were to overlay the NZB chart on the ABB110 chart, you would have to imagine the NZB chart 'squashed vertically' so that the variation in height of the graph is only 2.5/17= one tenth (approximately) the visual variation shown.

Comparator Observation

If I look at the ABB110 chart from about the beginning of April 2023, then I can imagine a steadily riding line or near constant gradient from a vertical axis figure of 5% up to a peak of 5.7%, with some variation like the sharp saw tooth peak of 5.8% reached in July 2023. Interestingly this July peak is matched by a saw tooth trough in the NZB chart over the same time period, which is exactly what I would expect (remember for equivalence these two comparator charts have to move in opposite directions). Yet something very strange is happening in this comparison show down. I would expect the rise in the AAB110 indicator in the period I am talking about, to be matched by a similar fall in the NZB unit price over that same time-frame. But I do not see that. Instead the NZB unit price is largely steady, starting out at about $2.87 and declining barely perceptibly to $2.86. IOW the NZB unit price is largely flat, when it 'should' be declining. Can anyone come up with a plausible explanation for this observation?

SNOOPY

P.S. This stuff is really testing me. I am finding it very difficult to understand how NZB works.

[Nor]

Are you saying that bond redemptions can adversely affect the value of the holding of those still in the fund? Seems wrong, that that should occur that is.

[Snoopy]

Are you saying that bond redemptions can adversely affect the value of the holding of those still in the fund? Seems wrong, that that should occur that is.


If you are investing in a 'closed fund' that is accepting no more new money from clients then 'no'. Because redeeming money from such a fund is just selling your existing fund units to someone else.

HOWEVER, the picture changes if you are investing in an open fund such as NZB that has no limit on the extent of cash contributions. In that instance, then the answer is 'yes'. If you wish to withdraw units from NZB in the current market at short notice (as all withdrawal notifications are), then it is very likely some bonds will have to be sold at a loss to meet your repayment demands. Fortunately you personally do not suffer the burden of that loss alone, because the burden of that loss is spread over all the unit holders in the fund. This means that you personally get your money out shouldering just 0.0001% of that loss (0.0001% being the value of your holding sold in proportion to the total value of the fund) whereas the rest of the loss (99.9999%) is shared around the unit holders that remain. It is an example of fund management with a 'communistic tint', where all losses are shared equally.

Very good for you if you want out. Perhaps not so good for those who remain. But the losses you caused to others by your 'sale demand' only affect their balances by a 'tiny bit'. Perhaps half a cup of coffee per year? And since coffee isn't that healthy for you anyway, it is probably best if you think of yourself as providing a 'health benefit' to others by selling out. You, as a seller, are a 'national health hero' improving the health of a whole nation (or all the other unit holders at least). Doesn't that make you feel good?

SNOOPY

[Nor]

With these funds you can buy and sell on market but also invest and withdraw directly. For why I wonder.

[Snoopy]

Why is the Smartshares bond fund NZB paying such low dividend yields, about 1.6%? I would have thought their price should have gone down and yield up to approximate current rates.


Some more reflections on your original question Nor.

How do you find out what is going on inside NZB? Ideally you would look at the fund prospectus or the commentary in what look like quarterly fund updates to determine this. But I have done so and this information is not disclosed. Also 'not disclosed' is what happens to the fund income received net of fees that is not paid out in dividends. Is it reinvested? Or does it go into the ANZ cash account? We don't know, and there is no way given to find out. We do know the strategy of the NZB fund from the original 2015 prospectus though:
"To outperform the S&P/NZX A-Grade Corporate Bond Index over a rolling three-year period."

But what is the managers' operational strategy to try and achieve this? We aren't told. Why has the fund seemingly under-performed its benchmarks in 2017, 2018, 2019, 2020 and 2023? We aren't told. Finally if you ring the fund manager up to clarify some of these points, you get told to submit your query by e-mail. This I did. But I never got a reply.

This leaves any investment in Smartshares NZB to be very much a 'guessing game'. So I make no apology for making some of my own guesses to try and understand what is going on inside the NZB fund.

SNOOPY

[Snoopy]

Look at the 'comparative bond' 'market interest' charts that I have identified (ABB110, AIA240, ARG020, CEN060, CCH030 - refer to post 30). Check the timelines from the start of February 2023 to August 2023. All are rising steadily (i.e. the underlying capital bond values are falling steadily). Yet, over the same period NZB, charted on a 'whole of fund valuation basis', is largely flat. This could indicate that as a rule (except for the few bonds that were actually sold), the constituent bonds that make up NZB are not being 'marked to market'. How could NZB get away with this? Well, the NZB fund has an indefinite life. So as long as the constituent bonds were held to maturity (i.e. not sold on the way), that means the NZB fund would eventually get its capital back, - even in a falling bond market. And that, in turn, means the need to 'mark to market' as part of a reporting procedure might disappear. Note that I am not saying this definitely is happening. I am merely raising the 'not being marked to market' idea as a possibility.

As an indicator of the NZB pull back we might have expected, between February 2023 and August 2023, -the pull back that didn't happen- we can gauge what I would have expected to happen, by looking at the ABB110 bond over that same 'time frame of concern'. The underlying interest rate of our reference bond ABB110, rose from 4.9% to 5.8% over our time period of interest. This represents a capital reduction of (1-(4.9%/5.8%))= 15.5% over the February 2023 to August 2023 period.

What is it that has allowed the NZB price to hold up in the wake of such bond market turmoil? I can think of three possible mechanisms, the first leading on from what I have just discussed.

This first suggestion, (I have already made) is that NZB does not 'mark to market' their constituent bonds (except for the subset of those bonds sold before maturity). This is a conjecture of mine (even if it doesn't seem likely). It is one possible reason why the change in value of NZB -seemingly- has not followed the direction of its constituent bonds.

SNOOPY

[Snoopy]

A second possible reason is the new money which came into the fund to purchase new fund units (and hence underlying bonds) at an undiscounted price, offsetting losses from the existing investments in the process.

At the start of February 2023, there were 116,927,077 NZB units on issue. This unit total on issue had risen to 145,073,077 (+24.1%) units towards the end of August 2023. The incremental increase of units supplied to the fund ( 145,073,077-116,927,077= 28.146m ) resulted in approximately 28.146m x $2.86 = $80.5m of net new investment capital flowing into the NZB fund between those February and August dates. Note that these new incremental shares represent 19.4% (say 20% round figures) of the now combined total.

Here is where the slightly tricky reasoning comes in. If 20% of the units now on issue have been issued at a 'premium price' (actually the market price of say $2.86), that means 80% of the benefit of this new money will go to existing investors in NZB, as this 'new money' is 'pooled together' within existing funds.

My previously calculated (post 35) 15.5% reduction in fund value (the possibly undeclared reduction in bond value from February 2023 to August 2023 I talk about in post 35) for 'existing bond holders', from the February 2023 'declared AND underlying value of $2.88', represents:
0.155 x $2.88 = 45cpu.

This means the value of our existing NZB units reduces down from its February 2023 value to:
$2.88 - $0.45 = $2.43 (as of August 2023).

Now we do the weighted average calculation reflecting the mix of old and new funds. This means that following the 'cumulative accumulation of new funds' at an estimated $2.86 average price between February 2023 and August 2023, the average underlying value per unit of all funds at NZB is now:
0.8x$2.43 + 0.2x$2.86 = $2.52

This means the 'new funds' have resulted in the recovery for earlier unit holders of up to $2.52 - $2.43 = 9cpu of value, an amount some external observers may have considered lost. Nevertheless while helpful, the 9cpu of value recovered from 'new investment' does not fully recover the suspected 45cpu of existing unit holder 'unit value' lost from wider market interest rate market movements.

SNOOPY

[Snoopy]

A third reason why the value of NZB is holding up could be retained earnings from from the balance of income from fund constituents, (less management fees of course), that has not been not paid out.. Using the quoted fund yield of 5.59% as at 31st July 2023, an actual calculated gross yield payout percentage number of 1.6%, a tax rate of 28% and a management fee of 0.54%, we can estimate the half year retained fund income that remains available for reinvestment as follows:

1/2 x (1-0.28) x (5.59%-1.6%-0.54%)= 1.24% (return on assets under management)

This represents a net retained income stream by NZB of:
0.0124 x 116.927m x $2.86= $4.15m

This is equivalent to $4.15m / 116.927m = 3.5cpu

If we make an alternative assumption, contrary to what I wrote earlier in 'post 35', that NZB does mark to market the value of their constituent bonds after all, do reasons 2 (post 36) and 3 alone provide enough new capital into NZB to keep the NZB unit price stable against a background of falling bond fund constituent prices?

3.5cpu + 9cpu = 12.5cpu, a figure well short of the 45cpu that I determined was likely lost. The answer therefore is 'no', Operational assets recovered, combined with the documented new capital injection, cannot make up for the observed capital loss effect of rising interest rates observed in comparative bonds.

As Sherlock Holmes would have said, by eliminating the likely explanations of a phenomena, then the explanation(s) that remain, however unlikely they may seem at first glance, are probably true. Thus unless I have missed another obvious explanation (which may be the case, because I am not Sherlock Holmes), it does seem that NZB are not marking their constituent bonds to market!

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

SNOOPY

[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

[Snoopy]

We do know the strategy of the NZB fund from the original 2015 prospectus though:
"To outperform the S&P/NZX A-Grade Corporate Bond Index over a rolling three-year period."

But what is the managers' operational strategy to try and achieve this? We aren't told. Why has the fund seemingly under-performed its benchmarks in 2017, 2018, 2019, 2020 and 2023? We aren't told. Finally if you ring the fund manager up to clarify some of these points, you get told to submit your query by e-mail. This I did. But I never got a reply.


Perusing the 2015 NZC/NZB/GBF prospectus, I see that both NZC and NZB are managed by 'Nikko Asset Management'. Perhaps that is why Smartshares never replies to my questions about how the NZB fund operates? If they have outsourced their NZB management to Nikko, they may not know.

SNOOPY