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-f...sh/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

[JeffW]

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

https://smartshares.co.nz/types-of-f...sh/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

[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

[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 date	Unit Price	Withdrawal amount
08-08-2022	2.92000	(140,000)
09-08-2022	2.92559	(60,000)
-----------------------	------------------------	------------------------
18-08-2022	2.90950	(800,000)
02-09-2022	2.87028	(50,000)
15-09-2022	2.87317	(700,000)
20-09-2022	2.87227	(100,000)
03-10-2022	2.84814	(700,000)
07-10-2022	2.85347	(250,000)
12-10-2022	2.84121	(50,000)
14-10-2022	2.83791	(30,000)
12-10-2022	2.84121	(50,000)
18-10-2022	2.82811	(30,000)
19-10-2022	2.81931	(50,000)
01-11-2022	2.83887	(580,000)
09-11-2022	2.82308	(100,000)
21-11-2022	2.86125	(100,000)
24-11-2022	2.85705	(100,000)
30-11-2022	2.85239	(50,000)
07-12-2022	2.86209	(50,000)
16-12-2022	2.84635	(350,000)
19-12-2022	2.84862	(150,000)
23-12-2022	2.84395	(50,000)
28-12-2022	2.83352	(50,000)
29-12-2022	2.83391	(50,000)
04-01-2023	2.84582	(50,000)
06-01-2023	2.85102	(90,000)
09-01-2023	2.85597	(150,000)
24-01-2023	2.87520	(50,000)
23-02-2023	2.85254	(500,000)
15-03-2023	2.85707	(150,000)
20-03-2023	2.87276	(200,000)
22-03-2023	2.86806	(50,000)
31-03-2023	2.87115	(300,000)
03-04-2023	2.87603	(160,000)
04-04-2023	2.87712	(90,000)
06-04-2023	2.88227	(150,000)
13-04-2023	2.88218	(100,000)
26-04-2023	2.88285	(170,000)
01-05-2023	2.88764	(240,000)
10-05-2023	2.88715	(50,000)
16-05-2023	2.88898	(100,000)
29-05-2023	2.87757	(50,000)
30-06-2023	2.86463	(50,000)
04-07-2023	2.86428	(60,000)
13-07-2023	2.86642	(50,000)
20-07-2023	2.86878	(50,000)
25-07-2023	2.88285	(170,000)
26-07-2023	2.86890	(300,000)
27-07-2023	2.87185	(50,000)
02-08-2023	2.86651	(100,000)
03-08-2023	2.86580	(100,000)
07-08-2023	2.86737	(50,000)
Yearly Total to 10-08-2023		(8,020,000)

SNOOPY

[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/...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]

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

https://smartshares.co.nz/types-of-f...sh/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-f...sh/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]

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.