AGF – The only way to invest in USD cash with a decent yield?

Last time I wrote about being underweight the AUD I suggested above 77 on AUD/USD was attractive to make such an underweight more meaningful. I would ideally like to be about 10% underweight around here, but stock selection is my main focus and I never like having too much in derivatives or low yielding assets to get to such a target. One way in which I have now managed that recently is by buying some AGF and also the GOLD ETF on the ASX which I already mentioned this week, more so when the AUD/USD around 76.4 but some higher.

AGF probably needs a spreadsheet to outline it best but I’ll do my best to explain. The August 31 “estimated” NAV after AGF has sold 95% of the portfolio (and AUD/USD approx. 75.2) is $1.04 per share (but the assets are 95% held in USD cash). Around 2/3 of this will come back in the form of returned capital over the next 3 months. With today’s company news update release much of this will even be quicker than first expected. The remainder AMP have an estimation of between 9 and 18 months. Given AMP have been embarrassed enough over this saga already I am expecting they are being conservative here. I will however be conservative myself and assume the rest can come back in 18 months. Given so much comes back so early the weighted average time held on this basis should only be approximately 7 months. With the currency at about 76.4 as I write, I will reduce the above 1.04 to 1.023. I will take off 2.5 cents for various management wind up costs or taxes, the taxation is not easy to guess but remember the portfolio and Chinese market has not really been growing much so I can’t imagine this should be significant. One must also ponder the classification of some of the distribution as income and weigh up their own personal situation. Now I am at 99.8. But 2% of the portfolio is still in suspended Chinese shares which I don’t know a lot about, so I again be conservative and will take off another cent to give us 98.8 cents left, as I said above to treat as a say 7-month hold. Buying this at 95.5 cents gives me approximately a 3.5% yield for that weighted average time period, but if I annualise it I get about 6%. If AMP were being really conservative on the last part of the portfolio that is where the returns could be much better. For instance, if they returned capital at the earlier of the 9 to 18-month range, the annualised rate becomes over 10.5% on all the above assumptions. Many of you will probably already fallen asleep reading about this investment opportunity and that is a reason why these situations can become ok risk/reward parking spots for your money. As always I get a suspicion I have overlooked something with these situations, but I figure it is a good buffer I have to buy AGF rather than buy more of other USD cash exposures that yield nothing. I have to respect LIM as they did some good work on all this saga, and note they sold at 96.5 recently. When we are talking about a bond like investment, and the fact they may have other more interesting ideas they need the cash for that doesn’t put me off. In a situation like this with tight spreads to work with the 1 cents less I am buying at means something. Also LIM sold some before the significant announcement today that much of the cash will come back very quickly in the next distribution. I am attaching no probability to my assumptions but couldn’t entirely dismiss it, that before the complete wind up finishes perhaps even there is a cent or two value if the structure is not entirely closed should a more reputable investment manager wanted to relaunch a China fund. As was well publicized there is no alternative ASX vehicle and no doubt there is some underlying demand still for one.

One reason I feel this can be an attractive investment strategy is your typical retail investor does not like to hang around in such vehicles and will sell out early for simplicity whilst paying very little attention to the potential yield remaining, of course many also don’t want to have an investment in USD. The institutions who were involved in the wind up may also feel that this type of remaining investment doesn’t really suit their fund and possibly sell despite some decent yielding returns remaining. It has kind of become a bond like investment yet your typical bond buyer being an institutional mandate will not have the mandate to invest in AGF. Therefore, we have an unusual investment remaining where there are kind of forced sellers and not many natural buyers, hopefully that has created a nice opportunity for me. I would classify this as “cash equivalents” that I sometimes refer to. You would only buy this if you feel from current levels there is downside risk to AUD/USD and you are buying this as an alternative to holding USD in a bank account, yet in this case hopefully pick up a decent yield.

Please treat my above workings as rushed guesswork from someone looking for some USD cash exposure with even a small yield, and someone that is prone to fat fingers with a calculator, and has a disclaimer noting I may be inaccurate on occasions! Obviously a lot of the money comes back to the unit holder soon in AUD, so to keep the same exposure in USD I will have to at the same time shift that to USD holdings that yield nothing again. The cash that AGF will take longer to get back to unit holders (9-18 moths) will continue to be held in USD.


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