i-win-you-lose“You can get ripped off easier by a dude with a pen than you can by a dude with a gun” – Bo Diddely

Last year, I have already expressed my deep concern for retail investors as they do not know what they were getting into. People were chasing so called yield investment such as Reits, Preference shares and other perpetual securities without understanding the risk of investing in such instruments.

Now you hear the news, OCBC is redeeming $1billion worth of preference shares paying 5.1 per cent a year in dividends. The bank sold the shares to investors to in July 2008 to raise funds, when liquidity was drying up.

I have highlighted the these terms in my 2008 blog entry, these OCBC preference shares are perpetual securities with “no fixed redemption date”. They can be “redeemed at the option of the lender” five years from the date of issue”

Exactly after 5 years, the preference shares will be recalled on July 29 – the first date that OCBC is able to do so after issuing them. With low interest rates environment, it was able to get a better deal by offering $1 billion 4 per cent dividends preference share in 2012, cheaper funds for the bank compared to the 5.1 per cent instruments.

How about the investors of the shares? What deal do they got?

Look at the tragedy. I pity those who bought it at $109 and thought that they would receive a 5.1% Yield “Perpetually”. Now you know you cannot, because on July 29, you have to surrender it at $100.

Some may argue that preference shares are safe. Well, that is what the bankers and issuers want you to believe. A quick revisiting of 2008 chart of the same stock clearly shows preference shares have minimal downside protection when the market tumbles. It dropped more than 15% in 2008!

Common sense will tell you that preference shares have big downside risks but the upside is limited. Unless you can buy them when they suffer severe sinking spells in bad markets, you are always at the mercy of the issuers.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

  • Hi, your article is very interesting.

    I would be interested if there is a website that shows the effective yield of the preference shares at the current market price.

    I acknowledge the risk but if the sponsor is a big bank and the earliest redemption date is 2020, it seems to me like this may be an opportunity to make some $$ on a relatively managed risk investment.


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