I continue to invest in the Lloyds CoCo (contingent convertible bond) in my fund, instead of the equity of the company.
Issuing contingent bonds that can be switched to become equity of a company at a pre-agreed point is more advantageous to companies than issuing regular convertibles. Until an investor exercises the option, the company does not need to count shares in its calculation of diluted earnings.
We have invested in the £736m issue with a coupon of 11.04 per cent maturing in March 2020, but convertible into Lloyds equity at 59.2p per share if the group’s tier 1 capital ratio falls below 5 per cent.
The chances of converting into equity are minimal, and we view this holding simply as a very attractive fixed income investment, with a current gross redemption yield of 8.3 per cent.
Lloyds has been our favoured domestic bank for some time, but has not paid a cash dividend to shareholders since 2008 – making it difficult for UK equity investors to have a holding.
This may change, as management has stated it wishes to return to the dividend list, though the timing is uncertain.
Our preference has therefore been to hold high dividend-yielding equity stocks such as Legal & General and Lancashire Holdings within the Ignis UK Equity Income fund, as well as retaining our holding in the Lloyds CoCo, which represents a 1.1 per cent holding in the fund.
Graham Ashby is manager of the Ignis UK Equity Income fund