Tuesday, 7 January 2014

Revenge of the Zombie! (Portfolio Sale)

zombiegnomes
Be careful out there...
Source
Imagine a zombie wearing perfume - that's Chesnara. No matter how good the perfume smells, it's still one of the walking dead. To be blunt, Chesnara - although it sounds like a fashion line - is in fact a zombie fund, a kind of Frankenstein monster built out of bits of other closed life assurance companies. Literally, it might be said, 'dealing in death'.

I have owned Chesnara since 2007, buying and selling different tranches at different prices. This chunk of shares was bought in 2011, primarily because of the yield, which at one point approached 10%. Time (and the company management) has worked its magic: early in the New Year - and thanks to the news of its acquisition of the Direct Line Life Insurance business - my patented 'sell' indicator started flashing (i.e. capital gains exceeded five times the annual income).

Chesnara plc was formed in only 2004 with a basic business model of making money by buying up blocks of closed life funds and squeezing cost and capital savings out of them. The success of this depended on:
  • how long people with policies survived
  • whether any new policies issued were correctly priced
  • how successful they were at managing the portfolio of financial assets. 

Well, they've done quite well, to give them their due. But given the opportunity of taking five years' income 'in advance' (by selling), was there any reason to continue holding? The yield was still attractive - at over 5% - but the dividend cover was thin (1.4). Also, given that life assurance requires long-term holdings - typically in bonds and gilts - I expected that the capital value of their assets was likely to plummet over the coming years, with the withdrawal of QE stimulus. Plus - barring a zombie apocalypse - people are living longer.

So, I sold, netting a 38% capital gain.

But, as in zombie horror movies, you need to be careful: make sure the zombie really is dead before you turn your back on it. Because I turned my back and it kept on coming - so it turns out that I left a bit of money on the table...

[Sale price: £3.33]



I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

2 comments:

  1. Interesting. I have been debating selling my holding too over the past couple of weeks. Their exposure to bond prices scares me. I was luck enough to buy in when it was yielding >10% and as well as some juice dividends the price has appreciated 107% since i bought in. Not bad at all!

    Still the greedy investor in me thinks they might still have some upward momentum in the short term. They are very good at what they do and were it not for the end of QE I would probably buy more.

    The big question is where I would re-invest the money...!

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    Replies
    1. Sellers remorse only cuts in if somebody goes and tells you the price - so ....

      I sold today at 261.0. My guess - Nobody wants bad news over Christmas - tomorrow they will find out what was wrong with the Direct Line deal!.

      Never mind - just think how well you did with RSAB cum prefs - masterstroke!

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