Jay,
I have been alerted to another problem that faces institutional investors. It turns out the solution favors oil sands stocks.
Ever since the bubble burst in 2000, institutions (pension funds, insurance cos) have been scrutinized on how they match liabilities (insurance claims, pensioner's payments) to assets. Actuaries and accountants require the duration (term) of the assets to match the liabilities (for example, 30 yrs of pension payments)
Ever since the Fed canceled the 30yr there has been a dearth of assets for institutions to match liabilities with and this has driven them into the long end of the curve. This is the primary argument (and not the buying by Chinese or Japanese argument) for long yields dropping so much.
There is another assets, though, that is long life (longer than the 10yr) and thus suitable for matching. That is commodity equities with long reserve lives. There are some commodity plays with long enough lives to enable substitutions. For example, a pension fund could substitute 19 yrs bonds COS.UN with a 35 year life (and 2.5% yield).
Since yield is dropping, even zero coupon equities like WTO.TO, SU, may be preferred over 10yr bonds because of the longer duration (in other words, forget the yield, focus on duration).
Of course, there are other long-life commodities. MSB, RIO, LIF.UN all come to mind. The most attractive against a backdrop of Peak Oil and countries like Russia and Venezuela barring foreigners from their oil markets is the oil sands, though
I am lightening up on some other commodities (energy juniors) and will focus on the energy commodities with the longest lives (including uranium).
David
PS I am adding AY.UN here. Their CBM program looks enticing and given the high valuations afforded CBM juniors with zero production (AY.UN is also a while from production), AY.UN with its several thousand acres of CBM, which is 'dry coals' and thus avoids the worst environmental issues, is very attractive. D/CF at 1.8 is a bit high, but there are even higher trusts. RFLI is decent (8-9 yrs, almost half half NG to oil, slightly more NG) and although the payout is high (80%, 10% higher than other CRTs) if they drop the yield from 16.2% to 15% the payout reaches the avg of 70% (incidentally, removing two trusts: PEY.UN and COS.UN increases avg payout to 80% anyway).
I think AY.UN is being overly punished by analysts (they are probably accumulating) to the tune of 150-450bp. In other words, dropping the yield to 15%, with a payout of 70%, would force analysts to put a target on AY.UN that drove prices to 'market yield' which is 10.5-13.5%. I would tend to the lower end of the range (ie undervalued by 450bp) because of the long-term investment in CBM they have made.
If you accumulate AY.UN, do so before the March Annual Report, when the CBM will be promoted and may be added to RLI.
JMVHO
David |
