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I read your article on the 16 October re TCL, made sense to me and purchased TCL. I have now read Charlie Aitken’s article last Thursday and am concerned with what he had to say about TCL. What is your response?
I also own SWTZ and wonder what you have both come up with for the trust re TCL and similar entities?
A: Thanks for the question.
I don’t disagree with Charlie in that if bond rates go up, there will be capital losses and a number of the equities with bond like features will be impacted. This is what happened in Oct through to December 2016.
Where I disagree with Charlie is:
Charlie fears that the US 10 year bond could quickly rise to 3.0% – I don’t think this is going to happen unless the US economy really shows a head of steam, or the new Federal Chairman takes a more hawkish view.
In regard to TCL, I think it is wrong to think of it as a bond substitute because it is growing revenue at a CAGR of around 8% to 10%, and although very leveraged, all borrowing are fully hedged. That doesn’t mean, however, that the market won’t view it initially as a bond substitute – but over the medium term, they will reassess it for what it is worth.
Here is how I concluded my article:
“While I have been largely wrong so far, I think bond rates will head higher over the next 6 to 12 months as the US economy expands and the US Federal Reserve tightens interest rates and winds back its balance sheet. This well effect bond proxies such as Transurban, although the lesson from last October/November is that dips will be well supported.
If you can afford to be patient, look to buy Transurban in market weakness or on the next blip up in bond rates. “
regards
