The Peanut Convertible Debentures Index™, a new index for Canadian convertible debentures? I'll drink to that! Phillips Brewery Tasting Room, Victoria, British Columbia. Copyright © 2018 Felix Choo / dingobear photography. Photo may not be reproduced without permission.
***
Benchmarks. Every investor knows that the go-to benchmark for Canadian stocks is the S&P/TSX Composite Index, just like everyone knows that the default benchmark for Canadian bonds is the FTSE Universe Bond Index and the benchmark of choice for tech stocks is the NASDAQ Composite Index. But exactly what is the undisputed, gold standard benchmark for Canadian convertible debentures?
Yeah, we couldn't think of it either, and that's a problem we wanted to solve. As such, we went away, worked many tireless days and nights and, today, we finally (at long last!) present you with the Peanut Convertible Debentures Index™... our new performance benchmark for our favourite asset class, Canadian convertible debentures. As always, thank you for reading The Canadian Convertible Debentures Project.
Important disclaimer: Like everything else on this website, content here is provided as information and opinions only and not intended to be a provision of investment advice or a recommendation of any investment action in any form. Investments made in convertible debentures are exposed to the risk of financial losses, and as with all disseminated information concerning investments you read, it is highly recommended that an individual consult with a qualified investment professional before making any investment decisions.
The Peanut Convertible Debentures Index™
Truth be told, building a decent benchmark for Canadian convertible debentures has been on our to-do list for quite a while. The goal was to come up with an index that meets several objectives. First, an index should be investable and replicable for investors. Second, the index should be diversified and broadly weighted. And, third, the index should beintuitive and easy to understand. Hopefully, the Peanut Convertible Debentures Index™ accomplishes these objectives. We will document all of the gory details of the thinking behind the index in a proper paper we'll publish on this site at a later date but, for now, to get the ball rolling we'll just go over some key highlights and rules behind the index as follows:
- As you might expect from the name, the Peanut Convertible Debentures Index™ is based on our Peanut Convertible Debentures Power Rankings.
- The inaugural constituents of the index are comprised of the top-16 (with exceptions, as you'll see below) convertible debenture issues in the Peanut Power Rankings as of December 31, 2018.
- Any single issuer can only be represented in the index by no more than one convertible debenture issue, to discourage excessive concentration in exposure to any one company.
- The index should be reasonably diversified by industry and sector.
- The index is constituted as a roughly equal-weight index. Weighting differences between different issues on the index's inaugural date (December 31, 2018) owe to variation related to theoretical acquisition prices based on the par value of issues, accrued interest (where applicable), and US dollar conversion into Canadian dollars (also where applicable).
- The index is in Canadian dollars, and the value of the index as at December 31, 2018, is nominally set at 100.00. The inaugural constituents of the index are assumed to have been acquired at the closing prices reported by the TSX on December 31, 2018, plus accrued interest.
- As implied by the points above, the index is a so-called "dirty price" bond index. In other words, the index, on any given date, includes the accrued interest income of its underlying convertible debenture issues.
- Any cash paid from coupon interest (or otherwise) is assumed to be reinvested at a rate of interest that is equivalent to the going rate of interest paid from a high-interest savings account available to an average Canadian investor, until the next index rebalancing date.
- The index will be rebalanced on a semi-annual basis (June 30 and December 31), unless cash balances from coupon payments, redemption, and/or conversion and implied sales exceed 10% of the market value of the index, in which case the index will be rebalanced as of the next trading day.
Going forward, I think what we'll do is formally review the Peanut Convertible Debentures Index™ approximately once a month, maybe with a bit of commentary and comparison regarding how the index is performing relative to other indices in the market. Further, I will endeavour to update the price of the index more often than that (hopefully daily, but let's just say weekly for now to be safe), which will be reflected on its own dedicated page here on this blog, as well as in a widget in the sidebar for those of you tuning in from desktop or laptop computers. Sound good?
Contact Us
Thank you for reading this blog. As always, if you have any comments or questions about convertible debentures or this blog, please leave us a comment at the bottom of the page or email us at convertibledebs@gmail.com.
In addition, for media, sponsoring and/or financial institution inquiries, please email us at convertibledebs@gmail.com. Thank you for your interest!
***
looks interesting....the last quarter (especially December) was a very opportune time to invest in debentures (across the board).
ReplyDeleteAgreed, the steep sell-off in equities in December also helped to produce some bargains in the convertible debentures space. Thanks for your comments and for reading this blog.
DeleteIf you are creating a Canadian Index, why do you include an American debenture? Just because it's listed on a Canadian exchange doesn't make it Canadian?
ReplyDeleteWould it be possible to have the same information about each debenture as you provide on your other report? Maybe you could just tie them together?
While I'm here, would it be possible to show the Debt to Equity Ratio for each debenture in you Peanut Report? This would show how much the debentures are secured by equity.
LOVE the site.
Hi, thanks for your questions and comments. Not sure you'll find my answers to your questions satisfactory but I'll try to answer them anyway.
DeleteOf the 16 index constituents, three of them (TCN.DB.U, HOT.DB.U, and IVQ.DB.V) are denominated in US dollars. All, however, maintain Canadian head office addresses despite having a majority of assets in the US and, as you acknowledge, all are listed on a Canadian exchange. I understand your point but given the limited size of the Canadian convertible debentures market, the issues' place in this market, and the methodology for our new index, I think their inclusion is appropriate.
I'll take your suggestion to tie the information in the Peanut Power Rankings with that of the Peanut Index and consider it in the future, but for now I don't want to detract and confuse from the information provided in the Peanut Power Rankings (which will continue to be a main feature on this blog) and feel some of the information there might be redundant whenever we update details for the Index. Hopefully that explanation makes sense.
For now, given time and other resource constraints, I'm not able to efficiently list and update the debt-to-equity ratios of all of the convertible debenture issuers we follow, but I won't rule it out for the future, it's a good suggestion.
Thanks for your kind comments, thank you for reading, and good luck in your investing.
Interesting idea. The Index should be most helpful.
ReplyDeleteWould it be possible to link the individual debentures in the Index to your regular Peanut Report so a reader can obtain more information about the individual debenture?
If this is a Canadian Index, why do you want to include an american debenture?
This is a question for the Peanut Report. Would it be possible to show the Debt to Equity ratio for each debenture? This would indicate some level of security for each debenture.
LOVE the site.