On Monday I wrote a blog (highrockcapital.ca/pauls-blog/corporate-bond-investments-the-best-part-of-high-rocks-private-client-division-part-i) about why our ability to invest directly in corporate bonds (specifically high yield bonds) is so important to our Private Client division. I used our recent purchase of Yellow Media's new issue of 10% 2022 as a good example. In fact, we bought another high yeild bond new issue yesterday as well to be allocated to our Tactical Model (as was Yellow Media).
The simple fact that High Rock is able to transact this way in the Institutionally-traded corporate bond market is, as I say in the title of these two blogs, one of the best parts of our Private Client division. But if that is not enough, I am going to describe in detail how we trade and allocate bonds across all of our Private Client accounts once the trades are done. I will continue with the Yellow Media example.
Trade Allocation Policy
First, I need to describe a regulatory requirement that is placed on all Portfolio Management companies (like High Rock) by the Ontario Securities Commission (OSC) stating that we need to fill all client accounts first before employee accounts and all accounts get filled on a pro-rata basis according to what their original needs were on a percentage basis.
First Trade in Yellow Media
Our first trade in Yellow Media was the new issue buy order for $2mm bonds at the new issue price of $98.00. We only got filled on $1mm bonds at $98.00 (cutbacks due to such high demand from buyers).
Second Trade in Yellow Media
Our second trade in Yellow Media bonds was to buy another $1mm bonds immediately in the aftermarket or secondary trading market. I think we were the first trade out of the blocks and were immediately filled on $1mm bonds at $99.25.
The total of $2mm bonds filled all of our internally-managed accounts (including the BNS high yield fund we manage).
So now comes the time to allocate those two different purchases. First, we need to fill all non-employee accounts at the first trade of $98.00. Once they are filled, then we allocate the second $1mm piece across client accounts so they get their "full fill" allocation and then we start filling employee accounts (Scott, Bianca and my households) with the second $1mm at the price of $99.25.
So, as you can see, our client accounts get filled at the preferential price of $98.00 first before employees. Once client accounts got their full allocation, their average price ended up being ~$98.58. It may not seem like much of a difference from the weighted-average cost of $98.625 but...it matters to us. Sure we employees would have liked to have bought these bonds in our personal accounts at $98.00, given they are now bid at $101.25, but not to the disadvantage of our clients. So clients own these bonds in their accounts at ~$98.58 and employees own them at $99.25.