Split Share Corporations Thomas Herbison Janelle Tibbatts Justina Williams Matt Wood
Agenda • Definition of a Split Share • Benefits and Risks of this Investment • Big 8 Split Inc. • Top 10 Split Trust • Conclusion • Type of investor
What is a Split Share? • Split Share Corporations have a portfolio of common shares in a specific industry or sector • “The split share structure allows the risk-reward component of common shares to be broken down into two components and then allocated differently for investors who are more or less risk averse.” (TSX Group) • The capital shares receive leveraged capital gains or losses of the common share • The preferred shares receive the constant dividends of the common share
Benefits of Investing in a Split Share Corporation • Allows the investment in a portfolio of a specific industry or sector • Qualifies as a mutual fund corporation, thus taxed similar to mutual fund corporations • Preferred shareholders are taxed on their dividends • Common shareholders’ gains are taxed as capital gains • Leveraged capital gains • Risk of capital loss can be avoided while still earning dividends
Risks of Investing in a Split Share Corporation • Leveraged capital losses • Market fluctuations for capital shareholders • Concentration of portfolio in specific industry • No ownership interest • Interest Rate Fluctuations • Securities Lending • Mutual Fund Policies
Big 8 Split Inc. • Holds equal portion (12.5%) of the following companies in its portfolio: • Bank of Montreal • Bank of Nova Scotia • Royal Bank of Canada • Toronto-Dominion Bank • Canadian Imperial Bank of Commerce (CIBC) • Great-West Lifeco Inc. • Manulife Financial Corporation • Sun Life Financial Services of Canada Inc.
Share Prices • Initial Public Offerings (IPOs) • Preferred Shares = $ 25.00 • Common Shares = $22.92 • Offered 4.5 million shares of each type • Redemption Date: December 15, 2008 • Current Prices (as of close on Tuesday, January 30, 2007) • Preferred Shares = $23.35 • Common Shares =$53.65 Source: Globe Investor
Administration Fees • 0.15% administration fee to TD Securities • Interest Income “from time to time” • May lend Portfolio Shares to generate additional income
Big 8 Preferred Shares Source: Globe Investor
Big 8 Common Shares Source: Globe Investor
Top 10 Split Trust • Banks Annual Total 5 year returns(%) • BMO 14.64 • Bank of Nova Scotia 20.31 • CIBC 14.08 • National Bank of Canada 20.94 • RBC 15.01 • TD 10.25 • Life Insurance Companies - Great-West Lifeco 13.73 - Industrial Alliance Insurance and Financial Services 12.76 - Manulife Financial Corporation 12.49 - Sunlife Financial Corporation 9.01 Equally weighted average 14.32
Top 10 Split Trust • Equal number of Capital units and Preferred Securities: • $76,757,812.50 (5,859,375 Capital Units) • $73,242,187.50 (5,859,375 Preferred Securities) • Together issued as a combined unit, but separately traded on the market. • Prices: • $13.10 per Capital Unit • $12.50 per Preferred Security • Minimum Purchase: • 100 Capital Units or 100 Preferred Securities. • Terminates on March 31, 2011
Top 10 Split Trust • The Trust will generally invest between 5% and 15% of the Trust’s assets in the securities of each issuer in the Financial Portfolio. • Utilizes Derivatives in the form of covered call and put options for additional return in the market or to protect from declines in the individual securities or the portfolio as a whole.
Top 10 Preferred Shares Source: Globe Investor
Top 10 Common Shares Source: Globe Investor
Type of Investor for Split Share Corporations • Capital Shares • Risky investors • If you believe an industry is going to do well, you can leverage your gains • Preferred Shares • Risk-adverse investors • Receive dividends without the risk of losing capital