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Fidelity Asian Values - Subscription Shares
Sara G
Posted: 19 April 2017 10:25:05(UTC)

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As a holder of FAS I recently acquired bonus subscription shares (FASS) which can be converted to ordinary shares over the next 3 years at a set price. Looking at the current price of FAS, which is above the first redemption price, this looks like it could well prove to be a good deal at some point during that period. The subscription shares are available to buy and sell, although volumes are low currently.

Does anyone have a view as to whether it may be advantageous to buy more of the subscription shares as opposed to the ordinary, now that the discount has evaporated?
Posted: 19 April 2017 18:24:58(UTC)

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I was looking into these at one point - there is a list of current subscription shares and warrants here:

They are economically similar to options, so I compared the price of the subscription share / warrant with the Black-Scholes price of a call option with the same date/price. I tried a couple of different online option pricers which gave similar numbers, I believe they all use the same algorithm underneath. E.g.

At the time I looked PCFS and UEMS appeared cheap on this basis, and GRIW expensive.

So this might be an avenue for you to value the FASS shares?

The effect on your portfolio would be leverage - a small difference in the FAS price on the redemption date could mean a big payoff or 100% loss of the money you spent buying the FASS "options".

Caveat - DYOR! I later released that a policy at work forbids me trading derivatives, and so I didn't commit any money in the end. I don't have an explanation for the discrepancy between the option prices (which are theoretical) and the subscription share / warrant prices.

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Sara G on 19/04/2017(UTC)
Sara G
Posted: 19 April 2017 19:42:09(UTC)

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Thanks Tom, that's really helpful.

It certainly looks like it could be an exciting way to invest (with limited downside) and if I can get my head round the maths I might consider it for the speculative / high risk end of my pf.

I've found a series of introductory articles on Monevator which may be of interest to anyone else who is new to this topic.

Looking at FAS / FASS in more detail:

If I understand it correctly, the notional fair value for FASS would be around 14p as the current price of FAS is 389 and the first exercise price (Nov 17) is 375, so the sub shares are on a premium as they are priced at 32p - which is not to say they are not good value as the Trust has performed well and has strong prospects in my view.
Posted: 19 April 2017 21:24:28(UTC)

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Sara I think you may be aware of most of the caveats but I'll post this piece anyway.
From previous experiences there are a few things to watch out for if you are planning to trade subscription shares. Firstly your broker may refuse the trade unless you can prove you are a competent investor and even then you may have to indemnify them against any future claims (ie sign a form) before allowing you to trade what are classed as sophisticated products.
Secondly do a dummy run on the subscription shares just to verify the buy and sell spread - it may be larger than you were expecting.
Then do the maths.
Buying the subsc shares today locks in your exposure at todays price. If the ordinary share price goes up sufficiently by the conversion time then the conversion price may look a bargain. Currently the subscription shares are on around 17p premium so the rise needs to get above this figure before you even start looking at any profits.
Remember each conversion window is short so the price has to be attractive at the right time. Conversely if the ordinary share price falls below the conversion price then the subs share premium may quickly dissapear and you could easily lose all the value of the subs shares unless it recovers. Usually the premium reduces as the maturity date gets closer. There may be of course other opportunities of realizing good profits by simply selling the subscription shares as (if) they rise but remember to factor in charges and spreads. Remember this is a leveraged transaction so an external event can wipe out your subscription share value very quickly. Have I put you off yet?
Sadly I learned my lessons the expensive way but that hasn't stopped me. Start small if you must.
3 users thanked john_r for this post.
Sara G on 19/04/2017(UTC), c brown on 20/04/2017(UTC), mc2 on 24/04/2017(UTC)
Sara G
Posted: 19 April 2017 22:26:31(UTC)

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Thanks John, that's useful.

I certainly won't be rushing into anything and will be doing my research thoroughly.

Nice to have the bonus shares anyway, even if I decide not to add to them.
Posted: 20 April 2017 11:56:44(UTC)

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I too received FAS subscription shares (FASS). Although they are showing a profit over the notional issue price, it would cost more than that to sell them! I did consider buying more, but the spreads were large, and so they have always looked expensive. I am generally optimistic about prospects for Asian shares, but FAS is currently the most expensive (minimal discount to NAV) in a crowded field in which its performance is not outstanding, even though its volatility is low. In other words, i am not a buyer of FAS at the present price, and so FASS shares are currently even less attractive. There may come a moment when they look good, but not (yet) for me.

I've made money out of subscription shares - buying in the market and selling again (UEMS and FJVS) - but I lost so much by holding to redemption when FJVS took a temporary but stunningly ill-timed dive, that I am now very cautious. I would only be a buyer if I thought good times were about to roll, and right now my optimism is shaded by dark clouds.

CULS, however, are a different matter. They guarantee return of capital with a modest coupon, but also carry the prospect of capital gains if the share price rises. I've done reasonably well out of FCS and AAS CULS (not so well out of CYN). Not as spectacular as subscription shares, but proper investing rather than gambling.
3 users thanked chazza for this post.
Freddy4Skin on 20/04/2017(UTC), Sara G on 20/04/2017(UTC), mc2 on 24/04/2017(UTC)
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