Bearbull - "But that still left the stock as the biggest single contributor to the portfolio's income - in 2011 it produced roughly £1 of every £4 of income received."

I no longer receive the IC and have never rated BBull. To have one stock accounting for a third of his income just confirms my opinion of him/her.

IC is offering a balance of opinion. Firstly 'Bearbull' from 30-Nov................

"But, before I set off bargain hunting, I have a bigger dilemma to tackle - shares in the fund's holding of life insurer Chesnara have just dipped below their stop-loss level.

The problem is that dumping Chesnara would make a big hole in the portfolio's income. Sure, I had acknowledged this possibility a year ago when I sold a third of the fund's Chesnara shares. But that still left the stock as the biggest single contributor to the portfolio's income - in 2011 it produced roughly £1 of every £4 of income received.

The circumstances that have depressed the share price are discouraging. As for any life insurer, the pot of capital that Chesnara needs to meet its potential liabilities must get bigger as interest rates fall - because a given amount of capital will produce less income. And the more capital that has to be set aside for policyholders, the less that's left over for shareholders. Thus falling bond yields have hit Chesnara's net asset value. Simultaneously, the company has shown that its investment book had a higher exposure to (falling) equities than was thought and it has rearranged its outsourcing deals - Chesnara is the archetypal two-men-and-a-dog operation - but at higher upfront costs. The upshot is that between the end of 2011's second and third quarters Chesnara turned a cumulative £3.8m pre-tax profit into an £8.8m loss, and its net assets dropped by 15 per cent.

Sure, much of this could unwind pretty quickly if equity markets bounce or, more significantly, if bond yields rise. But, if lower actuarial values really do presage less ability to generate spare cash, which is what they imply, then Chesnara's ability to pay dividends will be eroded. Still a dividend cut is probably not imminent and there's no pretending that the Bearbull fund would not miss the income that Chesnara is likely to produce in 2012. Yet the fund's losses on the Chesnara holding in the past six months already amount to six years' worth of dividends.

Is that a reason to wait for some form of mean regression to kick in, or to take a deep breath, sell the Chesnara holding and move on? My instinct tells me it should be the latter, especially as that metaphorical fire next door has barely been doused.

Closed-life fund specialist Chesnara has warned that a sharp fall in equity values has meant the group's European embedded value (EEV) has fallen to £288m by the end of September from £340m at 30 June.

Chesnara is also renegotiating the current outsourcing arrangements used for policy administration and accounting arrangements, and has indicated that this will trim profits on an IFRS basis by £5.8m. However, transfer of the long-term business of Save & Prosper, acquired last December, into the group's core closed-end business is on target for completion by the end of the year, and this will deliver significant regulatory capital and fiscal benefits for the group.


And then its regular tip update from 21-Nov.................

SHARE TIP UPDATE:
Chesnara continues to generate plenty of cash, and solvency levels remain at near double the minimum requirement. Yielding almost 10 per cent and trading 33 per cent below EEV, the shares remain an income buy at 167p.

Weekend share tips :
04/12/2011 by ukcitymedia.co.uks
http://www.ukcitymedia.co.uk/news/fullstory.php?id=2253

The Investors Chronicle on 25th November 2011 Tip Bits column suggested 'keep buying' outsourcing services provider Serco as well as Chesnara, Albemarle & Bond and Ricardo

First, the NPV of cash flow per share contractually in place (the EEV in the accounts per share) is 50 per cent higher than the current share price. Second, the Directors say there are prospects of winning new business - they have been right on this in the past; given all the pension schemes that have closed in the last decade there must be a large number of possibilities; and the need to maintain capital in reserve provides a good reason to offload running these closed schemes if you can. Third, the open life business in Sweden is said to be about to move from loss to profit. Fourth, exposure to EMS area problems for shareholders is limited.

When the Swedish business started eating up capital I sold out of Chesnara. What with that and reductions in earnings because of changes in bond yields the eps figure for 2011 is very low. So new investors are likely to be very suspicious of the high dividend on offer. At worst I expect my money back plus a bit. At best I expect the 10 per cent yield for years to come, with modest increases in dividends supported by purchases of more closed life schemes as as old ones run down.

DYOR