The Greater Society Perpetual Bond

Let’s cut right to the chase. For more background on charitable giving and its unique problems and opportunities, please see our Letter, Charitable Giving & The Perpetual Bond, July 2012.

In this example, we established a Perpetual Bond in May 2012 that is owned by a non-profit organization and registered charity (the “Foundation”) whose only purpose is to distribute the income from the Bond, net of the expenses of running it, to another group of registered charities and causes that are specified in the Foundation charter and managed by its board of directors.

The original donor of $10 million is anonymous by preference and the Bond is expected to distribute approximately $1 million every six months in perpetuity. The simplified pro forma income statement for the Bond is below and one notes that we can reasonably expect to have $1,187,830 (Liquidity line) plus an additional $174,072 (Accrued tax account) for a total of $1,361,902 to distribute in December (the end of the first six months) while still maintaining the original capital of $10 million invested in the balance of the current portfolio.

The Bond was funded by buying approximately 2,600 common shares in each of fifty-one companies in the NASDAQ 100 designated as (B) in May for a cash outlay of $9,800,000. Since that time, we have “sold” our interest in eight of them and used some of the cash to buy one which became a (B) in June. The word “sold” is used in the usual sense in which we use it (please see these Letters, NASDAQ 100 – (B)(N) There And Done That, June 2012) – all of the equities that we buy are protected as much as possible by a volatility-based stop-loss or a revolving long-dated bought put at the purchase or later current price which expense is partially offset by a similarly long-dated sold call at a much higher price so that we need not necessarily “sell” all of our holding immediately and can, in fact, wait to execute the put at the end of the year (or sooner or possibly not at all) or be sold out by the opportunistic call on our long position. The estimated dividend income is $20,000 per month and we have no choice but to take it into the current Bond income; expenses above that are covered from cash or taking capital gains (Portfolio Credit (CR)). The Federal Tax rate is 26% but the Foundation is tax exempt as long as it retains its registration. The RiskWerk Company manages the Bond using its patented replication technology and the success of the Bond depends not on risk-taking but a proactive policy of risk aversion.

The Perpetual Bond®

“Alpha-smart with 100% Capital Safety and 100% Liquidity”

Guaranteed

With No Fees and No Loads

The RiskWerk Company, however, is paid for performance and earns a management fee (HFP line) calculated as 20% of the dividend income and quarterly capital gains and a new “high water” mark is set whenever that fee is paid. In this case, because of the disbursements, the high water mark is almost always $10 million plus whatever earnings are retained in the capital account in order to offset the effects of inflation. In effect, with that consideration, the Bond will always be worth $10 million in real terms and the expected (but not guaranteed) disbursements will always be worth $2 million per year.

But that’s not all. The Foundation has been set up to administer the Bond and its distributions and the Bond is a gift that just keeps on giving.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.