# Bonds vs. HISA: some new insights



## Zaxon (12 October 2019)

For fixed rate income, you have the choice of a High Interest Savings Account or Bonds.

Given how bad bond rates are: 1.22% is the best you get if you buy a treasury bond at current face value



Given how HISA accounts can give a better return: 2.1% for instance



I've been struggling to understand why bonds are so blatantly recommended in a balanced portfolio, but virtually nobody is talking up HISA, which often seem to have a higher return, without any risk to capital: win-win.  I believe I've now developed some insight into why this oversight exists.

*Tax Free*
Most treasury and municipal bonds in the US are tax free (for US citizens).  I know.  Crazy talk!  Whereas HISA would be taxed at the marginal rate.  So of course, if you read investing advice given by Americans, you may not realize that advice may be biased (due to their tax law), and that doesn't apply to you as an Australian.

*History*
You don't have to go back too far before HISAs didn't exist.  "Online only banks" etc are a recent development.  So "traditional advice" will always recommend bonds, simply because people keep repeating the same advice without modernizing it.

*Bond Price Appreciation*
I read in a forum how that the coupon rate isn't that important, since the majority of your return come from the bond price appreciation.  Very true...at the moment.  While interest rates keep falling, existing bonds you hold will capital appreciate.  But that's short term thinking. When interest rates go up, existing bonds drop in value.  And if you plan on holding bonds as a permanent percentage of your balanced portfolio, guess what - we're at historically low interest rates.  Over the next 30 years, there's so much more room for you to lose value on bonds than there is to gain from it.  And when interest goes up, HISA benefit!

*Investing advice from rich people*
One limitation to HISAs is there's typically a limit to the amount you can place in them. Up to a million dollars, for instance.  So for someone like Warren Buffett or (insert your favourite wealthy person here), of course they're not going to recommend HISAs, because they wouldn't be suitable for them.

So these are my recent thoughts into why bonds are held as the Holy Grail of fixed income, and often better HISAs get overlooked by most investment advisors.


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## Value Collector (12 October 2019)

There is also the safety element.

Bank accounts are only government guaranteed up to a certain balance, so if you are looking for a place to store a lot of money, and you want a government guarantee, then government bonds are your only option.

———————-

But when people recommend having bonds in your portfolio, I don’t think they are just talking about government bonds, corporate bonds can be used.


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## Zaxon (12 October 2019)

Value Collector said:


> There is also the safety element.
> Bank accounts are only government guaranteed up to a certain balance, so if you are looking for a place to store a lot of money, and you want a government guarantee, then government bonds are your only option.



Correct.  Guaranteed up to 250k.  In theory, you could also have 250k in a number of different banks.


Value Collector said:


> But when people recommend having bonds in your portfolio, I don’t think they are just talking about government bonds, corporate bonds can be used.



Corporate bonds can certainly play a role.  If people use the term "treasuries", then that's government bonds only.  It would be interesting to know in the "classic" advice, such as 60:40, what the recommended breakdown is of the 40% bonds.  I don't know if that's ever specified.


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## Value Collector (12 October 2019)

Zaxon said:


> Correct.  Guaranteed up to 250k.  In theory, you could also have 250k in a number of different banks.
> 
> Corporate bonds can certainly play a role.  If people use the term "treasuries", then that's government bonds only.  It would be interesting to know in the "classic" advice, such as 60:40, what the recommended breakdown is of the 40% bonds.  I don't know if that's ever specified.




Given the huge amount of pages that Ben Graham dedicated to analysis of corporate bonds in his books security analysis and the intelligent investor, I think he lent towards a large chunk of the bond allocation going towards corporate bonds.

But as Buffett says, you should never own debt in a company you wouldn’t be willing to hold the equity of.

So going down the bond route doesn’t mean you have less security analysis work to do, it just means you are accepting a slightly different risk/reward ratio, you still have to have a good understanding of the business, unless you are going for a diversified etf type shot gun approach to your bond portfolio.


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## Zaxon (12 October 2019)

Warren's advice to his heirs: "put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund".  Here is where a HISA account would be the right fit in place of bonds.

The 2yr Australian government bond currently yields 0.68%



Virtually any HISA would do better.  The only restriction would be if you were keeping > $250k, but as mentioned previously, you can break that up across different banks.


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## Value Collector (13 October 2019)

Zaxon said:


> Warren's advice to his heirs: "put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund".  Here is where a HISA account would be the right fit in place of bonds.
> 
> The 2yr Australian government bond currently yields 0.68%
> View attachment 97949
> ...




Yep, the 10% bonds he recommends is just an insurance policy, he has also stated that 100% shares would be fine to if you had he right mindset to ride out storms.

Check out this video, where Buffett admits some people don't really need any cash.


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## So_Cynical (13 October 2019)

Bonds = A mix of different govts and corporates including Aust, US and Canadian states, typical yield with
the right mix is around 2% conservative and 3 or 4% for funds with a higher exposure to Bxx rated bonds.

Vanguard Diversified Bond Index Fund: for example returned about 3.1% yield for calendar 2018. (*Initial investment: *$500,000)
https://www.vanguardinvestments.com...tml#/fundDetail/wholesale/portId=8138/?prices


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## Zaxon (13 October 2019)

Value Collector said:


> he has also stated that 100% shares would be fine to if you had he right mindset to ride out storms.



I agree with his sentiment. Outside of a cash safety net: if your car brakes down or you lose your job, you need some amount of cash on hand for that.  Or though arguably you could sell down some shares, and possibly be in front over holding cash, since you've been getting 10% returns rather than 2% for your "safety net money".


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## Zaxon (13 October 2019)

So_Cynical said:


> Bonds = A mix of different govts and corporates including Aust, US and Canadian states, typical yield with
> the right mix is around 2% conservative and 3 or 4% for funds with a higher exposure to Bxx rated bonds.



But your changing countries, and the US has a higher interest rate...at the moment.  The question then goes, would someone living in The States do better in a HISA or holding goverment bonds?


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## aus_trader (14 October 2019)

Zaxon said:


> But your changing countries, and the US has a higher interest rate...at the moment.  The question then goes, would someone living in The States do better in a HISA or holding goverment bonds?



I think for a US citizen either would provide a safe yield.

I thought I'd never see the day that RBA would surpass the US interest rate cuts in race to the bottom to see who could get to zero first. Testing times ahead... I think even the most conservative of investors would be fed up of getting nothing on their cash. Just wandering if there are other safe assets that can provide a good yield without the volatility of shares. If it could stay flat or go up in recessions that would be a bonus. The reason for asking is I'm not sure how secure the 250k bank deposit guarantee is, so I am happy to spread my bank cash into different safe asset classes in case the Govt don't honour it in a banking crisis type scenario.


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## Zaxon (14 October 2019)

aus_trader said:


> I thought I'd never see the day that RBA would surpass the US interest rate cuts in race to the bottom to see who could get to zero first.



It is interesting.  In 2008, we faired so much better than the rest of the world.  What we call the Global Financial Crisis, Americans call the Great Recession (they also use the term GFC), which for us doesn't ring true, since we didn't have a recession in Australia.  But this time, it looks like we're sitting somewhere between the US and Europe on our race to the bottom.


aus_trader said:


> I think even the most conservative of investors would be fed up of getting nothing on their cash. Just wandering if there are other safe assets that can provide a good yield without the volatility of shares. If it could stay flat or go up in recessions that would be a bonus.



I would have to say investment grade corporate bonds: better rates than HISA or treasuries.  Bond prices would go up in an economic downturn, but make sure you're holding a basket of bonds to spread the risk of default.


aus_trader said:


> The reason for asking is I'm not sure how secure the 250k bank deposit guarantee is, so I am happy to spread my bank cash into different safe asset classes in case the Govt don't honour it in a banking crisis type scenario.



Others have raised that as a concern, so you're not alone.  I'm assuming that actually government bonds could be safer.  You would think that the government would just print more money to cover their debt obligations, and they wouldn't really want to risk a default, since who would hold treasuries after that happened?  The desposit guarantee, by contrast, is there to make us feel good about the banks.  Sure, the government wants the banks not to fail, but would it reneg if massive number of customers called on the guarantee?  I suspect what could happen, is you'd get x cents on the dollar returned.  Think Pyramid Building Society collapse.

Alternatively, spread your money across several different banks.  They're not all going to fail


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## So_Cynical (15 October 2019)

Zaxon said:


> But your changing countries




That Vanguard fund is Australian domiciled, there are 3 or 4 Bond funds/ETF's that are Australian domiciled and ASX traded and
hold a mix of corporate and state/national Bonds yielding similar to a HISA, i have cash in a HISA and in a Bond ETF.


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## aus_trader (15 October 2019)

Zaxon said:


> I would have to say investment grade corporate bonds: better rates than HISA or treasuries. Bond prices would go up in an economic downturn, but make sure you're holding a basket of bonds to spread the risk of default.




Thanks , I am looking into these at the moment and taking my time to really go through the underlying securities to see what the business is like before considering it's corporate bond. Yeah, definitely a basket rather than individual since that would spread the risk in case of any company defaults. I was also researching corporate bond ETF's and what the constituents are before buying.



Zaxon said:


> Others have raised that as a concern, so you're not alone. I'm assuming that actually government bonds could be safer. You would think that the government would just print more money to cover their debt obligations, and they wouldn't really want to risk a default, since who would hold treasuries after that happened? The desposit guarantee, by contrast, is there to make us feel good about the banks. Sure, the government wants the banks not to fail, but would it reneg if massive number of customers called on the guarantee? I suspect what could happen, is you'd get x cents on the dollar returned. Think Pyramid Building Society collapse.




That is exactly what I have been thinking, so our thinking process aligns in a similar risk aversion direction. I always like to get opinion from others as colleagues helping each other with their ideas is always better than thinking boldly alone. I would definitely be allocating a fair chunk of my cash into Govt bonds and lesser amount to Quality Corporate bonds and keep a much smaller % in HISA than what I currently have.

I am not losing sleep over the fact that I have all of my cash in a HISA at the moment since it's below the 250k limit. But I do still worry every now and then if the bank deposit guarantee is not kept in a worst case crisis scenario. Yes I agree that everything will be done to prevent the banks from collapsing so deposits are unlikely to disappear. However the worry comes from the possibility of taking a % from savings accounts including HISA to bail out banks and what if the 250k guarantee is amended in some way in doing so ? Touching saving accounts has happened before and it could happen again, so I'd be less concerned if the amount kept in the HISA is a smaller % of my total savings than currently is.


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## aus_trader (15 October 2019)

So_Cynical said:


> That Vanguard fund is Australian domiciled, there are 3 or 4 Bond funds/ETF's that are Australian domiciled and ASX traded and
> hold a mix of corporate and state/national Bonds yielding similar to a HISA, i have cash in a HISA and in a Bond ETF.



Sounds good So_Cynical, I plan to follow a similar path as my cash savings are in a 100% HISA at the moment. Do you spread the risk via parking part of your savings in a Govt Bond ETF or Corporate Bond ETF?


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## Zaxon (18 October 2019)

I was doing a search on Google about bonds, clicked on a link that sounded interesting to me, and low and behold, I ended up here...on my own thread.  lol.  See @Joe Blow, our posts are discoverable and making a difference.


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## Value Collector (19 October 2019)

aus_trader said:


> I think for a US citizen either would provide a safe yield.
> 
> I thought I'd never see the day that RBA would surpass the US interest rate cuts in race to the bottom to see who could get to zero first. Testing times ahead... I think even the most conservative of investors would be fed up of getting nothing on their cash. Just wandering if there are other safe assets that can provide a good yield without the volatility of shares. If it could stay flat or go up in recessions that would be a bonus. The reason for asking is I'm not sure how secure the 250k bank deposit guarantee is, so I am happy to spread my bank cash into different safe asset classes in case the Govt don't honour it in a banking crisis type scenario.




I have said it a few times, but the rate setter platform is a decent place to store a portion of your cash.

In my opinion, it is safer than low interest government backed deposits, which are guaranteed to lose over time due to taxes and inflation.

—————-
Buffetts number one rule is “don’t lose money” and that has become a cliche that is thrown around, in my opinion it is a very miss understood quote.

It leads people astray because they think they should be avoiding risk, when in reality it means preserve and grow your buying power.

In today’s climate, it’s impossible to preserve your buying power using government backed deposits, and silly to think you can grow your buying power using them.

You must take on some risk to achieve a satisfactory return, the key is to build a portfolio of assets, with varying attributes that as a group provide as steady return of growth and income through the cycle.

I believe platforms like rate setter can be part of such a balanced portfolio,


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## Value Collector (19 October 2019)

Zaxon said:


> It is interesting.  In 2008, we faired so much better than the rest of the world.  What we call the Global Financial Crisis, Americans call the Great Recession (they also use the term GFC), which for us doesn't ring true, since we didn't have a recession in Australia.  But this time, it looks like we're sitting somewhere between the US and Europe on our race to the bottom.
> 
> I would have to say investment grade corporate bonds: better rates than HISA or treasuries.  Bond prices would go up in an economic downturn, but make sure you're holding a basket of bonds to spread the risk of default.
> 
> ...




If we are talking about managing capital over a long time frame Eg 10+ years, good low/no debt income generating property can operate as a quasi inflation hedged bond.

Yes property prices can fluctuate, but so do bond prices.

Over time a good piece of debt free real estate will provide regular income over and above its outgoings, that will grow with inflation over time, and more than likely out perform any government bond at today’s rates.


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## Joe Blow (19 October 2019)

Zaxon said:


> See @Joe Blow, our posts are discoverable and making a difference.




Yes, we do get a fair bit of search engine traffic. Currently around 850-900 visitors on an average weekday, which results in approximately 200 or so new member registrations each month.

It's really the only thing that's keeping us alive.


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## qldfrog (19 October 2019)

200 registration a month is enormous imho
Do these new member ever post?


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## Joe Blow (19 October 2019)

qldfrog said:


> 200 registration a month is enormous imho
> Do these new member ever post?




Some do, most do not. Those that do tend to start new threads and ask beginner questions. I have noticed that those who get their question(s) answered often stick around, while those who do not just disappear and generally do not return.


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## Zaxon (19 October 2019)

Value Collector said:


> If we are talking about managing capital over a long time frame Eg 10+ years, good low/no debt income generating property can operate as a quasi inflation hedged bond.



Property certainly can be a good investment.  I feel, however, that buying an investment property is like having kids.  It's a massive commitment.  You need to have it tenanted, you're bound to get bad tenants at times, and then there's all those repair costs.  Then you go to the tribunal to fight over the bond, and then you go grey...prematurely.

The civilized version of holding property is via a REIT.  They're mostly office, warehouse, and retail, they're not really a drop in replacement for residential property.  And REITs did badly in 2008.  Mind you, physical property in the US did terribly in 2008.  But I feel that REITs are more aligned with the share market than physical residential, so I don't know how much diversification they really add.


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## SirRumpole (19 October 2019)

AirBnB, short term tennants less likely to wreck the joint.


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## Zaxon (19 October 2019)

SirRumpole said:


> AirBnB, short term tennants less likely to wreck the joint.



And a much higher return, as long as it's in a tourist area.  It still needs inspecting and cleaning though.  Bring me the AirBnB REIT, and I'd be interested


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## qldfrog (19 October 2019)

That is an interesting idea actually
Either as owners of properties or as airbnb management


Zaxon said:


> And a much higher return, as long as it's in a tourist area.  It still needs inspecting and cleaning though.  Bring me the AirBnB REIT, and I'd be interested


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## Value Collector (19 October 2019)

Zaxon said:


> Property certainly can be a good investment.  I feel, however, that buying an investment property is like having kids.  It's a massive commitment.  You need to have it tenanted, you're bound to get bad tenants at times, and then there's all those repair costs.  Then you go to the tribunal to fight over the bond, and then you go grey...prematurely.
> 
> The civilized version of holding property is via a REIT.  They're mostly office, warehouse, and retail, they're not really a drop in replacement for residential property.  And REITs did badly in 2008.  Mind you, physical property in the US did terribly in 2008.  But I feel that REITs are more aligned with the share market than physical residential, so I don't know how much diversification they really add.




There is also a good amount of unlisted property investment trusts, also managing a small property portfolio is not as hard as poeople make out


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## aus_trader (19 October 2019)

Value Collector said:


> I have said it a few times, but the rate setter platform is a decent place to store a portion of your cash.
> 
> In my opinion, it is safer than low interest government backed deposits, which are guaranteed to lose over time due to taxes and inflation.
> 
> ...



Thanks VC, but what about the credit default risk if there is a major downturn ? Wouldn't most of the loans given out by Rate Setter be at risk especially if individuals who borrow money lose jobs or companies that borrow money goes belly up ? I have looked into Rate Setter and some other P2P lenders before but this is the worry that I have. I know that rate setter is a little better than some of the others that I have come across due to having a "provision Fund" in case things go bad.


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## Value Collector (19 October 2019)

SirRumpole said:


> AirBnB, short term tennants less likely to wreck the joint.




Yeah, Property investment is as broad as the economy itself, you can invest in houses, office buildings, hotels, supermarkets, shopping centres, factories, warehouses, farmland, renewable energy sites, theme parks, medical centers, local strip shops the list is endless.


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## Value Collector (19 October 2019)

aus_trader said:


> Thanks VC, but what about the credit default risk if there is a major downturn ? Wouldn't most of the loans given out by Rate Setter be at risk especially if individuals who borrow money lose jobs or companies that borrow money goes belly up ? I have looked into Rate Setter and some other P2P lenders before but this is the worry that I have. I know that rate setter is a little better than some of the others that I have come across due to having a "provision Fund" in case things go bad.




You can be diversified across hundreds of loans, and as you mentioned the provision fund is there to cover losses.

But let’s say for a year during a recession loan defaults sky rocket from the current 1.5% default rate to say 12%.

The provision fund would more than cover the first 6% of those defaults, that would leave you taking a 6% hit.

However, you have been earning 8% interest, so that 6% hit you take just reduced your take home return from 8% to 2%.

So in that bad year of 12% losses you just end up matching the return of today’s term deposits.

And if that bad year happens 1 out of 15 years, the 14 good years more than offset even a huge loss.

As I said it’s all about risk vs reward.

When you put your money into a Term Deposit, the bank is taking it and making similar loans to what ratesetter does, and keeping the margin for the shareholders and executive bonus, while you take the inflation hit and low income.

You don’t have to put all of your cash in Rate Setter, as I said it’s a good place to store a portion of it, along with a mixture of other assets.


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## Value Collector (19 October 2019)

Zaxon said:


> Bring me the AirBnB REIT, and I'd be interested




My Disney shares are my exposure to Hotel / tourism and leisure market.

Disney has 40+ hotels that operate with close to 99% occupancy, it also operates a time share business called Disney vacation club, and 4 (soon to be 6) cruise ships that sail with almost 100% occupancy.

Have you guys seen the size of the Disney property in Florida, 2x the size of Manhattan, all owned freehold, and they control the local governing body, so they can build new hotels or resorts etc and they only pay construction costs, cause they have owned the land since the 60’s


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## Zaxon (19 October 2019)

Value Collector said:


> There is also a good amount of unlisted property investment trusts, also managing a small property portfolio is not as hard as poeople make out



Any listed REITs that hold primarily residential properties?


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## aus_trader (20 October 2019)

Zaxon said:


> Any listed REITs that hold primarily residential properties?



Don't know of any in Australia other than Retirement Village operators but there is a US residential property trust that's listed on the ASX that's been on a downward slide for the last couple of years called US Masters Residential Property Fund (URF).


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## aus_trader (20 October 2019)

Value Collector said:


> You can be diversified across hundreds of loans, and as you mentioned the provision fund is there to cover losses.
> 
> But let’s say for a year during a recession loan defaults sky rocket from the current 1.5% default rate to say 12%.
> 
> ...



OK, sounds good. I'll investigate and consider putting around 5% of my HISA balance into Rate Setter to diversify. Cheers VC.


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## Value Collector (20 October 2019)

Zaxon said:


> Any listed REITs that hold primarily residential properties?



 I am not sure about listed, but I think I have seen some Unlisted ones a while back.


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## systematic (20 October 2019)

Resifund is one I’ve run into, but beyond the name I can’t tell you anything more about it.


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## BlindSquirrel (24 October 2019)

aus_trader said:


> that's been on a downward slide for the last couple of years called US Masters Residential Property Fund (URF).




Now there's an ironic ticker!
That's the noise I'd be making if I'd been invested in it!


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## aus_trader (25 October 2019)

BlindSquirrel said:


> Now there's an ironic ticker!
> That's the noise I'd be making if I'd been invested in it!



Don't know how that fund works. If we were smack in the middle of GFC, I understand URF falling like that. But US residential property prices are fairly stable over the last couple of years, so the fund does not seem to reflect that.


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## So_Cynical (25 October 2019)

aus_trader said:


> Don't know how that fund works. If we were smack in the middle of GFC, I understand URF falling like that. But US residential property prices are fairly stable over the last couple of years, so the fund does not seem to reflect that.




The vast majority of URF holders were clients of Dixon advisory and Dixon sold them their own product, add to that (now) Evans Dixon 
has taken some reasonably hefty "managmant" fees out of the fund and it all starts to look a little dodgy, not super dodgy but certainly 
suspect, Evan Dixon has been bleeding FUM for the last 12 months and different advise has lead to a wave of at market selling - SP decline.

Thats my conclusion anyway, Bottom has been missed as the URF share price has now been rallying due to the ridiculosly low valuation and high yield.


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