I’m a little surprised to see a preferred share fund on the worst of the year list. Typically, prefs are thought of as fairly conservative investments, and they tend to hold their value fairly well.
Unfortunately, this year has been an exception to that, with preferred shares, particularly fixed rate reset preferreds being hit especially hard after the Bank of Canada’s rate cut. With a dividend rate that is fixed based on the prevailing rate of interest, fixed resets were sold off as investors worried that future dividends would be pushed lower.
All preferred funds were negative, but this was hit the hardest, losing 10.5% in the first half of the year.
The reason this was hit harder than the other funds is it is passively managed, fully invested, and tracks an index. The preferred indices were all hit hard, with the S&P/TSX Canadian Preferred Index losing 8.6%.
So while 10.5% may be bad compared with its peers, it’s not out of line given the performance of the broader share market. If we take the 8.6% loss of the index, factor in the 1.75% MER, and we get an expected loss of 10.4%, right in line with the actual performance. If nothing else, this highlights how in some sectors and asset classes, active management can add value in volatile times.
Given that, if I were looking for pure preferred share exposure, I’d lean towards a high quality actively managed fund. However, until the rate picture is a little clearer, I’m avoiding the preferred market entirely.