Preferred shares were long thought to be less volatile than common equity. Well at least they were until 2015, when investors sold off their preferred holdings indiscriminately on worries that the lower interest rates would affect the coupon rates of their preferred shares. Hit hardest were the fixed reset preferred shares, which have a coupon rate that is reset periodically, and uses the Bank of Canada rate as its benchmark. So with two cuts in 2015, and it looking increasingly likely one or more is on the way in 2016, preferreds appeared to be much less attractive.
With a loss of nearly 17%, this fund was the worst performer in the category for 2015. One of the big reasons for this underperformance is also one of its most attractive features – it is designed to track an index. It provides exposure to the 50 largest, and most liquid preferred share issues in Canada.
The downside of this, particularly in volatile markets is it is fully invested, and carries virtually no cash. Therefore, it is fully exposed to the movements of the market. Also, there is no manager making any sort of a tactical call, so there is nowhere to hide when things get rocky.
While I believe the recent selloff in the preferred market is overdone, I would likely lean towards one of the more actively managed offerings. Two that would warrant a closer look would be the Dynamic Preferred Yield Class (DYN 2900 – Front End Units), which is managed by Marc-Andre Gaudreau, invests in a mix of Canadian and U.S. traded preferreds. Launched in April 2013, there isn’t a ton of history to review, but early results, combined with the manager’s longer term track record, look encouraging. Another option in the space is the National Bank Preferred Equity Income Fund, which has been managed by Benjamin Jasmin for the past three years. It has one of the longest track records in the category, and carries one of the lowest MER’s at 1.46%.