We believe an exceptional buying opportunity for preferred securities may exist today.
1. High-quality preferreds offer some of the highest yields in fixed income
Issued primarily by investment grade companies, preferreds offer historically high yields of 5.6-7.3%, providing stable income in the near-term and long-term total return potential as interest rates likely continue to decline.
January 2014–September 2024
2. OTC preferred securities’ yield spread to corporate bonds has widened relative to long term averages
OTC security yields are historically wide to comparably rated senior debt, in contrast to tighter valuations within the retail market and historically tight credit spreads across all fixed income markets.
At September 30, 2024. Source: ICE BofA, Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. The information presented does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. (1) ICE BofA Investment Grade Institutional Capital Securities Index (2) ICE BofA Core Fixed Rate Preferred Securities Index (3) ICE USD Contingent Capital Index (4) ICE BofA US Corporate Index (5) Average since January 1997.
3. Performance has been strong following initial Fed rate cut
Since 1990, preferreds have returned 9.0% on average in the twelve months following the initiation of a Fed rate-cutting cycle (vs. 6.1% for all 12-month periods).
Significant positive performance following initial Fed rate cut
At September 30, 2024.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future or any way to know in advance when such a trend might begin. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.
(1) ICE BofAML Fixed Rate Preferred Securities Index (Credit quality: BBB) tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market.
(2) ICE BofA Corporate Master Index (credit quality: A-) tracks the performance of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market.
(3) ICE BofA High Yield Master Index (credit quality: B+) tracks the performance of U.S. dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market.
FURTHER READING
Five reasons to consider preferred securities if you own municipal bonds
With many investors feeling the sting of taxes, municipal bonds aren’t the only option for tax-advantaged income. Preferred securities currently offer among the highest after-tax yields in fixed income, regardless of tax bracket.
Preferred securities call alert—$19.3 billion reinvestment opportunity
Investors are facing new challenges as many of their single-issued preferred securities may be subject to call—including some that are trading above par and could lose value. Now may be the time to look beyond single issues to the added value of an actively managed portfolio.
Moody’s methodology shift reshapes preferreds market
Moody's methodology change has led to increased issuance of hybrid securities, creating opportunities for investors with attractive yields, reduced extension risk, and greater diversification in the preferred securities market.
Index definitions and important disclosures
An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.
Preferred securities: OTC: ICE BofA U.S. IG Institutional Capital Securities Index (Credit quality: BBB) tracks the performance of USD-denominated investment grade hybrid capital corporate and preferred securities publicly issued in the U.S. domestic market. Retail: ICE BofA Core Fixed Rate Preferred Securities Index (Credit quality: BBB-) tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market. CoCos: The Bloomberg Developed Market Contingent Capital Index (Credit quality: BB) includes hybrid capital securities in developed markets with explicit equity conversion or write down loss absorption mechanisms that are based on an issuer’s regulatory capital ratio or other explicit solvency-based triggers. U.S. bonds: ICE BofA Corporate Master Index (Credit quality: A-) tracks the performance of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market.
Past performance is no guarantee of future results. This material is for informational purposes and reflects prevailing conditions and our judgment as of this date, which are subject to change. There is no guarantee that any market forecast set forth in this presentation will be realized. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or take into account the specific objectives or circumstances of any investor. We consider the information in this presentation to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.
Risks of investing in preferred securities. An investment in a preferred strategy is subject to investment risk, including the possible loss of the entire principal amount that you invest. The value of these securities, like other investments, may move up or down, sometimes rapidly and unpredictably. Below-investment-grade securities or equivalent unrated securities generally involve greater volatility of price and risk of loss of income and principal and may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher-grade securities. The strategies’ benchmarks do not contain below investment-grade securities. Duration risk. Duration is a mathematical calculation of the average life of a fixed-income or preferred security that serves as a measure of the security’s price risk to changes in interest rates (or yields). Securities with longer durations tend to be more sensitive to interest rate (or yield) changes than securities with shorter durations. Duration differs from maturity in that it considers potential changes to interest rates, and a security’s coupon payments, yield, price and par value and call features, in addition to the amount of time until the security matures. The duration of a security will be expected to change over time with changes in market factors and time to maturity.
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