We believe an exceptional buying opportunity for preferred securities may exist today.
1. Discounts to par value represent uncommon value
Preferreds are trading at discounts to par value not seen since the global financial crisis, with segments selling for as little as 83 cents on the dollar. Current discounts represent a substantial capital appreciation opportunity for investors, in our view.
Historical average prices by preferreds market
March 2003–September 2023
At September 30, 2023. Source: ICE BofA, Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results.
(1) Average since March 2003; average for contingent capital securities is since January 2014 inception. (2) Weighted-average rating from Standard & Poor’s. 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, and there is no way to predict precisely when such a trend will begin.
2. High-quality preferreds offer some of the highest yields in fixed income
Issued primarily by investment grade companies, many preferreds currently offer 6-9% yields, considerably greater than what is available from investment-grade corporate bonds. Many also feature dividend reset structures, providing benefits in a “higher-for-longer” rate environment unavailable from other fixed income investments.
Yield to maturity (%)
January 2014–September 2023
At September 30, 2023. Source: ICE BofA, Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results.
(1) Average since March 2003; average for contingent capital securities is since January 2014 inception. (2) Weighted-average rating from Standard & Poor’s. 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, and there is no way to predict precisely when such a trend will begin.
3. Performance has been strong following market corrections
Preferreds have often generated double-digit gains in the months after corrections, meaningfully outperforming bonds. Historically, the end of Fed rate hikes also leads to strong performance: Since 1990, preferreds have returned 14.2% on average in the twelve months following the end of the rate-hiking cycle (vs. 6.3% for all 12-month periods).
Significant corrections and their aftermath
At September 30, 2023. Source: Morningstar Direct, Cohen & Steers.
Past performance 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, and there is no way to predict precisely when such a trend will begin. Preferreds are represented by 50% ICE BofA Capital Securities Index and 50% ICE BofA Fixed Rate Preferred Securities Index through 12/31/2016; 60% ICE BofA US IG Institutional Capital Securities Index, 30% ICE BofA Core Fixed Rate Preferred Securities Index, and 10% Bloomberg Developed Market USD Contingent Capital Index through 12/31/2018; 60% ICE BofA US IG Institutional Capital Securities Index, 20% ICE BofA Core Fixed Rate Preferred Securities Index, and 20% Bloomberg Developed Market USD Contingent Capital Index through 3/31/2022; and 55% ICE BofA US IG Institutional Capital Securities Index, 20% ICE BofA Core Fixed Rate Preferred Securities Index, and 25% Bloomberg Developed Market USD Contingent Capital Index. U.S. equities are represented by S&P 500 Index. U.S. bonds are represented by Bloomberg U.S. Aggregate Bond Index, a broad-based index that measures the investment-grade USD-denominated fixed-rate taxable bond market.
FURTHER READING
Yields, regulations reinforce a positive preferred securities outlook
We see scope for good relative performance, given appealing valuations and structures that can benefit from high interest rates. Solid issuer fundamentals today and tighter bank regulations to come may provide a credit tailwind.
Preferred securities: Resetting for a new cycle
Recent bank turbulence and the end of the Fed’s rate-hiking cycle create what we believe may be an exceptional buying opportunity for preferreds.
Three tax-smart income alternatives
Strategies with inherent tax efficiencies may help investors diversify sources of income and potentially keep more of what they earn.
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. U.S. equities: The S&P 500 is an unmanaged index of 500 publicly traded large-capitalization U.S. stocks representing a variety of industries.
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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