After a strong 2024 for preferreds, we are watching the impact of the election, the interest rate environment and sector performance in 2025.
KEY TAKEAWAYS
- Preferred securities generated a healthy total return in 2024, outperforming most fixed income categories, including high-yield bonds.
- Looking ahead, the economic impact of the U.S. election and the interest rate environment are two key developments we are watching in the preferred securities market.
- Diversification and sector performance will also be important to watch this year across sectors like insurance, financials and utilities to help navigate potential economic slowdowns.
Transcript:
Hello everyone, I’m Allie Quine.
In 2024, the preferred market delivered a total return of 9.1%.
Despite an evolving growth and interest rate backdrop, preferred securities generated a healthy total return.
Economic growth in the U.S. exceeded expectations, while Europe avoided contraction.
Inflation measures generally stabilized, leading central banks to reduce overnight lending rates.
Preferred securities outperformed U.S. Treasuries, investment-grade corporate bonds, and high-yield bonds.
The technical backdrop was also positive, with limited net new supply and strong performance from contingent capital securities.
As we look ahead to 2025, here are three key things we’re watching:
- Economic Impacts of the U.S. Election: Trade, immigration, and fiscal policies may have inflationary impulses, potentially affecting interest rates and economic growth.
- The Interest Rate Environment: Elevated interest rates could pose downside risks to the economy, but strong credit fundamentals and a resilient consumer base may mitigate these risks.
- Diversification and Sector Performance: We believe in the importance of diversifying preferred holdings across sectors like insurance, utilities, and telecoms to navigate potential economic slowdowns.
Thank you for your time. We remain committed to delivering strong performance and navigating the challenges and opportunities that lie ahead in 2025.
ABOUT THE AUTHORS
Allie Quine, CFA CFA, Vice President, is a member of Cohen & Steers’ Portfolio Specialist Group.
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.
Why passive preferred ETFs miss market opportunities
The market has evolved considerably, but passive ETFs have not adapted. We believe active strategies that invest across the entire market are a better solution.
Tariffs, volatility and the opportunity in preferred securities
In a market shaped by tariffs and volatility, we explore how preferred securities are holding up—and where we see opportunity ahead.
Data quoted represents past performance, which is no guarantee of future results. The information presented does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this video will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.
This video is for informational purposes and reflects prevailing conditions and our judgment as of January 15, 2025, which are subject to change. This material 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 video 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.
Index definitions.
Preferred securities market performance measured by a blended benchmark consisting of 55% ICE BofA U.S. IG Institutional Capital Securities Index, 20% ICE BofA Core Fixed Rate Preferred Securities Index and 25% Bloomberg Barclays USD Developed Market Contingent Capital Index.
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. Our preferred strategies may invest in below-investment-grade securities and unrated securities judged to be below investment grade by the advisor. 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.
Contingent capital securities (CoCos). CoCos are debt or preferred securities with loss absorption characteristics built into the terms of the security, for example a mandatory conversion into common stock of the issuer under certain circumstances, such as the issuer’s capital ratio falling below a certain level. Since the common stock of the issuer may not pay a dividend, investors in these instruments could experience a reduced income rate, potentially to zero, and conversion would deepen the subordination of the investor, hence worsening the investor’s standing in a bankruptcy. Some CoCos provide for a reduction in the value or principal amount of the security under such circumstances. In addition, most CoCos are considered to be high yield securities and are therefore subject to the risks of investing in 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. Various techniques may be used to shorten or lengthen a portfolio's duration. 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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