Many preferred securities offer yields of 5–6% or more, largely from investment-grade issuers, yet the complex and often misunderstood asset class is typically underutilized by institutional investors. We discuss how preferreds may improve income profiles and risk-adjusted returns within diversified portfolios due to their unique and complementary characteristics.
- Preferred securities are generally issued by noncyclical companies with stable business models in regulated industries—attractive attributes from a risk standpoint, yet they offer some of the highest income rates found within investment-grade fixed income.
- Preferreds have often provided stronger total returns compared with other fixed income investments.
- In addition, preferreds can provide diversification benefits and help manage interest-rate risk, given the large number of low-duration structures found in the asset class.
- For institutional investors seeking to expand beyond strict style box approaches, preferreds can be implemented either as an addition within an income-oriented solution or as a satellite allocation in a core/satellite model.
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