Preferred Securities
The strategy offers the potential for above-average income and attractive total returns, accessing the full universe of the preferred securities market while managing long-term credit and interest -rate risks.
WHY COHEN & STEERS
History of success in full market cycles
Experience managing preferred securities across various interest rate and credit cycles
Proprietary tax analysis
Identifies securities that distribute Qualified Dividend Income (QDI) vs. interest income
Global reach with local knowledge
Experienced analysts and traders in the key markets including New York, London and Hong Kong offer local knowledge and real-time decision making
WHY PREFERRED SECURITIES
Higher income rates
Preferred securities tend to offer higher yields than similarly rated bonds
Large global institutional investment universe
We seek to add value by providing access to the $1 trillion, over-the-counter, preferred securities market. As well as securities of high quality and historically stable companies.
Diversification from stocks and bonds
Preferred securities may offer a low correlation of returns with other areas of the stock and bond markets
The Cohen & Steers Preferred Securities Strategy seeks to generate above-average income and total returns compared with preferred market benchmarks. We believe active management can enhance the investment characteristics of preferreds.
We believe income is an important component of preferred returns, and it is the primary focus of our investment strategy. While maintaining a high income rate, we seek to dampen the effects of credit and interest rate risks via superior security selection and active management.
As more investors turn to preferred securities for higher yields, many are limiting their selection to direct allocations to passive ETFs or investment-grade $25 par securities. A different approach is through an active manager with the skills and resources to utilize the entire preferred securities market, including:
- Below-investment-grade preferred securities
- Over-the-counter preferred securities
- Foreign-preferred securities
FEATURED INSIGHT
A primer on investing in preferred securities
At a time of scarce yields and growing tax challenges, preferred securities may enhance after-tax income and return potential, while broadening diversification with other fixed income investments.
September 2021 | 3 mins
WHY INVEST WITH US
Delivering value to our clients
As an industry leader in real assets and alternative income, Cohen & Steers is focused on delivering superior risk-adjusted returns and income. Our global footprint gives us access to a wide range of institutional securities, including nonregistered transactions involving non-U.S. issuers that are placed exclusively outside the United States. Together, our experience and global capabilities provide the insight and versatility to adapt to changing economic environments and opportunities.
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PORTFOLIO MANAGEMENT
An experienced team
Senior Portfolio Manager, Fixed Income and Preferred Securities
33 years of experience
+2 analysts and associates
PORTFOLIO SPECIALIST GROUP
Supporting our investment team and clients
Preferred securities have historically offered the highest yields in the investment-grade market and regulatory drivers are continuing to improve issuer fundamentals and issuer quality.
We believe that research and a disciplined investment process can add significant alpha to preferred security returns because preferreds are a complex, underfollowed fixed income asset class.
We evaluate securities and our portfolio from the standpoint of total returns and potential volatility and seek the best risk-adjusted mix.
Our commitment to investment excellence is built on a culture of continuous improvement, which includes our approach to integrating environmental, social and governance factors.
Our proprietary approach to integration and engagement, combined with the framework established in the Principles for Responsible Investment Initiative (a United Nations-backed initiative focused on ESG issues to which we are a signatory), helps promote transparency and enhances our ability to deliver more consistent, attractive risk-adjusted returns.
APPROACH
Our investment process
We utilize various model-based valuation techniques to search for value within the preferred securities universe, which consists of more than 1,000 securities.
Fundamental research
Our fundamental analysis of industry sectors, issuers and individual issues enables us to make decisions regarding relative value. We employ traditional credit metrics, assess companies’ more subjective characteristics (such as management profit incentives) and place great emphasis on industry and regulatory trends.
Macro-overlay
Our views on the likely direction of interest rates and credit spreads, together with historical assessments of the broad market’s valuation, help us set portfolio direction and discern value.
Portfolio construction
Important portfolio construction goals include overall portfolio liquidity and diversification. We pay close attention to the impact of our investment execution and to potential exit requirements.
Active management
Although our models and valuation process results identify the relative value of the securities we cover, changes in our macro views or fundamental credit opinions can drive sell decisions, as can risk management.
Preferred securities call alert – $13 billion reinvestment opportunity
April 2024 | 2 minsInvestors 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.
3 Reasons to own preferred securities today
We believe an exceptional buying opportunity for preferred securities may exist today.
Tax-smart income alternatives
Strategies with inherent tax efficiencies may help investors diversify sources of income and potentially keep more of what they earn.
Understanding quality, ratings and long-term compensation of preferred securities
Preferreds provide attractive income and total returns from high-quality securities; despite added risks, default rates can be lower than credit ratings suggest.
Putting recent commercial real estate debt headlines into perspective
We believe the developments at New York Community Bancorp are not indicative of a systemic CRE debt problem or broader systemic stress across regional banks, but they do deserve some further explanation.
What impending resets mean for preferred securities
Upcoming call dates/dividend resets provide preferred securities with a potential catalyst in today's uncertain market. Primarily issued by investment-grade-rated companies, preferred yields are currently in the 7–9% range. Most preferreds come with dividend-resetting structures, potentially leading to income growth for investors in the face of sustained interest rates. Additionally, many securities are selling at 10–20% discounts to par value. Given their historical trend of trading near par, these deep discounts present significant potential for capital appreciation for patient investors.
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We’d be happy to answer questions about our investment solutions or any corporate-related inquiries.
We consider the information in this communication to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of suitability for investment. Investors should consult their own investment professional with respect to their individual circumstances.
Past performance does not predict future returns. Risks involved with investment, including potential loss of capital, are substantial and should be carefully considered. The views and opinions are as of the date of publication and are subject to change without notice. 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. There is no guarantee that a market forecast made above will be realized. Active management is not guaranteed to outperform the broader market index.
Important Risk Considerations: Investing involves risk, including entire loss of capital invested. There can be no assurance that the investment strategy will meet its investment objectives. Diversification is not guaranteed to ensure a profit or protect against loss. Investing in any market exposes investors to risks. In general, the risks of investing in preferred securities are similar to those of investing in bonds, including credit risk and interest-rate risk. As nearly all preferred securities have issuer call options, call risk and reinvestment risk are also important considerations. In addition, investors face equity-like risks, such as deferral or omission of distributions, subordination to bonds and other more senior debt, and higher corporate governance risks with limited voting rights.
Risks associated with preferred securities differ from risks inherent with other investments. In particular, in the event of bankruptcy, a company’s preferred securities are senior to common stock but subordinated to all other types of corporate debt. We will often make comparisons of preferred securities to corporate bonds, municipal bonds and 10-Year Treasury bonds. It is important to note that corporate bonds sit higher in the capital structure than preferred securities, and therefore in the event of bankruptcy will be senior to the preferred securities. Municipal bonds are issued and backed by state and local governments and their agencies, and the interest from municipal securities is often free from both state and local income taxes. 10-Year Treasury bonds are issued by the U.S. government and are generally considered the safest of all bonds since they're backed by the full faith and credit of the U.S. government as to timely payment of principal and interest.
Strategies focusing on preferred securities 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. The benchmarks may not contain below-investment-grade securities.
Contingent capital securities (sometimes referred to as "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 or "junk" securities and are therefore subject to the risks of investing in below investment-grade securities.