Preferreds offer long-term return potential superior to investment-grade and comparable to high-yield bonds, with diversification and quality advantages.
This Knowledge Center will help you understand:
- What are Preferreds
- The potential benefits of Preferreds
- How to incorporate Preferreds into your portfolio.
What are Preferreds
Preferreds (also known as capital securities or hybrid securities) are typically a form of equity or junior subordinate debt, but they act like bonds, offering a set face value and a predetermined rate of income. Because they sit lower (subordinated) in the capital structure than bonds, preferreds would fare worse in a bankruptcy, and payments could be at risk in a stressed situation. Recognizing this, preferred securities also bear lower credit ratings than the senior debt of the same issuer, though most are still investment grade (as most issuers are high quality).
To compensate for the additional risks, preferred securities typically pay much higher rates of income than bonds from the same issuer. The “subordination premiums” that preferreds offer vary due to market factors, as well as by issuer, quality and security structure. However, income rates among high-quality preferreds are typically 150–200 basis points higher than for senior debt of the same issuer (and are normally 200+ basis points higher for below-investment- grade preferreds). The long-term spread of investment-grade preferreds over investment-grade corporate bonds has been 190 basis points.(1) This additional income has historically driven preferreds’ strong relative returns (Exhibit 1).
In recent periods, preferreds’ favorable relative returns have been supported both by their high income rates and their shorter average durations, which stem from the regular coupon resets that most preferred securities offer. However, over long periods of time (5–10 years), total returns on fixed income have been driven mainly by income, including income reinvestment and default rates.
EXHIBIT 1
Preferreds frequently outperform other fixed income
Total returns by asset class (%)
At December 31, 2024 Source: Morningstar, ICE BofA, Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. Returns are stated gross of fees. Composite returns reflect the reinvestment of dividends and interest income. Returns greater than a year are annualized. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment.
(1) Cohen & Steers Global Preferred Securities Composite, represents the investment performance records of fully discretionary Global Preferred Securities accounts, which invest in preferred securities of companies located around the world. The composite includes the Cohen & Steers SICAV Preferred Income Fund (“Fund”) and is presented here to provide historical performance of this strategy prior to the Fund’s share class return history for informational purposes only. Actual performance returns for the Fund may differ. (2) 50% ICE BofA Fixed Rate Preferred Securities Index and 50% ICE BofA Capital Securities Index through December 31, 2016 and 60% ICE BofA US Capital Securities Index, 25% ICE BofA Hybrid Preferred Securities 8% Constrained Index and 15% Bloomberg Developed Market USD Contingent Capital Index for periods thereafter. Full year returns are back tested prior to 2018. (3) The ICE BofA US Capital Securities Index is a subset of the ICE BofA US Corporate Index including all fixed-to-floating rate, perpetual callable and capital securities. (4) ICE BofA Hybrid Preferred Securities 8% Constrained Index contains all securities in The ICE BofA Fixed Rate Preferred Securities Index that are hybrids, but caps issuer exposure at 8%. (5) ICE BofA Contingent Capital Index through January 31, 2017 and Bloomberg Developed Market USD Contingent Capital Index for periods thereafter. The ICE BofA Contingent Capital Index tracks the performance of US dollar denominated investment grade and below investment grade contingent capital debt publicly issued in the US domestic and eurobond markets, with a remaining term to final maturity of at least one month and at least 18 months to maturity at point of issuance. The Bloomberg Developed Contingent Capital Index 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. (6) ICE BofA Global Corporate Index tracks the performance of investment grade corporate debt publicly issued in the major domestic and eurobond markets. (7) The Bloomberg Global Aggregate Bond Index is a broad-market measure of global investment-grade debt from many different currencies. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indexes. The index also includes investment-grade eurodollar, euro-yen, Canadian, and 144A Index-eligible securities not already in the three regional aggregate indices. (8) ICE BofA Global High Yield Index tracks the performance of USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or eurobond markets.
Preferreds Explained Video Series
Single Issues vs Portfolio
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.
The potential added value of active portfolio management
Some preferred securities have better call protection than others—just one of many factors we consider when building diversified portfolios. We believe this complex asset class is best navigated by an experienced investment team with deep, global research capabilities, and access the Institutional Over-the-Counter (OTC) market.
Our investment team
Our preferred securities team is led by four portfolio managers averaging 16 years of experience at Cohen & Steers and over 21 years in the industry. They are joined by a team of analysts whose proprietary analysis is supported by extensive contacts in the industry and leverages Cohen & Steers’ global research capabilities, as well as a team of dedicated traders. As of March 31, 2025, the team managed $16.8 billion in preferred securities across all the firm’s strategies for individual investors and pension funds around the world.
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We’d be happy to answer questions about our investment solutions or any corporate-related inquiries.
Need to contact us?
We’d be happy to answer questions about our investment solutions or any corporate-related inquiries.
Need to contact us?
We’d be happy to answer questions about our investment solutions or any corporate-related inquiries.
Important Disclosures
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.
Cohen & Steers Capital Management, Inc. (Cohen & Steers) is a U.S. registered investment advisory firm that provides investment management services to corporate retirement, public and union retirement plans, endowments, foundations and mutual funds. Cohen & Steers U.S. registered open-end funds are distributed by Cohen & Steers Securities, LLC and are only available to U.S. residents. Cohen & Steers Asia Limited is authorized and regulated by the Securities and Futures Commission of Hong Kong (ALZ367). Cohen & Steers Japan Limited is a registered financial instruments operator (investment advisory and agency business and discretionary investment management business with the Financial Services Agency of Japan and the Kanto Local Finance Bureau No. 3157) and is a member of the Japan Investment Advisers Association. Cohen & Steers UK Limited is authorized and regulated by the Financial Conduct Authority (FRN458459). Cohen & Steers Ireland Limited is regulated by the Central Bank of Ireland (No.C188319). Cohen & Steers Singapore Limited is a private company limited by shares in the Republic of Singapore.
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