As we have suggested on numerous occassions on our weekly webinar and on this blog, after last years fixed-rate reset preferred share debacle, that particular asset class has slipped into a new category of potential volatility.
This is not the sleepy, decent yielding, low volatility investment that it may have been a few years back and as with all things that change, we need re-assess our exposure to it relative to our risk tolerance.
Looking at the 2 year Total Return Analysis (including re-investment of dividends) it is not a pretty sight:
Will it comeback?
We don't think anytime soon because Canadian banks need to contuously raise Tier 1 capital and as was the case last year they utilized the fixed-rate reset preferred share market. But this market was overcome by the supply and it forced banks to "sweeten" the deal by offering more attractive dividend yields to move it.
The whole secondary market in these preferred shares was re-priced lower to accomodate the new yields (hence the negative return). This could happen again, if and when the supply is increased with new issues and if and when it overwhelms the market demand (regardless of the yield or interest rates).
Capital requirement rules for systemically important banks changed in 2013 and they have a sliding scale each year from 2013 to 2020 to hit and maintain annual targets for Tier 1 capital ratios according to their Risk Weighted Assets.
This is by no means a recomendation to take (any buying or selling) action, but a suggestion to get in touch with whomever advises you in these matters and to discuss it with them.
The point is, for the forseeable future, the basis of the preferred share index has changed and we need to take note.
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