There are a number of posts that will be forthcoming. In the near future. I swear!
Drew asked some questions on April 5:
1. HIMIPref currently gives high valuation scores to several P3 issues. You, however, have noted that HIMIPref is less reliably values P3’s as compared with investment grade. Is the credit risk worth the potential reward? The yield differential alone does not seem to warrant taking on the risk.
2. Widely accepted equity portfolio theory says that adding risk in small amounts to an otherwise conservative portfolio can increase returns and actually decrease risk, where risk is measured in terms of volatility. Does the same hold true for preferred shares where risk is measured in terms of credit and not duration?
3. My intuition is that not all P3’s are in principle alike in terms of risk/return potential. A P3 (high) of a utility-like business such as Yellow Pages seems substantially less risky from a credit perspective than a cyclical issuer with a P3 rating. Further, a P3(high), it seems, has substantially higher reward potential than any P3 due to the bump in price that will no doubt result from a credit upgrade. Should these issues – issuer specific and differences between P3(high) and all other P3’s – play a role as we move down the food chain?
I will answer these briefly in this blog, but this is high-level fixed-income stuff … I think it’s probably worthy of an article.
I have been asked recently to comment on Brompton Lifeco Split Corp, LCS.PR.A. This is too small an issue to warrant inclusion in the HIMIPref™ universe but since I was asked by a subscriber to PrefLetter (cough, cough) I will write something more formal shortly. Not article-formal, not full-analysis-formal, but something.
Also, I haven’t yet commented on the closing of CIU.PR.A, other than to note its role in the redemption of CU.PR.T, CU.PR.V & CU.PR.D. This will be rectified shortly.
No rest for the wicked!
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