PrefBlog

There’s a story about preferreds in the Mid-February 2007 Investment Executive, titled A new belle at the investment ball?

I was quoted a bit.

The story so far … David Berry was an extremely successful preferred share trader at Scotia, made all kinds of money for them and took a large chunk of it home.

Then things went sour and you can take your choice of stories:

(i) Scotia found out that he was being naughty and fired him

(ii) Scotia decided they were paying him too much and made mountains out of regulatory molehills to avoid paying severance when they fired him

Berry now has a $100-million-plus lawsuit outstanding against the bank, which has now filed a statement of defense:

The 18-page statement said “Berry engaged in serious misconduct in his trading, including violating securities rules.”

“He successfully hid his conduct from Scotia for a period of time. His misconduct breached fundamental terms of his employment with Scotia and was just cause for his termination.”
…
It also says that from “June, 2004, through April, 2005, RS requested that Scotia provide information to it in respect of specific trades Berry had made.”

In May, 2005, the statement said RS issued a “warning letter to Berry in respect of the specific trading it had reviewed. While RS determined at that point that there was insufficient evidence to support breaches and so no formal proceedings were commenced, RS specifically warned Berry that it was concerned about a particular instance of trading ‘as it contains elements of manipulative and deceptive trading …’ “

Mr. Berry was suspended on June 20. The statement said that on that day there were “18 trading transactions that did not comply with UMIR [uniform market integrity rules].”
…
RS has yet to file any allegations against Mr. Berry.

Today’s Financial Post has a summary of the differences between the parties.

I have no idea where the truth lies. It would not surprise me to learn that a trader bloated with hubris and a desire to execute his clients’ wishes to earn a fat fee would break some rules. It would also not surprise me to learn that Scotia put an army of lawyers on the paperwork and ecstatically screamed “Gotcha!” when it found an uncrossed T.

For the duration of his tenure as King of Pref Traders, Berry was blessed with huge amounts of capital. You could call Scotia at any time of the trading day and ask to know a price for any block of any size of any preferred and a price would be put on it. An extremely lousy price, way off market, to be sure, but a price at which you could trade – instantly.

Rob Carrick has a piece in today’s Globe, Two words for investors stung by the trust crackdown: preferred shares, in which he points out the enormous tax advantage provided by the Dividend Tax Credit and has some nice things to say about me.

Gee … I guess all the information is in the headline!

I’ll be talking about … preferred shares, just as a change of pace.

Update and bump: I thought it went pretty well. There should be a link to the video for another week here.

Claymore has filed a preliminary prospectus on SEDAR date January 8, 2007, for the “Claymore S&P CDN Preferred Share ETF”.

The Claymore S&P CDN Preferred Share ETF has been designed to replicate the performance of the S&P CDN Preferred Share Index, net of expenses. The investment strategy of the Claymore S&P CDN Preferred Share ETF is to invest in and hold the Constituent Securities of the S&P CDN Preferred Share Index in the same proportion as they are reflected in the S&P CDN Preferred Share Index.

The preliminary prospectus goes on to advise that

The S&P CDN Preferred Share Index is designed to serve the investment community’s need for an investable benchmark representing the Canadian preferred share market. The S&P CDN Preferred Share Index measures the performance of a selected group of preferred shares listed on the Toronto Stock Exchange. The index is comprised of preferred shares issued by Canadian entities that meet critera relating to minimum size, liquidity, exchange listing and time to maturity determined by Standard & Poor’s

…

The constituents of the S&P CDN Preferred Share Index™ are available on the Claymore website at www.claymoreinvestments.ca and on the S&P website at www.standardandpoors.com

The referenced list of constituents is not yet available, but this is very interesting.

Hat tip to Financial Webring Forum for bringing this to my attention.

The current issue of Canadian Portfolio Strategy Outlook has a few things to say about prefs:

While trust valuations are likely to bounce back, trust market issuance will be restricted by the new regulations. Hence investors’ search for yield is likely to lead them to new instruments in 2007. A resurgence in preferred share issuance may be one of the new vehicles to pick up the slack.

I’ve been saying this for a while now – every time a trust blew up, in fact – but now the line is being picked up by the majors. I hope that doesn’t mean it’s not likely any more.

An important advantage of preferred shares for taxable investors is that the income, in contrast to the coupon stream from a bond, qualifies for the dividend tax credit. All the more so given Federal tax changes that lowered the effective tax rate on dividend income from 31% to 25% starting this year. Since 2004 preferred shares have offered a higher yield than even long Canada bonds. The average yield at present on Canadian preferred shares is about 5%, versus 4.0% for the GoC 30-year bond and about 4.7% for the typical Canadian corporate bond (Chart 7). However, on an after-tax basis, the spread against the long Canada rises to 150 bps, (Chart 8 ) a huge yield pickup for investors able to tolerate the somewhat larger degree of repayment risk.

I wish I knew where to pick up a basket of good quality prefs yielding an average 5%, but I guess that’s one of the things you learn when you work for a bank. And I think they could have been more specific about taxation. Still – it’s nice to see an organization that has an actual marketting budget talking about these things!

Those who have read  Dividends & Ex-Dates will enjoy this press release!

Readers will have noticed the occasional reference to Financial Webring Forum in this blog – I’ve been participating there for almost as long as it’s been around.

 I have now joined the Webring itself and the Webring Navigation bar to …

  http://www.financialwebring.com/

will now displayed at the footer of this page. I can’t show the navigation bar in this post … it’s a Javascript and my poor little blogging software gets confused … so to see the actual image, you’ll have to skip down to the footer.

I can’t say I agree with all participants in the Webring … not even some of the people all of the time! … but I strongly agree with the ideals!