PrefBlog

Andrew Allentuck was kind enough to quote me in his Investment Executive piece, A life preserver for rising interest rates:

“[Floaters] are not a one-way street and can just as readily generate price losses if spreads open up,” says James Hymas, president of Hymas Investment Management Inc., a Toronto-based firm that specializes in fixed-income investing. “The spreads can open up for the specific issue, for any category of issuer that ranks below the Government of Canada or because an issuer has subordinated the floater [or, indeed, any other bond] by issuing more debt or more senior debt.”

One very important point to note is that even though floaters usually are short-term notes, they have been issued as long-dated obligations in the past. Says Hymas: “Where an investor holds a long-dated floater, there’s more time for credit-quality issues to arise. In that case, rate resets will matter less than quality deterioration and potential decline in liquidity if holders rush to sell and overwhelm buyers. This is all potential, but it did happen in 2008.”

Romina Maurino of the Canadian Press was kind enough to quote me in her story Preferred company shares can provide steady income, tax benefits:

James Hymas, president of Hymas Investment Management in Toronto, said preferred shares, which have taken a hit as investors speculate about what the U.S. Federal Reserve will do about its tapering program, are currently more attractive relative to bonds than they have been since the credit crunch.

“I believe that people will be nibbling away at the preferred shares market,” Hymas said. “No taxable investor should own more than a bare minimum of long-term corporate bonds because preferred shares are much more attractive than long-term corporate bonds at this point.”

Update: No sooner are the words out of my mouth than TCA.PR.X is called for redemption; this issue carries a 5.6% coupon, and that’s a dividend! On September 9 – that is to say, four days ago – TCA issued a preliminary prospectus for $300-million in 4.55% 28-year debentures priced at 99.521.

Today’s skill testing question is: would you borrow at 4.55% interest to earn 5.6% dividend?

I will be taking questions on the Globe’s chatline at 1pm today, June 25:

Preferred shares can be complex investment instruments, but when used effectively in a portfolio, they can provide a stable income stream at lower risk than common shares or in some cases corporate bonds – and with tax advantages. For this week’s live discussion at Inside the Market, we’ll hear from one of Canada’s top experts on preferred shares, James Hymas, president of Hymas Investment Management.

Mr. Hymas has been in the investment industry for nearly three decades and is frequently called upon for his advice of preferred shares.

John Heinzl was kind enough to quote me in his latest piece for the Globe and Mail, Beware the tax trap of these tempting preferreds:

The banks gave themselves the option to redeem the shares on the reset date. With preferred yield spreads having contracted sharply now that the financial system has stabilized, “virtually all of them are going to be called,” says preferred share expert James Hymas, president of Hymas Investment Management. Any high-quality preferred with a spread of at least three percentage points is pretty much a lock for redemption, barring another financial crisis, he says.
…
“Most investors look only at current yield,” Mr. Hymas says. But the more important number is the “yield-to-call” (similar to the yield-to-maturity of a bond), which also takes into account the expected capital loss or gain. In the case of RY.PR.T, the yield-to-call is about 2.3 per cent.

There are tax implications, too. If you’re investing in a non-registered account and buy a rate-reset preferred with a current yield of 6 per cent, you’ll have to pay tax on the inflated dividend. Even taking into account the dividend tax credit and assuming you can use the capital loss to offset other capital gains, you could end up paying an effective tax rate of more than 30 per cent on the yield-to-call of 2.3 per cent, Mr. Hymas says.
…
“Before you even think about buying them, you have to do your calculations properly and account for taxes, if any,” Mr. Hymas says.

For more on preferred share yields, plus a link to an online yield calculator, read Mr. Hymas’ article at goo.gl/tjr72

Dominique Beauchamp was kind enough to quote me in her article Privilégiées : comment se prémunir contre la hausse des taux (“Preferred: how to protect themselves against rising rates” – translation by Google)

[Translation by Google]

A repeat of 2008, which was flinching preferred shares is not in the cards, since we are not witnessing a credit crisis this time, but a return to normal levels, said for his part James Hymas, a leader of the Preferred Shares, president of Hymas Investment Management and author of prefblog.
…
Mr. Hymas expects a gradual increase in interest rates and an equally gradual effect that the preferred shares. When interest rates rise, fixed income securities fall for the performance of their distribution, dividend or interest increases in proportion to their course, so as to be competitive with the new rates.

“Over a period of 12 months, I expect that the Preferred Shares will maintain a positive total return. In other words, the dividend income will fully offset the decline in stock prices, “said Hymas, in an interview.

Jade Hemeon of Investment Executive interviewed me again for IE.TV:

James Hymas, president of Hymas Investment Management and manager of Malachite Aggressive Preferred Fund, drills down to specifics of how to manage preferred shares. He spoke with Jade Hemeon, senior reporter with Investment Executive, at the TMX Broadcast Centre in Toronto.

I believe it’s eligible for next year’s Oscars!

Jade Hemeon was kind enough to quote me in her Financial Planning article at Investment Executive:

Because of the possibility of a preferred share being called, James Hymas, president of Toronto-based Hymas Investment Management Inc., says it is important for investors to calculate the prospective yields to the first possible call date, or “yield to worst.” If the security is trading at more than par value, investors should make sure they will be paid enough in dividends before the first possible call date to compensate for the premium being paid.

“Yield to worst is the single most important measure when buying a preferred,” says Hymas, who manages Malachite Aggressive Preferred Fund, an investment fund available to accredited investors, and also offers analysis of individual preferreds at his website www.himivest.com.

Jade Hemeon of Investment Executive interviewed me for IE.TV:

James Hymas, president of Hymas Investment Management and manager of Malachite Aggressive Preferred Fund, explains how preferred shares can be used in portfolio construction for your clients and itemizes some tax and income advantages provided by a preferred share fund. He spoke with Jade Hemeon, senior reporter with Investment Executive, at the TMX Broadcast Centre in Toronto.

What a great video that is!

Andrew Allentuck was kind enough to quote me in his Investment Executive piece, Are long bonds safe for your clients?:

The question, therefore, comes down to how long today’s low interest rates will last. Upward pressure is in place, says James Hymas, president of Toronto-based Hymas Investment Management Inc. and an expert in preferred shares. “Current interest rates are unsustainable, as is the U.S. deficit,” he says. “Negative real yields on government bonds in the U.S. and in Canada, and the risks intrinsic in investing in the still growing U.S. deficit by way of holding U.S. T-bonds, imply that investors will demand higher interest rates.”

There is as yet no rush to sell bonds, he suggests, but when the rush does start and yields start to drop, the long end of the yield curve will rise swiftly.

I’m way late reporting this, but I only just realized I hadn’t added it to my press clippings file!

Scott Blythe was kind enough to quote me in his advisor.ca Special Report No shortage of risk in preferred shares:

“One thing to consider is who benefits from new issuance. There was a big spike in spring 2009 when all of the banks were busily raising capital hand over fist,” notes James Hymas, who blogs on preferred shares and runs the Malachite Aggressive Preferred Share Fund. “We’re certainly not back to those levels yet, but on the whole the preferred share market has grown considerably over the last 10 years. There are a lot of new issuers coming out and some of the old issuers are starting to put their toes back into the water.”

Because of their place in the credit structure behind bondholders, investors could be wiped out. Hymas notes two major issues that have defaulted: Nortel and Quebecor World.
…
Hymas estimates that preferreds trade at a yield of 195 basis points over equivalent corporate debt. Of that, 10 basis points can be attributed to credit risk. The rest is a liquidity premium.

“Liquidity is extremely important in the preferred share market; you can make excess returns by selling liquidity and you can get make horrible returns by buying it.”
…
“It depends a lot on the time scale that you want to look at,” says Hymas. “On a day-to-day basis, individual issues can vary considerably and also on a day-to-day basis the market as a whole can do very extreme things for various reasons. However over the long run, the market is only a little bit more volatile than long corporate bonds.”
…
“There are two major components to the prices: the credit risk and the interest rate risk,” Hymas explains. “The fixed resets and the floaters address the interest-rate part of the equation but they do not address the credit risk part of the equation. So a lot of people tend to buy fixed resets, for instance, on the grounds that they are just five year issues, but that is not correct. The interest rate risk might be about five years, but the credit risk is forever.”

On credit risk, PFD1 indicates stability as good as a bank; PFD 2 ratings are equivalent to an investment grade corporate bond, while PFD 3 is more like a good high-yield bond.

That said, Hymas advises against buying solely on yield.

“A lot of people attempt to build fixed income portfolios from the bottom-up, which is a horrible mistake. A fixed income portfolio should always be built from the top down, meaning that you first understand what the client is attempting to accomplish with his portfolio and then pick pieces out of the jigsaw puzzle that fit. It’s simply a question of keeping in mind what the client is attempting to do.

“Simply ‘making money’ is not an investment plan, though there are many advisors who will tell you different.”