Why preferred shares just got pounded – again

John Heinzl was kind enough to quote me in his recent Globe piece, Why preferred shares just got pounded – again:

When Brookfield Asset Management (a.k.a. BAM) announced a $250-million rate-reset preferred-share issue last week, the sell-off that ensued was extreme, even for the beaten-up preferred-share space.

“It was total carnage,” said preferred-share expert James Hymas, president of Hymas Investment Management in Toronto.

“A big fat yield like that could well have caused some repricing of the market as a whole,” Mr. Hymas wrote on his PrefBlog.com.

In an interview, Mr. Hymas said it’s unlikely the provision will even come into play because he expects the five-year Canada yield will rise – not fall – from its current depressed levels. Still, given the jangled nerves of investors who have watched the S&P/TSX preferred-share index plunge about 24 per cent this year (excluding dividends), Brookfield and Canadian Utilities may well have set a precedent.

“I think it’s going to be very difficult for the next while to come out with an issue that does not offer a floor,” he said.

After such an extended drop, is it finally safe to invest in preferreds? Certainly, the market has fooled everyone who has called a bottom so far. Given the unpredictable and complex nature of many preferred shares and the propensity for retail investors (who dominate the preferred space) to panic at the first hint of volatility, the market could well tumble again.

But with prices down so sharply – and yields up as a result – Mr. Hymas is seeing some compelling values emerge among rate-resets and straight perpetuals, particularly when the dividend tax credit is taken into account. His advice to anyone thinking about buying preferred shares: Allocate no more than half of your fixed-income holdings to preferreds, and focus on the long-term income they produce, not the price.

2 Responses to “Why preferred shares just got pounded – again”

  1. gimlimike says:

    Hi James, Historically with common shares during times of distress the “poor” quality shares are the first to go down followed buy “good” quality shares later as people are looking to sell their winners before they get hit in the panic, do you think the same rational ( irrational) behavior applies to preferred shares.

  2. jiHymas says:

    I must confess that I don’t know. I have found good correlations throughout the downdraft between returns and Issue Reset Spread and (somewhat confounded, slightly worse) correlations between returns and Term To Reset, which I have documented in PrefLetter.

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