Preferreds

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gsp_
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Re: Preferreds

Post by gsp_ »

ockham wrote:Therefore, glad to read that those who did the serious work reached the same conclusion.
I stand to be corrected but doubt Insomniac ever did any serious work with regards to prefs. IIRC he bought ETFs, lost money, bailed near the lows and decided this asset class wasn't for him.

Scomac's objection is to the ETFs, lack of market efficiency is a good thing if you're planning to trade competently.

No opinion whether or not you should take prefs on but confirmation bias is strong once one is leaning a certain way.
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Re: Preferreds

Post by AltaRed »

gsp_ wrote:Scomac's objection is to the ETFs, lack of market efficiency is a good thing if you're planning to trade competently.
Indeed, but you really have to know your stuff AND keep an 'eagle eye' on (be on top of) the bid/ask of the various issues regularly to exploit it. If one is not prepared to do that daily/weekly, probably best to either stay away from this space or pay for active management.
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Re: Preferreds

Post by Phil D »

Pref shares are definitively not fixed income ! However, high quality perpetuals as originally produced are fairly easy to understand and evaluate. More recently, though, as everyone says, prefs have had more and more financial engineering, making them become like derivatives and resulting in unanticipated ( somehow always negative...) consequences. I agree with the comments about not trying to select individual securities without fully investigating their terms and risks.

However, despite the financial engineering involved, I am partial to split prefs. High quality split prefs have significant downside protection built in and do provide a bit of yield.
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Re: Preferreds

Post by Peculiar_Investor »

Koogie wrote:Plus I worry that getting into preferreds is a form of reaching for yield. Something I have been trying to train myself to avoid.
I would agree with the first sentence. For me, it is a bit of a balancing act with asset allocation and tax-efficiency decisions. The dividend tax credit and fact that per our investment policy statement our asset allocation to fixed income cannot all fit into our registered accounts.

For those reasons I have including preferred shares into our asset allocation, with preferred shares pseudo allocated as fixed income.
AltaRed wrote:FWIW, I currently have about a 7.5% allocation to prefs (both straight perpetuals and fixed resets) in my portfolio and I have them in a separate class in my asset allocation chart so that I can 'visualize' them either way.
That's probably a better approach, I just haven't gotten there yet. In my own mental accounting, I do keep the ratio of preferred shares as under 10% of our bond holdings.
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Re: Preferreds

Post by rhenderson »

I guess I'm taking a chance and reaching for yield. :roll: I have 30% of my portfolio in prefs, some splits but mainly P-2 min resets that I purchased at either par or below.

Eg, I have a ton of CU.PR.I that either resets at 4.5%, (or better) or is called at par.Either way I don't care and I don't lose any sleep over the holdings.Seems to me that holding Canadian Utilities prefs is no riskier than holding the common.

Am I missing something :?:
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Re: Preferreds

Post by AltaRed »

rhenderson wrote:Eg, I have a ton of CU.PR.I that either resets at 4.5%, (or better) or is called at par.Either way I don't care and I don't lose any sleep over the holdings.Seems to me that holding Canadian Utilities prefs is no riskier than holding the common.

Am I missing something :?:
In this case, no. Firstly, as a wide spread pref, I agree it would have a good bottom in event of a total collapse of GOC5 yield upon reset and would more likely be called by the issuer should GOC5 rise. But that in itself is a reason to watch it with respect to a decision that could be made 'earlier' given it is currently trading above par. You could sell earlier for a cap gain, as long as you purchased it below par.

Since commons are subordinate to preferreds, "technically" it is lower risk than the common from a solvency perspective.
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Re: Preferreds

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gsp_ wrote:[quote="ockham"
I stand to be corrected but doubt Insomniac ever did any serious work with regards to prefs. IIRC he bought ETFs, lost money, bailed near the lows and decided this asset class wasn't for him.
Yes, I bailed on ZPR almost 2 years ago and it dropped another ~25% after that. At the time, there was some inane comments like "it's panic selling" and "he's buying high, selling low" about my decision. Anyhow, it was a good decision as I have recovered my losses. ZPR has recovered lately from it's lows in the mid $9 range, but I doubt it will see $14 again. I don't care.

This article was one of the ones I read that influenced me that preferred are useless:
https://www.pwlcapital.com/pwl/media/pw ... f?ext=.pdf
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Re: Preferreds

Post by gsp_ »

Insomniac wrote:
gsp_ wrote:[quote="ockham"
I stand to be corrected but doubt Insomniac ever did any serious work with regards to prefs. IIRC he bought ETFs, lost money, bailed near the lows and decided this asset class wasn't for him.
Yes, I bailed on ZPR almost 2 years ago and it dropped another ~25% after that. At the time, there was some inane comments like "it's panic selling" and "he's buying high, selling low" about my decision. Anyhow, it was a good decision as I have recovered my losses. ZPR has recovered lately from it's lows in the mid $9 range, but I doubt it will see $14 again. I don't care.
I did not comment at the time and wasn't making any judgement now with regards to your investment decisions. My post was simply questioning the characterization of having put in "serious work". Glad to hear you bailed earlier than I thought, sorry for misremembering. FWIW ZPR's low was just below $8.50.
This article was one of the ones I read that influenced me that preferred are useless:
https://www.pwlcapital.com/pwl/media/pw ... f?ext=.pdf
That report has many issues as discussed when first linked in this very thread for those interested. IMO it's of very little relevance for someone contemplating learning about prefs in order to trade individual issues.
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Re: Preferreds

Post by Hogwild »

Are we allowed to ask for advice on specific stocks within this thread? If so...

I bought 400 shares of SLF.PR.G at $16.79 in August of 2015. I rode it down to as low as below 12.50 at one point, during the rally of the last couple of years. Surprisingly, it's now rebounded the last week or so back to today's price of 16.61.

I'm on the fence about deciding whether to keep it or ditch it. Am I right current yield would be approx:

(GOC5 yield) 1.141
+premium 1.41
===================
= 2.551%

But this would be for a $25.00 price. For current price, of 16.61, yield would then be ...~ 3.4%. Is that right?

I say I'm on the fence because I see several opposing forces at play right now...

-The markets have rallied for so long
-then the Trump effect, which so far has extended the rally (too far, IMO)
-Recent increase in US Fed interest rate
-OTOH, some are returning to value plays and non-growth equities, bonds etc, thinking the rally will lose steam

What do you think is the likely trajectory for this preferred?


(Mods, if this is in the wrong place, please bump to wherever you think it belongs, with my thanks.)
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Re: Preferreds

Post by brad911 »

Did you buy for yield, capital gains or both?
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Re: Preferreds

Post by Hogwild »

brad911:

I really just expected yield.
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Re: Preferreds

Post by gsp_ »

You should have booked the capital loss and switched to its sister floating reset slf.pr.j when the carnage occured. J traded in the high 10s/low 11s at the time, from memory. You can still pick up over a $1 a share by making the switch now without the cap loss incentive. They are exchangeable for each other every 5 years at reset date so will trade at the same price by then.
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Re: Preferreds

Post by Hogwild »

Thanks, however that doesn't really help me, nor does it answer my question. What do I do with the shares now? The next reset date is in 2020, so it wouldn't be easy to exchange for J series shares until then. Do I hold or sell?
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Re: Preferreds

Post by OnlyMyOpinion »

..
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Re: Preferreds

Post by gsp_ »

Hogwild wrote:Thanks, however that doesn't really help me, nor does it answer my question. What do I do with the shares now? The next reset date is in 2020, so it wouldn't be easy to exchange for J series shares until then. Do I hold or sell?
It doesn't seem like you understood what I posted; you sell G and buy J(aka switch). You pick up $1-2 per share depending on your trading skill and come 2020 you decide which you like best and exchange or stay put accordingly. Unless you are predicting average 3 month GOC rates until reset to be below -1% this is a no brainer.

As to whether you should be holding prefs, more specifically resets, even more precisely non NVCC compliant insurance issues I have no idea as I don't know the first thing about you. Regarding this issue's short term price trajectory I haven't the slightest idea and I would suggest neither does anyone else. FWIW J is my largest pref holding, it and other insurance fixed/floating resets are bets on insurance regulators mimicking OSFI.

Good luck to you whatever you decide to do.
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Re: Preferreds

Post by Hogwild »

gsp_:

Thanks. My misunderstanding was because I thought you meant that these were the type of shares which could be directly exchanged with the company for another series. Since I figured that wasn't accurate, I got confused. So when you said "exchange" you meant buy and then sell.

I'll definitely give the J series shares a look. Are they NVCC compliant, cause I'd like to avoid that type?
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Re: Preferreds

Post by gsp_ »

Switch: sell one, buy the other on the open market.
Exchange: at reset time, contact your broker and express your wish to have your fixed reset converted to its floating reset sibling or vice versa.

All terms are identical other than how their dividend rates are calculated. The fixed reset's is fixed for 5 years at reset time based on 5 year GOC + spread. The floating reset's dividend is announced every 3 months based on the 3 month GOC + same spread. For some reason the market has an irrational distaste for floating resets which has lasted way longer than I ever would have thought.
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Re: Preferreds

Post by Hogwild »

Any idea what the current yield is on the variable resets right now (SLF.PR.J for those just tuning in)? Also, I wonder how wise it is to buy something that resets every few months when Trump is in office. It could be a wild ride....not what one is hoping for when one buys this asset class.
Last edited by Hogwild on 30 Jan 2017 18:17, edited 1 time in total.
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Re: Preferreds

Post by Sensei »

Hi,

SLF.PR.G, SLF.PR.J

I'll leave what you should have done to the experts. However, Hogwild, you said you are interested in yield. The current annual dividend for J is $.48 which gives it yield of 1.92% at par and 3.11% current yield. Buying at $10 to $12 would make some sense. Add in the uncertainty of the yield at reset, and that SLF doesn't necessarily have to pay the dividend since it is non-cumulative, paying $15 or $16 would not be my choice. Issuers have so many advantages over you, and yet you are willing to accept what seems like on an uncertain and mediocre yield considering all the other choices available.
Last edited by Sensei on 30 Jan 2017 18:27, edited 1 time in total.
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Re: Preferreds

Post by Hogwild »

Having trouble understanding that last sentence. Language barrier maybe? I assume you simply meant that SLF has many advantages over other shares, with their uncertain and mediocre yields? That SLF is the one with the advantages?

Sensei wrote:Hi,

SLF.PR.G, SLF.PR.J

I'll leave what you should have done to the experts. However, Hogwild, you said you are interested in yield. The current annual dividend for J is $.48 which gives it yield of 1.92% at par and 3.11% current yield. Buying at $10 to $12 would make some sense. Add in the uncertainty of the yield at reset, and that SLF doesn't necessarily have to pay the dividend since it is non-cumulative. Preferred shares should give peace of mind and decent yield based on par value. SLF has so many advantages over you accepting what seems like on an uncertain and mediocre yield considering all the other choices available.
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Re: Preferreds

Post by Sensei »

Hi,

Sorry about the first post. I was in the process of editing it a little but while doing that, you responded almost immediately. I didn't have time to respond among all the domestic turmoil that is usual in the morning for us (two cats, bird, stepson fx crisis, spouse going out with me in tow).

I meant to say that SLF has many advantages over you the shareholder as do all preferred share issuers. The relationship between preferred share owners and the issuer is adversarial. All of the advantages to the issuer are baked into complicated prospectuses which ultimately benefit the issuer and not the preferred share owner. Still, as gsp pointed out, if you are nimble, owning a preferred share could still be very profitable.

A lot depends on your situation as gsp noted. What I was trying to say (not well perhaps), is that I would want to be paid more than a 1.92% yield for that sort of arrangement. This is especially true since there are better yields elsewhere.

I'm not totally wet behind the ears (opinions vary however), but I do own one Canadian preferred and it has the qualities that I like. It's ENB.PF.C (aka Series 11)
1. Dividends are cumulative (others may disagree, but I think this is important.)
2. It's a fixed rate reset. (good point I think but it's moot. Depends on interest rates, but I think the direction will be sideways.)
3. The dividend rate is 1.10 with a yield at par of 4.40%
4. I bought my shares at 16.88 (Thus 6.5% yield on cost)
5. Today's price is 20.16. (19% capital gain should I decide to sell, which I probably won't)
6. It will reset at GOC 5 year plus 2.64%. (2020) (better than SLF)
Bad point: Debatable in absolute terms, but Enbridge is not as creditworthy as SLF.
Just accidental, but Enbridge's merger with SE is credit positive according to Moody's.

Again we don't know the depth of your knowledge, but you can learn a lot by reading PrefBlog. As an example, this is ENB.PF.C offer information from back in 2015.

ENB Series 11 offer information

I also own three preferred issues in the US.
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Re: Preferreds

Post by Hogwild »

Sensei:

Interesting...thanks for that. Care to share what your US dividend picks are? I've been looking for some US exposure for a while. Was going to get part of that US exposure with Milestone REIT, among others. Then, just before I pulled the trigger, Milestone got acquired, which gave me pause to think.
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Re: Preferreds

Post by Sensei »

Hi,

My three current US preferred share issues are:

National Retail Properties Series D (marked as called 02/23/2017)
SL Green Realty Series I (Call Date 8/10/2017)
Realty Income Series F (Trading just past call date 02/15/2017)
The latter two may or may not be called but I'm leaning towards 'not'.

If I was looking for a newer preferred share in the US, I might be looking at PartnerRe 6.50% Series G (cumulative) callable 04/2021 and be willing to pay a modest premium for it. I'd have to work out some YTWs. Today it trades at $25.92 which is a bit too high.
Cheers

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Re: Preferreds

Post by cardhu »

Sensei wrote:I would want to be paid more than a 1.92% yield for that sort of arrangement
There is no 1.92% yield … that would be an accurate portrayal of SLF’s dividend expense measured against the capital they raised, but that’s not what “yield” means ... not sure why would an investor care about that, other than as a means of assessing whether SLF is likely, or not likely, to redeem at its next opportunity?
Sensei wrote:Buying at $10 to $12 would make some sense. ....paying $15 or $16 would not be my choice.
It was never $10 … went a hair below $11 for about 20 minutes one day … in any event, the price paid for J is not what matters … what matters is the price differential between G and J … getting J for $14, after selling G for $16 (a 12.5% "discount"), would be far preferable to getting J for $11 after selling G for $12 (an 8.3% "discount") ... either way, you'd end up holding G, at the next conversion date at whatever its worth on that day, but with the deeper discount, you'd hold more of it.
Sensei wrote:Add in …the uncertainty of the yield at reset,
The same uncertainty is common to all rate reset issues … it is nonsensical to claim a preference for one issue over another on that basis.
Sensei wrote: ...that SLF doesn't necessarily have to pay the dividend since it is non-cumulative,
This is true … but they can’t just arbitrarily decide on a whim not to pay it … they would first have to cut the dividend on their commons to ZERO, before skipping any payments on their preferreds … it could happen, but there’s a pretty significant buffer.
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Re: Preferreds

Post by cardhu »

Hogwild wrote:Any idea what the current yield is on the variable resets right now (SLF.PR.J for those just tuning in)?
3.04% as of this moment, but that’s not the point … the arbitrage that gsp is suggesting would provide a significant boost to that … in fact, it would provide a significant boost to the 3.49% that your PR.G is presently yielding ... you would get less on a quarterly basis going forward, but you would either (a) do so with a fat wad of cash in your pocket from cashing out the price differential, or (b) you’d arrive at the next reset/conversion date with more shares than you presently own … somewhat like a DRIP.
Hogwild wrote: I wonder how wise it is to buy something that resets every few months when Trump is in office. It could be a wild ride....not what one is hoping for when one buys this asset class.
Depends what one is hoping for when one buys this asset class, I suppose ... I don’t think it would be fair to assume that all investors have identical expectations ... yes, there would be more variability in quarterly dividend amounts, but as long as the price differential is sufficient to compensate for that, then you’re golden.
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