Natixis Canada Blog

Month: April 2015


NexGen Canadian Preferred Share Fund Re-Allocates

Jeff Herold
Jeff Herold, J. Zechner Associates, Lead Fixed Income Manager

With regards to NexGen Canadian Preferred Share, we have made some re-allocations recently.

First, we have reduced the cash component. At the end of 2014, cash equivalents made up 14% of the fund, as we were somewhat defensive about share valuations. This year, we let cash go as high as 16%, which helped protect the fund as the preferred share market sold off. However, in the last couple of weeks we have reduced the cash component to roughly 3% as we believed that the selloff had run its course.

The second shift is that we have substantially increased the holdings of rate reset issues. Perpetual issues remain our largest sectoral holding, but rate reset issues now make up 37% of the portfolio, up from 19% at the start of the year.

You may also be interested to know that we have made temporary use of the BMO Laddered Rate Reset ETF (ZPR) to accomplish some of these changes. The holding will be sold as we purchase more individual rate reset issues.

Jeff, Dax, and Ian

J. Zechner Associates Inc.

 

 

All performance data is as of March 31, 2015. Performance for the NexGen Canadian Preferred Share Tax Managed Fund is for the Capital Gains Class Front End Load Regular Series and is as follows:
1 month: 0.1%; 3 months: 0.2%; 6 months: 2.3%; 1 year: 6.4%; and Since Inception: 6.6%. Performance for the NexGen Canadian Preferred Share Registered Fund is for the Front End Load Regular Series and is as follows: 1 month: 0.2%; 3 months: 0.3%; 6 months: 2.4%; 1 year: 6.6%; and Since Inception: 6.7%.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.  Please read the prospectus before investing. The indicated rate of return is the historical annual compounded total return including changes in share value and reinvestment of all dividends or distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.  Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

 

https://secure.nexgenfinancial.ca/legal/index.html

 

Pref Update: BMO Perpetuals

Ian Clare headshot (2)
Ian Clare J. Zechner Associates Inc.

Bank of Montreal announced after the market close on April 23, 2015 that it would be redeeming all 14,000,000 shares of the BMO.PR.J perpetual preferred share issue, effective May 25, 2015, at the redemption price of $25.25. The regular quarterly dividend will be payable along with the redemption price.

The banks continue to redeem issues that are not NVCC-compliant due to their decreasing value as regulatory capital.

NexGen Canadian Preferred Share fund does not own the BMO.PR.J.

 

 

 

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.  Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

https://secure.nexgenfinancial.ca/legal/index.html

 

Policy Flip-Flop: Preferred Share Commentary from Jeff Herold

Jeff Herold
Jeff Herold, J. Zechner Associates, Lead Fixed Income Manager

The preferred share market stabilized in February, following the downdraft in January. Rate reset issues continued to fall in price, but slower than the month before. On average, rate reset preferred share issues returned -0.60% in the month. Floating rate and perpetual issues fared better, earning +1.01% and +0.68%, respectively. The overall S&P/TSX Preferred Share Total Return index gained 0.17% in February.

After its January 21st surprise interest rate reduction, the Bank of Canada gave every indication that it would reduce rates again, likely as soon as its March 4th meeting. The Bank’s January rate cut caused rate reset preferred share issues that are to reset in the next two years to fall in price the most. Our research shows that there is little correlation between preferred returns and bond yields. However, clearly the level of interest rates at the future reset dates affects the new dividend yields on rate reset issues. The prospect of lower yields in the future combined with low rate reset spreads could result in new dividend rates on preferred shares resetting in the next two years being much lower and investors sold as a consequence. We have generally been avoiding these low reset spread issues since the inception of the fund as we believe they have the risk of becoming perpetual in nature with low dividend rates. Unfortunately, the Bank’s policy flip-flop in February did not cause a rebound in the rate reset prices.

Three perpetual issues were called for redemption in February; the third one this year from TD Bank, one from CIBC and one from Industrial Alliance. As with its earlier redemptions this year, TD Bank did not call the issue on a regular redemption date, nor did it wait until the redemption price had fallen to $25.00, preferring to call them at $25.50. Industrial Alliance also called its issue at a premium, at $26.00 per share. The CIBC issue was to be redeemed at par. The details of the issues to be redeemed are as follows:

 

Issue Size Dividend Rate Reset Spread
TD.PR.R $ 250,000,000 5.60% perpetual
CM.PR.G $ 200,000,000 5.40% perpetual
IAG.PR.F $ 100,000,000 5.90% perpetual

 

As expected, Aimia chose not to redeem its AIM.PR.A issue. Instead, the new dividend rate will be set at 5-year Canada bonds plus 3.75%. Bank of Nova Scotia also decided not to redeem its BNS.PR.Y issue. Although this issue is not compliant with the Non-Viable Contingent Capital rules, and therefore receives less and less credit as regulatory capital, the 100 basis point reset spread made the overall cost too attractive for the bank to pass up.

There were four new issues in the month, including ones from TD Bank and CIBC to refinance the issues they were redeeming. We believed all of the new issues were expensive and the fund did not participate in any of them. The TransCanada issue, for example, yielded 30 to 50 basis points less than similar issues available in the secondary market. In contrast with previous new issues, these ones experienced only tepid demand and their respective sizes were increased only marginally from the initial announcements. Details of the new issues were as follows:

 

Issue Size Type Dividend Rate Reset Spread
FFH.PR.M $ 230,000,000 Rate reset 4.75% +398 bps.
TRP.PR.G $ 250,000,000 Rate reset 3.80% +296 bps.
CM.PR.Q $ 300,000,000 Rate reset 3.60% +279 bps
TD.PF.D $ 350,000,000 Rate reset 3.60% +279 bps.

 

We continue to believe that perpetual issues generally offer better value than rate resets. However, the recent selloff in rate resets has brought some issues close to what we consider reasonable value. We are monitoring the market for undervalued opportunities and will add to holdings, if possible. We have also reduced the defensive cash position somewhat as we have taken advantage of the recent price weakness in the market. We remain cautious regarding the largest preferred share issuer, Enbridge, as the details of the proposed reorganization have yet to be revealed. With the average preferred share in the NexGen Preferred Share Fund yielding over 5.0%, we believe that our holdings offer excellent value compared to new and outstanding issues.

Jeff Herold

Rate Reset Holders Continuing to Move to Floating Rate Alternative

April 20, 2015

Jeff Herold
Jeff Herold, J. Zechner Associates, Lead Fixed Income Manager

Continuing the trend that we identified some time ago, substantial quantities of rate reset preferred shareholders are choosing the floating rate option when it comes time to reset their dividend rates.

 

The Bank of Nova Scotia just announced that more than 42% of the BNS.PR.Y issue will convert into BNS.PR.D floating rate preferred shares. With 5-year Canada yields so low, it makes some sense to choose the floating rate option because there is not a large reduction in yield and there is potential for higher yields if short term yields rise in the future.

Jeff Herold

 

 

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.  Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

What the Heck is Going On?

Jeff Herold
Jeff Herold, J. Zechner Associates, Lead Fixed Income Manager

Preferred shares have declined in 12 of the last 14 days. To date in April, the S&P/TSX Preferred Share Index is down 2.4%. Rate reset issues have been bearing the brunt of the decline and are down 3.6%. As well, new issues are opening with significant losses; the recent Pembina issue, for example, started trading at $24.45 per share. The big ETF’s are having a bad start to the year, with the price of CPD off 8% and ZPR down 13% so far in 2015. What the heck is going on?

The preferred share market is going through, what we expect is, a short term correction. Preferred yields have fallen below their typical levels of the last 12 years, and investors have become a little more cautious as a result. In addition, an article in the Globe and Mail earlier this month with the sensationalist heading “Think preferred dividends are safe? Wrong” may have led some individual investors to sell their holdings. The article didn’t present any new information, in our opinion, but it may have caused some investors to wake up to the problems with the rate reset structure and some particular issues. With regard to new issues, the supply has been robust in the last couple of months, and it appears there is a little indigestion for new issues that have been priced a little too aggressively.

Market corrections are healthy and normal. We believe that preferred shares continue to offer outstanding value versus bonds.

As of April 13, 2014, the NexGen Canadian Preferred Share Fund is up 0.53%* over the S&P/TSX Preferred Share TR Index for the month and 5.5%* over the Index so far in 2015.We currently have a cash position of approximately 11% that is both defensive and allowing us to buy at new and improved levels. Our active management continues to benefit unitholders.

 

* Performance is for NexGen Canadian Preferred Share Tax Managed Fund, Compound Growth Class.

 

 

Rates of Return as of March 31 , 2015
Fund / Benchmark 1 month 3 months 6 months CYTD 1 Year Since Incept.
NexGen Canadian Preferred Share Registered Fund 0.2% 0.3% 2.4% 0.3% 6.6% 6.7%
NexGen Canadian Preferred ShareTM Fund – C GR Class 0.1% 0.2% 2.2% 0.2% 6.3% 6.4%
S&P / TSX Preferred Share Index -0.5% -4.9% -4.0% -4.9% -1.0% 1.8%

 

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

 

 

Invest better: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.