Natixis Canada Blog

Preferred Shares:


Canadian Preferred Shares Continued to Move Upward in Price in February

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Preferred Share Fund

Following their very strong gains in January, Canadian preferred shares continued to move upward in price in February, but at a more subdued pace. Reduced activity in preferred share Exchange Traded Funds (ETFs) probably accounted for the smaller preferred share gains. The Bank of Montreal Laddered Rate Reset ETF (ZPR) experienced a 45% drop in units created from January to February, although a meaningful $81.8 million still flowed into the ETF. We suspect that the lower activity in ZPR reflected reduced hedging requirements for structured notes as the RSP season wound down. Because of the lower demand for rate reset preferred shares, that sector underperformed the broad market for the first time since last September. Also in February, new issue activity increased to four issues, compared with only one the previous month. The S&P/TSX Preferred Share index returned 1.49% in the month.

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Preferred Shares Immune to the Volatility Arising From the Changeover in U.S. Administration

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Preferred Share Fund

The Canadian preferred share market started 2017 with a bang, outperforming investment grade bonds, common stocks and even junk bonds by a significant margin. Unlike other securities, preferred shares were immune to the volatility arising from the changeover in the U.S. administration. In part, the strong performance of preferred shares reflected investors’ ongoing search for attractive yield combined with limited new issue supply. In addition to investors purchasing outstanding individual issues, preferred share ETF trading volumes hit a record high in January. We believe that much of the ETF activity did not reflect simple buying of the asset class, rather, it was hedging of structured notes linked to the preferred share market. The S&P/TSX Preferred Share index returned 4.05% in January.

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Canadian Preferred Share Market Moves Sharply Higher In December

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Preferred Share Fund

The Canadian preferred share market moved sharply higher in December as large scale buying of preferred share Exchange Traded Funds (ETFs) pushed the prices of individual issues upward. A lack of new issues contributed to the market’s strength. As well, in contrast with recent years, there was relatively little tax-loss selling in December. Rate reset issues performed particularly well as a result of direct investor interest and also due to hedging of structured products. The S&P/TSX Preferred Share Index returned +3.59% in the month.

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Canadian Preferred Share Market Unaffected By U.S. Presidential Election

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Preferred Share Fund

In contrast with most global financial markets during November, the Canadian preferred share market was mostly oblivious to the surprise victory of Donald Trump in the U.S. presidential election. While equity markets reacted favourably to the more optimistic outlook, bond markets were dismayed by the potential for substantially higher U.S. budget deficits and increased inflation, leading to sharply higher yields and lower bond prices. Preferred shares, though, followed their own course, with prices initially extending the strong rally of October. A sharp decline in preferred share prices in the middle of the month erased earlier gains, however, and the market was unable to recover over the balance of the period. A series of large new issues in quick succession was responsible for the mid-month weakness. The S&P/TSX Preferred Share Index returned -0.65% in November.

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Preferred Share Market Enjoys Robust Returns In October

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Preferred Share Fund

The preferred share market enjoyed robust returns in October, powered by growing institutional participation and buying of preferred share Exchange Traded Funds (ETF). Rate reset issues had particularly strong returns, but still trail perpetual issues by a wide margin on a year-to-date basis. The S&P/TSX Preferred Share Index returned 2.32% in the month.

There was only one new preferred share issue in October, but it was particularly noteworthy because it set a couple of records. The issue was from Bank of Montreal (BMO.PR.B), and it had a 4.85% dividend rate and a +406 basis point reset spread. Initially sized at $350,000,000, the deal was upsized to $600,000,000 after the order book surpassed $2 billion. The issue was allocated 70% to institutional buyers and 30% to retail investors. A record number of 84 institutional investors participated in the issue and its first day of trading also set a record as 6.95 million shares changed hands.

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