Preferred Shares Or Groceries?
I had an interesting call from a former client the other day, he claimed that his advisor was more interested in his new grocery store than he was in the fact that the preferred share portion of his portfolio (near 20% of the total) was down by some 15-20% over the past year. Apparently the advice he received was to "just sit tight, it will all eventually come back".
About a year ago our research suggested Canadian banks were going to need to raise capital to stay current with the new regulations. It also came to light that they would likely be doing this in the preferred share market.
This meant that a fairly significant amount of supply was going to be added to the rate-reset preferred share market.
As it happened, in order to make this supply attractive so that it would sell, the banks offered some very attractive dividend yields on this new supply (higher yields than the existing yields on similar rate-reset preferred shares). Nice for those who had room in their allocation for more preferred shares, but not so nice when the whole rate-reset market of preferred shares that had been previously issued at lower dividend yields had to be re-priced lower, to be in line with all the new issue supply.
That was a devastating hit for unsuspecting advisors and their clients.
Needless to say, being out in front of the curve on this was certainly helpful as we made efforts to limit our exposure to this debacle (especially in the rate-reset preferred share market).
We still do not think that rate-reset preferred shares are out of danger, especially if and when banks need to raise more capital.
A client recently said to me: "Scott, my business is my hobby, I come to you so that you can look after my money and I can focus on my hobby." And I replied: "well, my business is my hobby too, so we make a good fit".
It is nice that a new grocery store might be someone's hobby (and all the best of luck with that), but I would rather be focused on my client's portfolios and guiding them through the "minefields" of investing.
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