Preferred Shares - 2016 in review
January 6, 2017
In 2016, Redwood Floating Rate Preferred Fund Series F returned 11.61%, while the benchmark S&P/TSX Preferred Share Total Return Index returned 6.98%. Primary reasons for the Fund’s outperformance included:
- The use of true active management – trading to take advantage of the illiquidity in the
preferred share market.
- Protection of capital, using cash and short positioning – raised cash levels in the Fund and shorted ZPR and CPD at the beginning of 2016, when the preferred share market sold off alongside the broader market. The result was a maximum drawdown of 8.5% for the Fund, versus drawdown of 15.93% for the S&P/TSX Preferred Share index.
- Access to and full fills in new issues – this means we have higher allocations in these outperforming securities relative to the index, resulting in higher total returns.
- Variable rate U.S. preferred exposure – generated additional alpha as the U.S. variable-rate preferred shares have significantly outperformed due to the increasing probability of rising rates.
- Liquidity advantage – quick and efficient rotation of capital, from overweight perpetuals early in the year, to overweight resets in the second half of the year.
Our outlook for the preferred share market continues to be very positive. Preferred securities currently offer very attractive yields, and a tax-efficient alternative to bonds. We also believe they provide the potential for significant capital appreciation over the next 12 – 18 months.