Following several weeks without any issues, two new ones came in late November, but were insufficient to satisfy investors’ appetites. The anticipated unwinding of structured note hedges linked to passive preferred share ETFs continued, but was offset by demand for actively managed alternatives. The S&P/TSX Preferred Share Index returned 0.70% in November.
Good investor demand pushed preferred share prices higher and yields lower in November. Following several weeks without any issues, two new ones came in late November, but were insufficient to satisfy investors’ appetites. The anticipated unwinding of structured note hedges linked to passive preferred share ETFs continued, but was offset by demand for actively managed alternatives. The S&P/TSX Preferred Share Index returned 0.70% in November.
Floating rate issues, which make up only 2% of the index but 6% of the total market, were the strongest sector in the month, earning 3.1%. Perpetual issues returned an average 1.5% in the period. Rate reset issues returned only 0.3% in the month, likely hurt by selling of the BMO laddered rate reset ETF (ZPR).
After a hiatus of two and a half months, two new issues came to market in the last three days of November. The Pembina Pipeline issue was well received, with 52 institutional buyers, and it was upsized from $300,000,000. The Brookfield Office Properties issue was priced aggressively compared to existing BPO issues and attracted only 7 institutional buyers as a result. Details of the issues were as follows:
We did not participate in either new issue because we held sufficient other Pembina issues and we prefer Brookfield Asset Management to Brookfield Office Properties.
During the month, Intact Financial announced that it would not be redeeming the IFC.PR.A issue, and holders have until mid-December to decide whether to elect the floating rate option for the next five years. In addition, Brookfield Asset Management announced that it would be extending the BAM.PR.Z issue and resetting its dividend. Holders will need to decide whether to stay with the new fixed rate or take the floating rate alternative.
HSBC Bank Canada announced that it would be redeeming both of its perpetual issues, HSB.PR.C and HSB.PR.D. Each issue was $175,000,000 in size. The rationale for the redemption was likely that the issues did not have Non-Viability Contingent Capital (NVCC) provisions and, therefore, received increasingly small credit as capital.
The preferred share ETFs continued to see a migration of assets from passively managed to actively managed funds. The two largest passive preferred share ETFs experienced $59 million of net withdrawals during November, while the three largest actively managed ETFs attracted $151 million of net deposits. The shift in ETF assets from passive to active validates our long-held contention that the inefficiency of the preferred share market makes active management a compelling choice.
Natixis Canadian Preferred Share Fund
Favourable security selection and relatively more perpetual issues contributed to the Fund’s good result this month.
During the month, we added to a number of existing holdings to invest new deposits. However, due to our price discipline and the illiquid conditions prevailing in the market, we did not make a significant dent in the cash position.
Market Outlook and Strategy
Preferred shares continue to be an attractive asset class. We remain in a low yield environment and the ~ 5.00% yields achievable in preferred share portfolios are very competitive. Demand for preferred shares remains strong, while supply of existing issues shrinks due to redemptions. We believe new issue supply will be insufficient to meet demand, which means preferred share values should gradually rise in coming months. As well, the lack of correlation to bonds will be valuable if the bond market falters again and bond yields rise.
In the next few months, though, we do not believe bond yields will change significantly. We believe the Bank of Canada will not change interest rates until March at the earliest, and bonds are likely to trade in a sideways pattern until then. So, rate reset issues are unlikely to get a boost from expectations of higher dividend rates due to rising bond yields before next Spring.
We are monitoring the market for opportunities to reduce the current cash balances. The scarcity of new issues in recent months has made liquidity challenging and we prefer not to chase it. We think the ETF-led rally of the last few months has left some issues over-valued. The potential for a mild correction has increased and, if one occurs, we will use it as a buying opportunity. We are also monitoring new issues for ones that offer better value than existing issues.
Looking forward to 2018, we believe that most rate reset issues coming due next year will be extended. However, TD Bank, Bank of Nova Scotia, and Bank of Montreal have five series of fixed rate reset issues (and associated floating rate issues) that will likely be redeemed because they are not NVCC-compliant. If the banks choose to refinance with new preferred share issues, they will likely be popular as we have not seen a new bank preferred share issue since July.
For more information about Natixis Canadian Preferred Share Funds, please contact your financial advisor.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.
This release may contain “forward-looking statements” which reflect the current expectations of Natixis Investment Managers Canada LP and/or its sub-advisor, J. Zechner Associates Inc. (“J. Zechner”). These statements reflect the applicable management’s current beliefs with respect to future events and are based on information currently available to such management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements including, without limitation, those listed under the heading “Risk Factors” in the Natixis Investment Managers Canada LP Funds prospectus, which is available on Natixis Investment Managers Canada LP’s website and on SEDAR at www.sedar.com. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this release. Although the forward-looking statements contained in this release are based upon what Natixis Investment Managers Canada LP and/or J. Zechner believes to be reasonable assumptions, Natixis Investment Managers Canada LP and J. Zechner cannot assure investors that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this release and Natixis Investment Managers Canada LP and J. Zechner do not assume any obligation to update or revise them to reflect new events or circumstances.
Natixis Investment Managers Canada LP is the manager of the Fund and is an affiliate of Natixis Investment Managers S.A.