The Canadian Preferred Share market had another solid month in August with the S&P/TSX Preferred Share Total Return Index (the “Index”) up 1.06%. Series F of Lysander- Slater Preferred Share Dividend Fund (the “Fund”) and Lysander-Slater Preferred Share ActivETF (the “ETF”) were in line with the Index at 1.05% and 1.08%, respectively.
The Limited Recourse Capital Note (“LRCN”) market saw one new issue in August, with Great West Life Financial (GWO) launching its first note. The $1.5 billion 3.60% issue was 2x oversubscribed, and takes the total LRCN market capitalization up to approximately $15.5 billion1. In light of this new issue, we believe that GWO is likely to call in some of its high-coupon straight perpetual issues, including its $194 million 5.9% GWO.PR.F and its $150 million 5.8% GWO.PR.M.
During the month, Sun Life Financial surprised the marketplace2 by calling in its $400 million 4.75% SLF.PR.A and its $350 million 4.80% SLF.PR.B straight perpetual issues. We believe that Sun Life Financial called these issues for redemption in response to the $1 billion 3.6% LRCN that it issued this past June. The cost-benefit of redeeming Preferred Shares and issuing LRCNs (a relatively cheaper financing instrument) continues to be advantageous for issuers.
Year-to-date, nearly $7.8 billion in Preferred Shares has been called, with an additional estimated $2 billion to be called by year end3.
The 5-year Canada bond yield (the benchmark rate for resetting coupons on fixed resets) was volatile in August, fluctuating between 0.73% and 0.92%. The 5-year yield finished the month at 0.84%, up modestly from 0.80% at the end of July. The volatility was attributed largely to higher than expected job creation in the U.S. in July, and the uncertainty that rising delta variant Covid-19 cases would have on a global economic recovery.
Over the past several quarters, we have positioned the Fund and ETF to benefit from an eventual increase in interest rates. In particular, we see opportunities in discounted fixed- reset and floating-rate Preferred Shares. Recently, we’ve modified our position in fixed- resets with spreads between 225-300 bps, and with spreads under 225 bps, taking their total weighting in the Fund and the ETF to approximately 38% and 13%, respectively. We also continue to look at attractive straight perpetual issues that have underperformed the market year-to-date, but offer compelling yields in the 4.5%-5.5% range.
The two factors that should help support Preferred Share performance going forward are: 1) a further estimated $9 billion in redemptions by the end of 2022, and 2) higher interest rates. As an active manager, we continually seek out the best opportunities in the Preferred Share market. With multiple positive catalysts on the horizon, we are optimistic about the Fund’s and the ETF’s performance for the remainder of the year.
1, 2. 3. Bloomberg Finance L.P.
This document has been prepared jointly by Lysander Funds Limited (“Lysander”) and Slater Asset Management Inc. (“Slater”) solely for information purposes. Information in this document is not intended to constitute legal, tax, securities or investment advice and is made available on an “as is” basis. Neither Lysander nor Slater make any warranties or representations regarding the information herein. Information in this document is subject to change without notice. Neither Lysander nor Slater assume any duty to update any information herein. Certain information in this document has been derived or obtained from sources believed to be trustworthy and/or reliable. Neither Lysander nor Slater assume responsibility for the accuracy, currency, reliability or correctness of any such information.
Lysander is the investment fund manager of Lysander-Slater Preferred Share Dividend Fund and Lysander- Slater Preferred Share ACTIVETF (collectively, the “Funds”). Slater is the portfolio manager of the Funds.
In this document, “we”, “us”, and “our” means Slater.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. The indicated rates of return are historical annual compounded total returns including changes in 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. Different series may have different fees payable which may result in series of the same fund having a different rate of returns. You will usually pay brokerage fees to your dealer if you purchase or sell units of the ETF on the Toronto Stock Exchange (“TSX”). If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them.
This document may contain forward-looking statements. Statements concerning a fund’s or entity’s objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition are forward looking statements. The words “believe”, “expect”, “anticipate”, “estimate”, “intend”, “aims”, “may”, “will”, “would” and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward- looking statements contain these identifying words. These forward- looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from current expectations. Readers are cautioned not to place undue reliance on these forward-looking statements. While Lysander and Slater consider these risks and uncertainties to be reasonable based on information currently available, they may prove to be incorrect.
Nothing in this document should be considered a recommendation to buy, sell or short a particular security. Any specific securities discussed are intended as an illustration of the portfolio manager’s security selection process. A fund may sell these securities at any time, or purchase securities that have previously been sold. The securities or short positions may increase or decrease in value after the date hereof, and a fund may accordingly gain or lose money on the investment in the securities. The statements by the portfolio manager in their commentaries are intended to illustrate their approach in managing the funds, and should not be relied upon for any other purpose.
The source of all S&P/TSX Indexes is TSX © Copyright 2021 TSX Inc. All Rights Reserved.
®Lysander Funds is a registered trademark of Lysander Funds Limited.