The Canadian Preferred Share market had another strong month in October with the S&P/ TSX Preferred Share Total Return Index (the “Index”)* gaining 1.81%. Series F of Lysander-Slater Preferred Share Dividend Fund (the “Fund”) and Lysander-Slater Preferred Share ActivETF (the “ETF”) outperformed the Index, gaining 2.26% and 2.29%, respectively.
Contributing to performance was an increase in the 5-year Canada bond yield which ended the month 40bps higher at 1.51%, a level not seen since late 2019. Global supply chain issues are affecting many industries, resulting in price increases and inflationary pressures. W e believe that this will persist for the next few quarters and will cause central bankers to begin raising interest rates sometime in 2022 in order to cool inflation.
A further positive catalyst was the cash that was available on October 29, 2021, to investors following the redemption of $1BN 4.85% Toronto Dominion Bank Preferred Shares (TD.PF.H)1. Power Financial (“PWF”) called in its $250MM 6% straight perpetual Preferred Share (PWF.PR.I)2, which will be redeemed for cash on November 22, 2021. This latest redemption call was highly anticipated following the recent $200MM new issue 4.6% straight perpetual Preferred Share by PWF3.
In late October, Royal Bank launched a new type of additional Tier 1 (AT1) capital instrument which was marketed to institutional investors. The new instrument is a fixed reset Preferred Share with a $1,000 par value. It is trading over-the-counter and is eligible for the dividend tax credit. The $750MM deal was priced with a 4.20%4 coupon and was met with very strong demand. Each of the Fund and ETF will hold an approximate weighting of 2.5% in this issue upon closing on November 5, 2021.
We believe that Royal Bank was approaching the upward limit imposed by OSFI in terms of Limited Recourse Capital Note (“LRCN”)issuance. With OSFI’s guidance, the bank chose to raise Tier 1 capital through this new instrument, rather than issue a traditional retail- oriented $25 par value fixed reset Preferred Share. OSFI’s goal is to reduce volatility in Preferred Share trading by establishing an institutional Preferred Share market where issues will trade over-the-counter like a bond. We believe other banks will eventually follow suit, but not until they have exhausted their allowable LRCN issuance limits. Many of the banks still have ample room to issue LRCNs.
We have increased our straight perpetual holdings in each of the Fund and ETF from an approximate weighting of 23% in September to 26% at the end of October. We believe this is an attractive sector given the yield pick-up that it offers at current valuations. We have also positioned both the Fund and ETF with an approximate weighting of 55% in fixed reset and floating rate Preferred Shares that are trading below par value and could benefit from rising interest rates.
The two factors that should help continue to support Preferred Share performance going forward are: 1) a further estimated $8 billion in redemptions by the end of 2022, and 2) rising 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 and the ETF’s performance for the remainder of the year.
*The S&P/ TSX Preferred Share Total Return Index is comprised of preferred shares trading on the Toronto Stock Exchange and is presented on a total return basis.
1, 2. 3. 4. 5 Bloomberg Finance L.P.
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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.
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