The Lemon Fool

Over the last few months I have been drip-feeding funds into higher yielding equities and investment trusts (of various kinds). In one sense, this tactic has paid off, in that I've been getting cheaper prices (and therefore higher yields) with each subsequent round of purchases. In another, I might have been better off just keeping the powder completely dry and sitting tight.

A possible alternative strategy would be to deploy the capital into bank and insurance prefs (as well as PIBS). The rationale for this approach is that they mainly yield around 7-7.5%, which is above both inflation and short-term gilt rates (or bank deposits). The likelihood is that many of the available options will be called before 2026 via tenders and when/if that happens, investment trusts and equities could have bottomed out. I can see a few risks with this line of reasoning, one of which being that inflation resumes it's upward trajectory which could cause pref yield to increase if base rates look like they might head up also. Has anyone else had similar thoughts about the strategy and/or the risks?

One other potentially related observation. The average yield on most conventional bank and insurance prefs seems to have coalesced somewhere around 7.25%. This is 2% above base rates (5.25%). Two years ago in 2021, the spread was something like 4-5% - which was roughly where it has been since 2014 or so (when concerns over bank failures began to abate). My recall of the period prior to 2007-2008 is sketchy, but the current differential seems comparable to the valuations of most prefs and PIBS from that era. Is the yield for prefs currently mis-priced or have we simply reverted to the mean?

ignotus20 wrote: Is the yield for prefs currently mis-priced or have we simply reverted to the mean?

One way of looking at these is to go back to the oriiginal issue date, given that they were issued at or around par. The relationship between the coupon and the yield at the time on longer dated Gilts gives an indication of the premium then demanded by investors.

ignotus20 wrote:Over the last few months I have been drip-feeding funds into higher yielding equities and investment trusts (of various kinds). In one sense, this tactic has paid off, in that I've been getting cheaper prices (and therefore higher yields) with each subsequent round of purchases. In another, I might have been better off just keeping the powder completely dry and sitting tight.

A possible alternative strategy would be to deploy the capital into bank and insurance prefs (as well as PIBS). The rationale for this approach is that they mainly yield around 7-7.5%, which is above both inflation and short-term gilt rates (or bank deposits). The likelihood is that many of the available options will be called before 2026 via tenders and when/if that happens, investment trusts and equities could have bottomed out. I can see a few risks with this line of reasoning, one of which being that inflation resumes it's upward trajectory which could cause pref yield to increase if base rates look like they might head up also. Has anyone else had similar thoughts about the strategy and/or the risks?

One other potentially related observation. The average yield on most conventional bank and insurance prefs seems to have coalesced somewhere around 7.25%. This is 2% above base rates (5.25%). Two years ago in 2021, the spread was something like 4-5% - which was roughly where it has been since 2014 or so (when concerns over bank failures began to abate). My recall of the period prior to 2007-2008 is sketchy, but the current differential seems comparable to the valuations of most prefs and PIBS from that era. Is the yield for prefs currently mis-priced or have we simply reverted to the mean?

Yes, it's annoying to buy and then see the price fall. If they have a decent yield at least one is receiving a divi.

I am still putting funds into Prefs. This morning, more RSAB. Currently we have c20% of our assets in Prefs, and will be adding. Largest holdings NWBD, INVR, AV.A/B, GACA/B, BWRA.
Barring some unforeseen crisis, I do not expect higher inflation, so in terms of SP over the next couple of years the only way is up.
Says he...
If concentration bothers you, an analogue could be FI-heavy ITs - NCYF, SHRS, BIPS - and I have money in all those, but it does dilute the Prefs focus which for me is presently compelling.

The spread... I think it hard to draw conclusions from a period of unprecedented low rates and QE distortion. I recall yields of 8%, but I do not think the mainstream Prefs will reach that level now.

V8

Yes, it's annoying to buy and then see the price fall.

Ha - the old fixed income mirage of expecting prices to trend upwards whereas, in reality, they can only fart around some fixed point constrained by a fixed return on a fixed nominal amount of capital.

My view is that rational investing in (non-distressed) fixed income can only be on the basis of growing income rather than capital over time. Back in mid 2021, when base rate was reduced to near zero, we all knew that market prices of prefs, PIBS etc could only fall but couldn't have our cake and eat it by selling and maintaining income.

In fact, the falling prices since, have presented many more opportunities than when prices were higher to increase income through the relative value trading opportunities arising from uneven falls between different issues. For example, earlier this year I managed to switch a load of my HALP bought at higher prices into HALB (so both PSB's of the same issuer) exiting a 6.1% yield to buy a 8.5% yield so increasing income by about 39%.

I hold bank and insurance prefs as well as Pibs. There is talk on this forum that these could be called or tendered in 2026. All my Pibs are irredeemable according to the prospectus. Should I worry about a potential call or tender?

Sniktaw1 wrote:I hold bank and insurance prefs as well as Pibs. There is talk on this forum that these could be called or tendered in 2026. All my Pibs are irredeemable according to the prospectus. Should I worry about a potential call or tender?

They can tender, even if irredeemable. Whether you want to accept their kind offer or not (and if the offer really is all that kind) are different questions.

Sniktaw1 wrote:I hold bank and insurance prefs as well as Pibs. There is talk on this forum that these could be called or tendered in 2026. All my Pibs are irredeemable according to the prospectus. Should I worry about a potential call or tender?

The purpose of any business is to raise capital from investors at a low share price, run a successful business, pay dividends, and finally return capital to investors at a high share price. Less risky investments promise return of capital at predetermined times -- a redemption date or maturity date.


-Permanent Interest Bearing Shares are deferred shares governed by the Building Societies Act 1986, as amended. They generally are perpetual which means the holder has no way of getting his money back other than the market.

-Prefs are shares governed by the Companies acts, and if irredeemable then they are issued without any redemption date for the holder, much like ordinary shares.


Both of these situations are a negative for the investor. They mean the investor has no prospect of return of his capital short of accessing the market. A call or tender therefore should be welcomed, the latter especially because it will often be on favourable terms for the investor.



GS