Preferred Securities

In times of market crisis, similar to what we are now experiencing, most preferred securities act more like common stock than fixed income.  As a result, preferred securities miss the upward price appreciation that common stocks enjoy but are exposed to the downward declines.  These investments that are traditionally thought of as income-producing vehicles have lost significant value, performing far below their income generating alternatives.

Preferred stocks are traditionally marketed to risk averse and income seeking investors.  The driving appeal of preferred stocks is the return from dividend payments.  However, many preferred shares are callable, meaning that the issuing company can repurchase the shares at par value and pay no further dividends.  If interest rates fall then companies have an incentive to call the security so preferred shares carry an inherent interest rate risk.  Other risks are associated with the credit of the issuer, the potential for overconcentration in specific industries, and lower liquidity than common stock.

The $200 billion preferred stock industry has significant industry sector concentration risks.  Companies can carry preferred stocks as equity on balance sheets so many regulated entities, such as insurance and financial institutions, choose to issue preferred stock instead of traditional debt.  Nearly 72% of all preferred stocks come from the banking industry, insurance industry, or other financial service industry.  Only a carefully constructed preferred stock portfolio can avoid the associated concentration risk.

Preferred stocks are a hybrid of debt and equity investments.  Like traditional debt, preferred stocks carry preference over common stock for dividend payments and bankruptcy proceedings.  Also like debt investments, preferred shares offer a fixed dividend payment similar to bonds.  However, like equity, preferred stock can fluctuate in value, especially when the value of the issuing firm is low.  Preferred stocks are given ratings similar to bond ratings but preferred ratings are almost always lower than bond ratings because preferred securities do not have the same guarantees for interest payments.

Investors holding preferred securities in their portfolios may have noticed drops in the investment values.  If your financial advisor recommended a portfolio concentrated with preferred securities and your portfolio has incurred damages, you may be able to recover your losses.  Please contact Peter Mougey at Levin, Papantonio for a free consultation.

Investors holding preferred securities in their portfolios may have noticed drops in the investment values.  If your financial advisor recommended a portfolio concentrated with preferred securities and your portfolio has incurred damages, you may be able to recover your losses.  Please contact Peter Mougey at Levin, Papantonio for a free consultation.