Issued by corporates, preferred securities rank between traditional bonds and common stocks in the capital structure of a corporate. In the event of corporate financial distress or a bankruptcy, a company's preferred securities are senior to common stock but subordinated to traditional bond.
The preferred securities issuers are usually large and highly regulated institutions and/or companies with stable cash flows such as banks, utilities, and real-estate investment trusts (REITs).
The average credit rating of preferred securities is BBB-, an investment grade (IG) rating.
Banks, insurance companies and financial services
Bank of America Corporation, HSBC Holdings, Morgan Stanley, MetLife Inc.
Dominion Energy Inc., DTE Energy Company, NextEra Energy Capital Holdings Inc.
Vodafone Group Inc., Ford Motor Company, Brunswick Corporation
With an average investment-grade rating, preferred securities now offer around 7.6% yield, the highest level in the past decade. Thanks to the higher credit spread, during the period of higher inflation over past 20 years3, preferred securities generally held up well with positive returns above US IG corporate bonds and US treasuries.
Yield of preferred securities rose to historical high levels4
Predominated by fixed-to-floating rate securities, preferred securities are less sensitive to rising interest rates (i.e. shorter duration) compared to other investment-grade bonds. Fixed-to-floating preferreds can offer coupon protection from rising rates as the variable coupon type securities can capture higher coupon when rates rise.
Duration of investment-grade fixed income assets5
Preferred securities are well positioned to help buffer economic slowdown as over 90% of preferred issuers are rated as investment grade and are generally well-established, high-quality companies with solid balance sheets. Historically, the default rate of preferred securities was much lower than US high yield bonds.
Average long term default rates (1994-2022)6
Manulife Preferred Securities Income Fund aims to offer monthly distributions with potential capital growth. Compared to broad preferred market, the Fund is more diversified positioned, with focus on utilities, energy and financials sectors, which are better-positioned in a high inflation and low growth environment.
The Fund adopts dynamic strategies to respond to the changing macroeconomic environment by flexibly allocating into various types of preferred securities, e.g., institutional/retail, fixed-to-floating/fixed and convertible/nonconvertible. The Fund also actively manages portfolio duration in accordance with the interest rate cycle.
(The distribution yield is not guaranteed. Distribution may be paid out of capital. Refer to Important Note 2.)
For illustrative purposes only and does not represent the actual investment.
Investment experience by the US based lead manager
Global fixed income investment experts8
USD 4.5 billion
AUM in preferred securities, one of the key players in the market9