PGI offers exposure to the fixed income asset class through specialist US boutique manager Spectrum Asset Management and its intermediate duration total return fund.
Preferred securities or preference shares are fixed income investments that are junior to senior debt but may carry priority over common stock in the payment of dividends and in the event of liquidation.
PGI operates in the trust-preferred securities space which are issued predominantly by financial services companies who issue them as part of their tier one capital requirements. It is currently seeing £3.2m inflows weekly into the asset class.
Brown says: “I spend half my time educating businesses. Over this year I have had some meetings with some very large asset management businesses who have never dealt with preference securities and do not understand them so I have to meet their asset allocators before I can meet the fund managers. The key bit is the filtering of knowledge.”
Principal’s key focus are multi-managers and the private banks. Brown acknowledges that “preferreds” are not a mainstream play for IFAs and their clients but says they are the “icing on the cake” for investors looking for extra yield, with default rates significantly lower than high yield corporate bonds.
He says: “It is amazing how many people will jump from investment grade to high yield with the associated risk characteristics thinking they are a lot more correlated than they actually are when they could go to preferreds which offer similar levels of return and yield without the default characteristics.”
Thames River Capital co-head of multi-manager Rob Burdett says the firm does not currently hold any specialist funds in preferred securities.
He says: “Although from time to time certain bond and equity managers will use preferred securities it is not something we feel that we want to make a specific judgement on and would rather leave it to the bond and equity managers to make judgement between whether the value is in a preferred share or a straight equity or bond. For us it would be an extremely niche area, we never say never but we do not have any intentions at the moment to look directly at that area.”