January 26, 2021
Bond yields are still low, meaning traditional income-generating assets just aren’t cutting it for many investors. Enter preferred stocks and the actively managed
PREF can act as a portfolio diversification tool and reducer of correlations. Another advantage of PREF’s active management is that the managers can look for value in an asset class that has been expensive for much of this year.
Preferred stocks are a type of hybrid security that show bond- and equity-like characteristics. The shares are issued by financial institutions, utilities, and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Additionally, preferred stocks issue dividends on a regular basis, but investors don’t usually enjoy capital appreciation on par with common shares.
Investors are pencilling in higher inflation. US inflation expectations, as measured by the ten-year breakeven rate (the gap between the yield on the ten-year Treasury bond and the rate on its inflation-linked counterpart) recently went above 2% for the first time since 2018, says John Detrixhe for Quartz. That’s “not exactly Argentina-style hyperinflation”, but it marks a big increase since last March, when the breakeven rate slumped to 0.5%.
An inflationary spring
Renewed lockdowns mean that inflation remains subdued for the time being. The annual rate of consumer price inflation in the UK (CPI) is just 0.6%. In America consumer prices rose by 1.4% last month on a year before.
The Problem With Analysts Forecasts
We can’t predict the future. If we could, fortune tellers would all win the lottery. They don’t, we can’t, and we aren’t going to try. However, this doesn’t stop the annual parade of Wall Street analysts from putting out forecasts on the S&P 500.
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The Problem With Forecasts
In reality, all we can do is analyze what has happened in the past, weed through the noise of the present and try to discern the possible outcomes of the future.
“Maybe this time is different. Those words, supposedly the most dangerous to utter in the investing realm, came to mind amid the frenzied pops in the highly anticipated initial public offerings recently.” That quote was from Randall Forsyth discussing why the current market mania reminds him of the
There are certainly many similarities between today and 1999. From exceedingly high valuations to a rush by private equity investors to IPO overly priced companies as quickly as possible, prices are high. Of course, such is not possible without an underlying
“Fear Of Missing Out, or F.O.M.O.” by retail investors.
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