The Canadian Preferred Share market had another strong quarter in Q4, 2024 to finish off a strong year in Preferred Shares, with the S&P/TSX Preferred Share Total Return Index (the “Index”) up 3.5% in Q4, and 24.7% for the year. Series F of Lysander-Slater Preferred Share Dividend Fund (the “Fund”), and Lysander-Slater Preferred Share ActivETF (the “ETF”), (Ticker “PR”), were up 3.3% in Q4, and 23.8% for the year respectively, on a total return basis.
The Bank of Canada (“BoC”) continued with quantitative easing in Q4 by cutting the overnight rate by 50bps twice to 3.25% each time, meanwhile the U.S Federal Reserve (“Fed”) continued to lower rates as well, albeit at a slower pace by reducing their overnight rate twice by 25bps each time, putting the overnight rate in the range of 4.25% – 4.5%. Bond yields rose in Q4 since U.S economic and inflation numbers came in stronger than markets were anticipating by the end of Q3. By year end, the CAD 5-year bond yield finished at 2.98%.
Several factors contributed to the strength in the Canadian Preferred Shares market all year. Firstly, continued Preferred Share redemptions of over $800MM led to investors reinvesting some of the proceeds back into the secondary market. This included a surprise redemption from Fairfax Financial as they announced they would be redeeming their $150MM issue of FFH.PR.C & their $100MM issue of FFH.PR.D in lieu of issuing cheaper corporate bonds1. For the year, over $6.4 billion of listed Preferred Shares were announced for redemption which had a positive effect market performance 2.
Another factor that contributed to positive performance is the attractive yield that Preferred Shares are offering as investors have been flocking back into fixed income assets over the past few quarters. Straight Perpetuals yield in the high 5’s to mid 6% levels, while over half the fixed rate reset market has been reset in this higher interest rate environment (since early 2022). Currently, mid level investment grade product like Enbridge, Pembina, Brookfield, are yielding 6.5%-7.5% while roughly 27% of fixed rate resets will be reset in 2025 which we believe will be beneficial for the market if rates can stay relatively high.
Heading into 2025 we expect the Bank of Canada and the U.S Fed to continue to slowly cut interest rates which will be dependent on the strength of inflation and economic numbers in both Canada and the U.S. As such, we continue to position the portfolios in high yielding securities that have already been reset, or in positions that still offer attractive yields upon reset even if the 5-year bond yield were to drop to the 2.5% range. We believe the Fund and ETF’s positioning, along with an approximate weighting of 27% in high spread $1000 Preferred Shares will help mitigate market volatility going forward.
We also expect approximately $4.3 billion of Preferred Share redemptions in 2025 will continue to have a positive affect on market performance. As such, we are excited about the Fund and ETF’s positioning and the outlook for Preferred Shares in 2025.The risk to our outlook is that a severe recession occurs, resulting in extreme downward pressure on bond yields and financial markets in general.
1, 2 Bloomberg Finance L.P.
