September 2024: Opportunities for Rotational Shifts in the Preferred and Hybrid Market

Preferred (PFD) and Hybrid securities offer investors compelling diversification and income opportunities in today's volatile interest rate environment.  There are a variety of different structures within the asset class, and we thus wanted to revisit our current exposure and preferences.  The opportunity in fixed-to-float PFDs with large backend resets we highlighted in early 2023 has largely played out as we predicted.  Many of those securities have been called or will be called in the next 12 months.  We currently see value in fixed-to-reset structures which have higher upfront coupons, longer call protections, and/or idiosyncratic features often creating pricing discrepancies.

The PFD/Hybrid asset class is often misunderstood due to the various structures, retail-heavy buyer base, and trading characteristics, thus providing an abundance of alpha opportunities. The PFD/Hybrid asset class has yields and returns comparable to high-yield fixed income yet these securities are typically issued by companies with stronger balance sheets and investment grade credit ratings at the senior level.  Furthermore, having a low correlation with the fixed income and equity markets, today's PFD and hybrid securities have evolved into a distinct and attractive income-generating asset class boasting a variety of structures and serving as a meaningful component of an investment portfolio.

Preferred and hybrid securities are a specialty of Bramshill Investments, differentiating our firm from others in the fixed income investment management arena.