Diversify Your Search for Income
October 25, 2018Adding Preferreds to Income Portfolios
In today’s low yield environment, many income seekers are diversifying into Emerging Market Debt, High Yield Debt, Senior Loans and Dividend Paying Stocks. As with any investing, income investing can benefit from diversification.
The table below shows historical correlation between preferreds and other popular income producing asset classes. Each of these asset classes brings its own risks and potential rewards. Mixing them effectively can help diversify the sources of yield or income in an investor’s portfolio and may help reduce volatility of the portfolio over time.
Preferred securities offer the highest yields available on fixed income securities issued by investment grade companies and can be an excellent diversifier for investors seeking current income potential. Along with their credit quality characteristics and relatively high income, preferreds also bring historically low correlations compared to other asset classes.
Asset Class Correlations to Preferred Securities
February 28, 1997 to September 30, 2018
| Taxable Preferreds | Long U.S. Corporate Bonds | High Yield Bonds | Municipal Bonds | S&P 500 | Leveraged Loans | EM Debt (USD) | 30 Year Treasuries | |
| Taxable Preferreds | 1.00 | |||||||
| Long U.S. Corporate Bonds | 0.57 | 1.00 | ||||||
| High Yield Bonds | 0.51 | 0.50 | 1.00 | |||||
| Municipal Bonds | 0.43 | 0.62 | 0.26 | 1.00 | ||||
| S&P 500 | 0.33 | 0.21 | 0.62 | -0.01 | 1.00 | |||
| Leveraged Loans | 0.33 | 0.24 | 0.77 | 0.18 | 0.44 | 1.00 | ||
| EM Debt (USD) | 0.33 | 0.51 | 0.64 | 0.28 | 0.57 | 0.37 | 1.00 | |
| 30 Year Treasuries | 0.14 | 0.66 | -0.17 | 0.51 | -0.24 | -0.37 | 0.07 | 1.00 |
Taxable Preferreds: Refers to 50% ICE* BofAML 8% Capped Hybrid Preferred Securities Index (P8HO) + 50% ICE* BofAML 8% Capped Corporate US Capital Securities Index (C8CT) prior to 4/30/2012 and thereafter to the ICE* BofAML 8% Constrained Core West Preferred & Jr Subordinated Securities Index (P8JC).
Long Corporate Bonds: Refers to the Barclays Long U.S. Corporate Index, which is a subset of the Barclays U.S. Corporate Investment Grade Index that contains publicly issued U.S. corporate securities and global issues that are SEC-registered. The index includes investment grade fixed rate securities in the industrial, utility, and finance sectors.
High Yield Bonds: Refers to the Barclays U.S. Corporate High Yield Index which is an unmanaged market value-weighted index that covers the universe of fixed rate, non-investment grade debt.
EM Debt (USD): Refers to the Barclays Emerging Markets (U.S. Dollar) Index. Municipal Bonds: Refers to the Barclays Municipal Bond Index which is a market capitalization-weighted index of investment-grade municipal bonds with maturities of at least one year.
Leveraged loans: Refers to the Credit Suisse Leveraged Loan Index, which is an index designed to mirror the investable universe of the $USdenominated leveraged loan market. The index inception is January 1992.
30 Year Treasuries: Refers to the Citigroup 30 Year Treasury Benchmark Index which measures the total return for the current 30 year on-the-run Treasury that settles by the end of the calendar month.
S&P 500 Index Refers to the capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses.
The correlations are calculated using the monthly returns since February 28, 1997 to July 31, 2018. The index returns do not reflect any fees or expenses and do not include the effect of any cash reserves.
*The benchmarks from ICE Data Indices, LLC (“ICE Data”) are used with permission. ICE Data, its affiliates and their respective third party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ICE Data, its affiliates nor their respective third party providers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an “as is” basis and your use is at your own risk. ICE Data, its affiliates and their respective third party suppliers do not sponsor, endorse, or recommend Flaherty & Crumrine Incorporated, or any of its products or services.