Preferred shares are generally less volatile than common shares, but Benjamin Jasmin isn't taking anything for granted in the $384-million National Bank Preferred Equity Income, which he co-manages.
A portfolio manager with Intact Investment Management Inc., Jasmin strives to keep volatility low. To that end, the fund is diversified by issuer and by type of preferred share, and with an emphasis on high-quality issues.
The fund currently holds 125 issues, or more than half of the 209 constituents of its market benchmark, the S&P/TSX Canadian Preferred Share Index.
As of the end of June, the fund's asset mix was almost equally divided between perpetual preferreds that have rate-reset provisions, at 48.3%, and fixed-rate perpetual preferreds at 48.1%. The latter are more vulnerable to rising interest rates. "We are experts in preferred shares, not interest rates," says Jasmin, "so we try to have a balanced approach."
In the hierarchy of capital structure, preferred shares are senior to common equities but rank behind bondholders in claims for distributions and the right to liquidation proceeds in the event of a bankruptcy of a company.
For the preferreds that he holds, Jasmin favours "solid" credit risks. Accordingly, the portfolio holds only investment-grade issues, with the vast majority being high-quality P1 and P2 credits.
More than half of the preferred-share market consists of financial-services issues, and Jasmin's weighting is even higher, at two-thirds of the portfolio. At mid-year, four of the top-10 holdings were bank issues, and another four were issues of the energy utility Enbridge Inc.
Elsewhere, Jasmin's other preferred holdings include Transcontinental Inc., a Montreal-based printing and publishing company. "The printing industry is declining," he says, "but Transcontinental generates a lot of cash flow."
Five years ago, when Transcontinental invested in improved facilities and consequently had to deal with a heavy debt burden, the company made a preferred offering. The Intact team, including Jasmin, conducted extensive research and held several meetings with management before buying the issue three years ago, "when we understood and were comfortable with the strategy."
The fund, which had portfolio turnover of 73% in 2013, is actively managed. "We are always looking for the best product and we have the liquidity to do that," Jasmin says. More frequent trading is done around core positions to take advantage of market inefficiencies and boost the potential yield.
Jasmin, 32, received a bachelor degree from the University of Sherbrooke in 2004. He joined the industry as an analyst in 2005 at Landry Investment Management Inc., a Montreal firm specializing in quantitative investing. At the end of 2005, he moved to Intact Investment Management Inc. (formerly ING Investment Management) and received the CFA designation in 2009.
Jasmin has been involved with National Bank Preferred Equity Income since its inception in November 2007, when it was named Omega Preferred Equity. (The fund was rebranded in May of this year.) He has co-managed the fund since 2013, along with portfolio manager Werner Muehlemann and analyst Jean-Mathieu Gareau.
Along with daily meetings with the equity team of which they are members, Jasmin and his preferred-share colleagues work closely with the fixed-income team. As well, every three months, the preferred-share team attends a credit-committee meeting that includes the common, preferred and fixed-income teams.
Following a relative value approach, Jasmin invests in both new issues and the secondary markets. New issues are not necessarily bargains, he says, adding that more attractive investment opportunities are often more available in secondary markets.
Over the past five years ended June 30, National Bank Preferred Equity Income has a five-year annualized return of 6.7%. that compares favourably with the median 4.8% return in the Preferred Share Fixed Income category, and the 6.2% return of the S&P/TSX Preferred Share Total Return Index, the category's benchmark.
With roughly $60 billion in total assets, says Jasmin, the preferred- share universe in Canada is much smaller than the common-shares and bond markets. As a result, he adds, it's not as widely followed. "We can take advantage of that," he says, with the goal of outperforming the index.
