Preferred Shares ETF Drops as Yields Rise on Fed Speculation

June 14, 2013 Leave a comment

Preferred Shares ETF Drops as Yields Rise on Fed Speculation

An exchange-traded fund that mimics a basket of preferred shares is suffering the worst four-day stretch in 20 months amid deepening concern the Federal Reserve will pare unprecedented stimulus.

The iShares S&P U.S. Preferred Stock Index Fund has dropped 5.7 percent from an almost five-year peak on May 8, in the worst four-day rout since October 2011.

Perpetual preferred stocks, whose fixed dividends mean they trade like bonds, have lost 5.6 percent as of yesterday since peaking on May 8, compared with the 1.2 percent drop in the Standard & Poor’s 500 Index (SPX), according to data compiled by Bank of America Merrill Lynch and Bloomberg.Investors in securities from Treasuries (USGG10YR) to emerging-market debt have been rattled as the Fed weighs a pullback from policies that have poured more than $2.5 trillion into the financial system since 2008. Yields on dollar-denominated bonds from the most to least creditworthy borrowers jumped to 3.91 percent yesterday, from a record low 3.35 percent on May 2, Bank of America Merrill Lynch index data show.

Because the asset class is ranked below subordinated debt, “as senior debt got cheap, it got hit,” Peter Tchir, founder of hedge-fund adviser TF Market Advisors, said in an e-mail. “The crowded trade syndrome where outflows hit” sparked price declines, he said.

Investors pulled a record $4.8 billion from U.S. high-yield bond funds last week and $850 million from investment-grade funds, the first weekly redemption since December, according to a Bank of America Corp. report.

Companies have issued $21.1 billion of preferred stock this year, compared with $18.5 billion in the same period of 2012, Bloomberg data show.

The U.S. Corporate & High Yield Index lost 2.6 percent through yesterday since Fed Chairman Ben S. Bernanke told Congress on May 22 the central bank could slow stimulus efforts during its next few meetings if the economy shows signs of sustainable improvement. The S&P 500 fell 3.4 percent in the same period.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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