Preferred securities in institutional portfolios

Preferred securities can offer higher income potential compared to other fixed income sectors. Primarily investment grade securities, their low correlation to other fixed income sectors and equities may also strengthen portfolio construction in an uncertain environment. Institutional investors often overlook this hybrid asset class, but we find the fundamentals especially attractive. Market inefficiencies may also provide opportunities to add alpha to fixed income portfolios.

Traditionally known as a retail market segment, we think preferred securities offer many benefits for institutional portfolios, including:
 

• Predominantly investment grade securities that may offer more yield potential
• Inherent market structure inefficiencies create alpha opportunities for active managers
• Lower correlation to other fixed income and equity asset classes
• Reduced interest rate sensitivity through careful security selection
• Strong fundamentals of the banking sector, the largest segment of the preferred universe

Together, these attributes may make preferred securities attractive for institutional investment grade fixed income portfolios seeking to add yield and total return potential, along with the diversification benefits of a lower correlated asset class.