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Manulife Preferred Securities Income Fund

Unique investment offering dividend and return potential

What are preferred securities?

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Potentially attractive yields with strong credits

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Relatively low default rate

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What are preferred securities?

 
  • Issued by corporates, preferred securities rank between senior bonds and common stocks in the capital structure1 of a corporate. They can be broadly classified into two types – preferred bonds and preferred stocks:
 
  • Preferred bonds: Have features similar to bonds with regular interest payments2, maturity dates and credit ratings, and no witholding taxes for non-US investors.
 
  • Preferred stocks: Generally with fixed dividends unaffected by the company’s profits and paid before the dividends for common stocks; yet mostly without any attached voting rights. 
 
  • In the event of corporate financial distress or a bankruptcy, a company’s preferred securities are ranked lower than traditional bonds but higher than common stock.
 
  • Preferred security issuers are mainly large and highly-regulated institutions including banks, insurance companies, utilities and REITs.

 

Priority of dividends and claims
Priority of dividends and claims

1 Capital structure means that a corporate raises fund through issuing securities such as stocks, bonds and hybrid securities.

2 Preferred securities issuers pay a dividend or interest to the holders, in two categories: cumulative and non-cumulative. For cumulative preferred securities, if the issuer does not pay a dividend on time, the dividend payable will accumulate and later, the holders are entitled to these cumulative dividends prior to common stock holders. For non-cumulative preferred securities, if the issuer cannot afford to pay the dividend in full, the holders of preferred securities have no right to claim the remaining part of the dividend in the following years. For illustrative purposes only.

 

Potentially attractive yields with strong credits

 
  • Unlike the high yield space which is dominated by energy sectors, preferred securities issuers are usually large and highly regulated institutions and/or companies with stable cash flows such as banks, utilities and real-estate investment.
 
  • When market fears ease, investors will look to higher yielding asset classes for income, with a focus on higher quality investments.
Yield to maturity as at 31 December 2021
Yield to maturity as at 31 December 2021

Source: Bloomberg. As of 31 December 2021.

Preferred markets are represented by the ICE BofAML US All Capital Securities Index (I0CS). US High Yield are represented by ICE BofAML US High Yield Index (HOAO). BBB Global Corp is represented by ICE BofAML BBB Global Corporate Index; US Treasuries are represented by ICE BofAML US Treasury & Agency Index (G0A0). For illustrative purposes only. Past performance is not an indication of future results. The above yield to maturity does not represent the distribution yield of the Fund and is not an accurate reflection of the actual return that an investor will receive in all cases. A positive distribution yield does not imply a positive return.

 

Relatively low default rate

 

Most preferred securities are issued by well-known corporates such as large banks and insurers, with high credit quality. Historically, the default rate of preferred securities was much lower than global high yield bonds.

Average long term default rates (1990 – 2020)
Average long term default rates (1990 – 2020)

Source: Default rates for global high yield bonds and global investment grade bonds are sourced from Moody’s Investor Services, as of 31 December 2020.

Default rates for preferred securities for the periods of 1990-2017 were sourced from Wells Fargo. Starting from 2018 default rates for preferred securities were calculated by Manulife Investment Management based on ICE BofAML US All Capital  Securities Index. As of 31 December 2020. Past performance is not indicative of future performance.

 

Contact your unit trust adviser or call our Customer Service at 03-2719 9271 for more information.

 

 

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