Looking at Preferred Securities as a High-Quality, High Yield Alternative to Address Income-Oriented Investment Goals
Mark Goodwin, Chief Executive Officer of North Square Investments, discusses the strategies Red Cedar Investment Management believes will enable investors to address their income-oriented investment goals with Red Cedar Investment Management’s Chief Investment Officer John Cassady, Director of Portfolio Management David Withrow and Senior Portfolio Manager Brandon Bajema.
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This podcast was recorded February 27, 2023. The opinions expressed herein are those of North Square Investments, LLC (North Square) and are subject to change without notice. The opinions referenced are as of the date of publication/distribution, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward looking statements cannot be guaranteed. The discussions in our podcasts are for general informational purposes only and should not be considered as investment advice. The inclusion and performance of specific investments discussed represent only a sample of North Square’s Fund investments, and do not represent North Square’s Fund investments or performance as a whole. A complete list of North Square’s holdings is available upon request. There is no guarantee that any investments discussed at the time of this podcast will remain in North Square’s Fund(s). Past performance is not indicative of future results. It should not be assumed that any of the securities or companies discussed have been or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. Nothing discussed herein constitutes an offer or recommendation to buy or sell a particular security or investment strategy. North Square reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no guarantee that North Square’s assessment of investments will be correct. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not take into account any specific investment objectives or risk tolerance you may have. Some information contained herein derives from third-party sources North Square believes to be reliable; however, accuracy and completeness cannot be guaranteed. Some material discussed represents an assessment of the market environment regarding a specific security or industry at a particular point in time and is not intended to be a forecast of future events or a guarantee of future results. The investment strategy or strategies discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. No assurance, representation, or warranty is made by any person that any of North Square’s assumptions, expectations, objectives and/or goals will be achieved. Nothing contained in the document many be relied upon as a guarantee, promise, assurance, or representation as to the future. This discussion, including any hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. North Square is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about the companies’ investment advisory services can be found in their respective form ADV, which are available upon request.
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Definitions of terms used in this podcast:
Quantitative easing / tightening: For two years after the onset of the COVID-19 pandemic, the Federal Reserve bought over $4 trillion in assets, mostly U.S. Treasurys and mortgage-backed securities, to help stimulate the economy. The Fed finally stopped purchasing bonds in March 2022 as it began to pivot toward slowing inflation. Fed officials “generally agreed” to selling $60 billion in Treasury securities and $35 billion of mortgage-backed securities each month, according to Fed Policy meeting minutes, a process known as quantitative tightening.
Core CPE Price Index (core PCE deflator): The “core” PCE price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.
Alpha: measures the amount that the investment has returned in comparison to a market index or other broad benchmark that it is compared against. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.
Yield Curve: The yield curve is a line/graph that plots interest rates or yields of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
S&P 500 Index: The Standard & Poor’s 500 Index tracks the value of 500 corporations that have their stocks listed on the New York Stock Exchange (NYSE) and the Nasdaq.
Bloomberg US AGG Index: The Bloomberg U.S. Aggregate Bond Index, or the ”Agg,” is a broad base, market-capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.
Bloomberg High Yield Index: The Bloomberg USD High-Yield Corporate Bond Index is a rules-based, market-value-weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable and corporate bonds.
Correlations: Correlation is a statistic that measures the degree to which two securities move in relation to each other. Non-correlated assets are assets whose values aren’t correlated with returns of another.
Fixed-to-float securities: Fixed-to-float securities are bonds that pay a defined coupon for a given period of time, and subsequently “float” or change what they pay based on some other criteria, which is very specifically stated in the indenture or agreement.
Variable rate instruments: Variable rate debt primarily consists of debt securities with nominal long-term maturities in which the interest rate is reset on a periodic basis; for example, daily, weekly, monthly, annually or commercial paper periods up to 270 days.
AT1s: also known as contingent convertible securities, are debt or preferred securities with loss absorption characteristics that provide for an automatic write-down of the principal amount or value of securities or the mandatory conversion into common shares of the issuer under certain circumstances. A mandatory conversion might be automatically triggered, for instance, if a company fails to meet the capital minimum described in the security, the company’s regulator makes a determination that the security should convert, or the company receives specified levels of extraordinary public support. Since the common stock of the issuer may not pay a dividend, investors in these instruments could experience a reduced income rate, potentially to zero, and conversion would deepen the subordination of the investor (worsening the Fund’s standing in a bankruptcy). In addition, some AT1s provide for an automatic write-down of capital under such circumstances.
Convexity: Convexity is a measure of the curvature in the relationship between bond prices and interest rates. Convexity reflects the rate at which the duration of a bond changes as interest rates change.
Duration: indicates the years it takes to receive a bond’s true cost, weighing in the present value of all future coupon and principal payments.
Par: The “par value” of a bond is the amount of money that bond issuers agree to repay to the purchaser at the bond’s maturity. A bond is basically a written promise that the amount loaned to the issuer will be paid back.
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