2018’s secret investment winner

2018 was a bruising year for investors, as traditional asset classes delivered returns that can at best be described as unsatisfactory. Yet, amidst the gloom, an often-forgotten asset class shone through, achieving a solid return of 15%: preference shares.

Pref share performance 2018

Source: Cannon Asset Managers (2019)

The benefits of preference shares

Little-known by most investors, preference shares – like ordinary shares – offer investors the potential for capital growth as their price rises over time. As the name suggests, preference shareholders are given preference over other shareholders in pay-outs, which means that they also offer investors the benefit of a stable income stream in the form of attractive dividend payments.

As the value of dividends is driven by interest rates, preference shares are the only asset class, other than cash, that benefit from rising interest rates. The advantage of this for investors has become particularly clear in recent years where equity markets have underperformed.

Additionally, the income stream from preference shares’ dividend payments is taxed according to dividend withholding tax (DWT), which is currently 20%. Compared to the after-tax yields of bonds, property or cash investments, which are taxed according to investors’ marginal tax rates, this means that preference shares also offer investors relatively attractive tax benefits.

The yield is especially attractive for corporates, which are exempt from DWT. This makes preference shares a great investment option for businesses.

Table 1: Performance over three years

Table

Source: Cannon Asset Managers (2019)

Diversification benefits

The asset class is often overlooked as the preference share universe is relatively small compared to other major asset classes, and the market for preference shares is comparatively illiquid. However, preference shares’ traditionally low correlation with other asset classes means that they offer investors excellent diversification benefits, particularly when paired with asset classes such as bonds or property. And asset allocation and effective diversification are the most powerful ingredients when it comes to investing, playing a key role in ensuring healthy returns through market cycles.

Cannon Asset Managers’ preference share portfolios

While past performance is not a guarantee of future returns, we take all factors into account when building preference share portfolios, focusing on the highest quality and most liquid preference shares.

Our preference share portfolio for private investors thus currently offers a handsome yield of 8.3% after tax, while our institutional preference share portfolio boasts a yield of 10.3% (as corporates are exempt from DWT).

We are also currently one of the few asset managers that offers a preference share solution for investors within a segregated portfolio. The benefits of this approach are that segregated portfolios are uniquely built and customisable for each investor, and they have the benefit of transparency, allowing investors to view all the holdings and financial movements within the portfolio.