Brompton Preferred Shares offer investors unique and valuable features:
- Periodic dividend resets at attractive market yields, without complicated reset formulas
- Shareholder’s option to redeem at end-of-term, with no restrictions
Corporate rate-reset preferred shares generally don’t offer these features. Approximately 76% of the Preferred Share Index is comprised of rate-reset preferred shares1.
Brompton Preferred Shares have outperformed the Preferred Share Index by 11.4% since February 2015, with 72% less volatility.
Why do reset formulas matter?
Corporate rate-reset preferred share dividend yields are reset periodically as the sum of: 1) the then-current base interest rate (usually the Gov’t of Canada 5-yr bond yield); and 2) a “spread” to account for the issuer’s credit risk. Market demands for increasingly higher reset spreads produced negative returns for many corporate rate-reset preferred shares in the period from mid-2014 leading up to early 2016 (representing “spread risk”). Certain preferred share trading prices declined by more than 50% during that time.
Brompton Preferred Share dividends are reset by the Manager every 5 years at competitive all-in market rates based on dividend yields observed in the preferred share market at the time of reset. This simple process effectively resets BOTH the base rate AND the spread for the preferred shares offered by our funds, mitigating spread risk for investors.
Why do retractions matter?
Typically, rate-reset preferred shares are only redeemable at the issuer’s option; when issuers redeem, this is usually ideal for the issuer, but not for the investor. Brompton Preferred Shares are retractable at the shareholder’s option at the end-of-term, providing support for the market price, and giving flexibility to shareholders.