NEW LISTINGS: Brompton launched the first ETF holding investment fund (split corp) preferreds Last Thursday Brompton broke ground with the launch of the first ETF holding a basket of preferred share series’ of Canadian split corporations: the Brompton Split Corp. Preferred Share ETF (SPLT). Until now, preferred share ETFs, such as iShares CPD and BMO ZPR, have been focused on the corporate preferred market as opposed to the investment fund preferred market. SPLT offers actively managed, diversified exposure to this relatively small but fast-growing pocket of the industry. Distributions are tax-advantaged with an initial distribution rate of 6.25%.
The Coles Notes on Split Corporations
Structure: Split Corporations are investment funds that are equally “split” into two share classes: preferred shares and class A shares. The funds typically hold high dividend paying equities, largely financials, and some also write options to generate additional income. The dividends/income are paid on the preferred shares in cumulative quarterly payments while all capital gains are applied to class A. As such, the preferred shares are protected from portfolio losses (to a point) with a predefined distribution while the class A shares offer higher risk-reward through leveraged NAV participation.
Benefits of Split Corporation Preferreds: There are numerous characteristics that differentiate split preferreds from traditional corporate preferreds. Some of these include, but are not limited to, redemption/retraction rights resting with the shareholder (not issuer), less interest rate sensitivity, historically less volatility since capital gains are tied to the class A shares.
Landscape: Zooming out, the market for Split Corp Preferreds has been growing at a solid clip with assets up 71% in the past 5 years while the corporate preferred market has waned, partly a result of bank issuers opting for other forms of hybrid financing such as LRCNs. The total AUM in the split preferred market stands at >$5bln across approximately thirty funds, and there are still only handful of issuer including Quadravest, Brompton, Middlefield, Brookfield, Mulvihill and Harvest. The table below lists the top 15 issues listed on Canadian exchanges. (Note: this list does not represent SPLT’s holdings).
One argument we’ve heard is the relative illiquidity of the split preferred market. Important to note, however, that innovative mechanisms have been implemented to enhance liquidity; in particular, most split corporations take advantage of at-the-market (ATM) issuance programs, in which brokers offer newly issued shares in the secondary market at prevailing market prices. Please reach out for more information on this.
