Staying Active with Preferreds

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Staying Active with Preferreds

The Sheaff Brock Preferred Income portfolio is an actively managed strategy, and there are reasons why. With the two-part goal of generating income while preserving capital, Senior Portfolio Manager JR Humphreys utilizes both institutional and retail preferred shares. No question as to which side of the ongoing debate about the merits and shortcomings of active vs. passive management is exemplified in the Preferred Income portfolio.

So, what is the distinction between active management and a passive approach? Passive investors buy an entire index (using either index funds or exchange-traded funds) in an attempt to match its performance. By definition, the investors are accepting not only the holdings in the portfolio—regardless of quality or inherent risks—as well as the weighting (the proportion of each stock or industry chosen by the committee for that index).

In contrast, the active management approach involves an ongoing process of buying and selling individual securities based on fundamental research. As Sheaff Brock portfolio manager Humphreys explains, managing the Preferred Income Portfolio involves being alert to interest rate movements. The active management approach involves an ongoing process of buying and selling individual securities, and interest rate movements are one ever-present consideration in the mix. Preferreds, he reminds investors, are hybrid securities, blending traits of both stocks and bonds, and, like bonds, they are issued at a fixed par value and rated by independent credit agencies.

Active management means constant evaluation, ranking qualified purchase “candidates” by duration, credit rating, yield to call, option-adjusted spread, and liquidity. As manager, Humphreys adds, diversification is always an important factor when adding to—or subtracting from—holdings. While seeking that consistent income flow along with preservation of capital, a variety of sectors need to be analyzed on an ongoing basis, including finance, real estate, banking (both global and U.S.), credit services, utilities, and other industries.

The authors of an Abbot Downing paper Active Versus Passive Investing conclude that while the active/passive debate does not yield a clear-cut solution, “indexes are far from perfect and may not accurately reflect a manager’s strategy or target universe or, for that matter, the investor’s objectives.”

At Sheaff Brock, we agree. When it comes to managing a portfolio of preferred securities, it’s important to stay active!

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