Principal Asset Management is betting on preferred securities to boost returns on its multi-asset portfolios, considering the bond/stock hybrid the best strategy to tackle a potentially brief and light economic recession.
(Bloomberg) — Principal Asset Management is betting on preferred securities to boost returns on its multi-asset portfolios, considering the bond/stock hybrid the best strategy to tackle a potentially brief and light economic recession.
Preferred securities “give a significant yield advantage over core bonds, but it’s more attractive than high-yield in terms of risk,” said Todd Jablonski, the US money manager’s chief investment officer of asset allocation. The firm is also overweight US fixed income and underweight equities.
Preferred securities share attributes of stocks and bonds and sit between the two in the capital structure, meaning holders are paid after creditors but before stock investors when a company is liquidated. As such, the hybrid instrument typically offers higher yields than government and high-grade corporate debt but with more downside protection than stocks.
Jablonski said he anticipates a shallow, short recession to begin later this year. “The US economy is like a big battleship. It takes quite a bit to slow it down and will take quite a bit to get it back going again.” He didn’t give details on specific targets of the firm’s preferred securities investment.
Preferred securities have been a winning trade so far this year as investors balance a modest rebound in stocks and bonds against uncertainties over the US economy and monetary policy. Jablonski’s views echo those of economists and investors who see signs of a resilient US labor market and cooling inflation as bolstering the case for a quick and mild economic contraction ahead.
An ICE Bank of America index of core-plus US fixed-rate preferred securities that includes issues from JPMorgan Chase & Co. and Wells Fargo & Co. has jumped 12% this year. That’s more than six times the return on the Bloomberg US Aggregate bond index and well above the S&P 500’s 7.8% gain.
“The yields are in junk bond territory but they’re in a higher quality cash flow than junk bonds,” said Michael Mullaney, head of research for Boston Partners, referring to preferred securities. “People want more yield again. They want to lock up yield for a longer period of time instead of just doing a money market fund.”
Jablonski said the firm’s multi-asset portfolios are also underweight high-yield dollar bonds and have a preference for commodities and listed infrastructure names to gain exposure to real assets like toll roads and airports.
Real assets are “less cyclically exposed than other types of investments and that has helped them through recent drawdowns,” he said. “Structurally, commodities are under-invested. I still like the commodities market and particularly metals as you see equities challenged from here.”
(Corrects title of Jablonski, changes company title, in story published Feb. 13. Refreshes index levels)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.