In Taiwan, where the general population is ageing, investor preference for high yield and low volatility has propelled PineBridge Preferred Securities Income Fund to become the largest onshore equity fund by assets under management.
Besides the need to invest for retirement, the current low interest-rate environment and the return of volatility have led domestic investors to seek better returns, says Ann Yang, CEO of PineBridge Investments Taiwan. However, higher return assets are often associated with higher risks.
The popularity of the PineBridge Preferred Securities Income Fund is due to its stable and relatively high dividend payout, compared with products such as investment grade and US government bond funds. The fund is also less volatile than equity or high-yield bond funds, says Yang. The fund’s higher return and lower risk profile is unique compared with other fixed-income instruments, she explains.
Prior to the fund’s launch in January 2017, retail investors in Taiwan had no access to such funds. “We had first-mover advantage. Following the launch of our fund, there were others who followed in our footsteps,” says Yang. The launch of the first preferred fund was very successful, taking only one year to reach $1 billion in assets under management. PineBridge was recently awarded AsianInvestor’s Fund of House of the Year in Taiwan.
STRENGHTENING PORTFOLIO DIVERSIFICATION
Preferred securities, which are sometimes referred to as “hybrids”, combine the features and characteristics of both stocks and bonds. Preferred securities generally pay fixed or adjustable rate distributions to investors and have preference over common shares in the payment of distributions and the liquidation of a company’s assets.
The preferred securities market has expanded, notably after the global financial crisis of 2008. Since then its attractive mix of investment attributes has helped fuel increased investor interest.
Due to regulatory and rating agency capital requirements, preferred securities tend to be issued primarily by financial institutions, such as banks, REITs, insurance and utility companies. As a result preferred securities also tend to have higher credit quality relative to high-yield bonds, despite comparable yields, as they are issued by investment grade entities.
The asset class has historically been providing relatively high-income potential with low correlations and durations compared to other fixed-income segments. Combined with other asset classes, the fund could help investors strengthen their portfolio diversification, says Yang.
MANAGE RISING US INTEREST RATES
In light of the US Federal Reserve’s move to tighten monetary policy, the prospect of higher interest rates could impact the preferred security market, Yang says. However, the fund is allowed to invest in fixed-to-floating rate or floating-rate preferred securities, which tend to be less sensitive to interest rates than fixed-rate securities. Additionally, the fund’s consistent and high dividend payout provides a further buffer that would help investors manage interest rate risk.
“For this type of product, the main contribution of performance is not only from capital gains, but the most important part is the accumulation of dividend payments,” says Yang.
The cumulative nature of the payments for the fund meant that deferred or missed dividends must generally be paid out to holders of preferred securities before common shareholders.
The PineBridge Preferred Securities Income Fund currently has a 75% allocation to preferred securities issued by financial services firms. The remaining are issues by technology firms and utilities. In terms of geography, the fund has a 66% exposure to the US. Despite recent market volatility, the cumulative year-to-date performance is better than other fixed-income funds. The fund’s underlying asset average annual yield is about 6%, says Yang.
“The unique characteristics offered by preferred securities should prove highly complementary in helping investors better position their portfolios for stronger risk-adjusted performance in today’s market,” says Yang.
Besides managing Taiwan’s largest onshore equity fund, PineBridge also manages the largest onshore fixed income fund—the PineBridge Global Multi-Strategy High Yield Bond Fund. The company recently introduced its “Turbo-Income” investment strategy, which combines both funds to enhance investment efficiency and lower risk.