The recovery in riskier assets extended for a third month. The price of oil moved higher, equities gained, the Canadian dollar strengthened, and credit-related yield spreads narrowed. Preferred shares enjoyed good gains as they struggled to erase losses suffered earlier in the year. The S&P/TSX Preferred Share index earned 2.96% in the month.

The most significant gains were in the rate reset sector, which earned an average 4.51% in the month. Rate reset issues had experienced the largest declines in value in January and February, so it was not surprising that they had the greatest rebound in April, although they remain under water so far in 2016. Limited supply, both in terms of secondary offers and new issues, resulted in significant share price increases on low volumes. Perpetual issues returned 1.95% on average, and in contrast with rate reset issues, have generated positive returns in the year to date.

New issue supply was fairly light with three new rate reset (floor) deals raising only $900,000,000. The first saw Brookfield Office Properties raise $150,000,000 with a 6.00% dividend and a 518 basis point reset spread. In the second issue, Pembina Pipelines raised $250,000,000 with a 5.75% dividend and a 496 basis point reset spread. The third new issue was by far the most successful as TransCanada Corp. raised an upsized $500,000,000 with a 5.50% dividend rate and a 469 basis point reset spread. The TransCanada issue had over $1.4 billion of demand and was allocated 71% to institutional buyers and 29% to retail investors. We participated in the TransCanada issue and are pleased to report that it went to an immediate premium when it commenced trading and closed the month at $25.63.

We have been discussing the growing participation of institutional investors in the preferred share market for some time. The level of institutional participation is most visible with new issues, and some data from BMO Capital Markets in that regard shows the growing importance of institutional managers. In 2014, the average institutional allocation for new issues was 32%, in 2015 it was 34%, and so far in 2016 it has jumped to 54%. It would seem that the substantial yield advantage of preferred shares has been recognised by increasing numbers of institutional managers. What remains to be seen is whether the institutional interest in preferred shares will continue as the market recovers and yields decline from the extremes hit earlier this year.

During the month, we looked to reduce the cash position in the portfolio. In addition to the TransCanada purchase, we added to a number of existing holdings. However, liquidity was relatively low and we chose to be disciplined about pricing rather than chasing issues higher. We also started taking profits in some issues that had rallied well above par, including Bank of Nova Scotia, Manulife, and TD Bank holdings.

As we move into May, we note the unmourned passing of the S&P/TSX Preferred Share Laddered Index. Created as a benchmark for the BMO S&P/TSX Laddered Preferred Share Index ETF, the index had no purpose once the ETF switched in October 2015 to a different index provided by Solactive. The switch allowed BMO to reduce expenses, have more frequent rebalancing, and simplify the ETF name to the BMO Laddered Preferred Share Index ETF. The changes just reinforce our conviction that bespoke indices created for unique ETF’s must be carefully evaluated for any informational value. Indices are generally not good prescriptions for how to invest, but can be used for clever marketing purposes.

Going forward, preferred shares continue to offer great value compared to alternative fixed income investments, including corporate bonds. We will continue to look for opportunities to reduce cash, with new issues offered at concessions being potential choices. We anticipate that new issue supply will increase in the coming months as a number of potential issuers have yet to raise the capital they will require this year. While we have reduced the proportion of the portfolio invested in perpetual issues in the last couple of months, we believe that locking in yields of 5.50% and higher is an attractive long term option.