hi my name is Doug Baker head of the
preferred security sector team for
Nuveen Asset Management today I would like to give
you an update on preferred security
asset class. what i can say is that over the
past six to 12 months no news has been
good news. The fundamentals remain strong
and the technicals continue to move in
our favor.
let's start with the fundamentals we're
going to focus on banks because banks
are largest sector in the preferred
security market for most indices banks
to account for close to seventy five
percent of the outstanding issuance bank
balance sheets continue to improve this
is the result of regulation like basil
three dodd-frank today banks hold more
common equity cap on their balance
sheets and they have at any time since
the nineteen forties as a preferred
investor what's important to us is
preferred securities investor is the
amount of common equity capital on a
bank's balance sheet common equity sits
below us on the balance sheet to protect
us from losses and impairments so today
as a preferred securities investor you
have to go back 75 years to find the
last time this much common equity set
below us on the balance sheet in
addition to the balance sheet
let's look at what regulations have done
to the bank business model it has
greatly reduced risk so from a preferred
securities investor standpoint we are
investing in firms whose business model
is much less risky today than it was for
decades leading up to the financial
crisis now people are often concerned
about rising interest rates and what
rising interest rates mean for
fixed-income securities it is also
important to consider what rising
interest rates mean to the business model
of our issuers arguably for the bank
sector rising interest rates are
incredibly positive many would argue
actually that the bank sector is the
sector that benefits the most from a
rising interest rate environment now we
also move onto technicals technical have
been something we've been talking about
the preferred space for quite some time
specifically the supply-demand technical
over the next few years
not many people know this but banks are
actually limited as the amount of
prefers that they can issue and count
towards their tier 1 capital
requirements
for those that don't know really the
only reason why banks issue preferreds is
because they count as regulatory capital
now over the past several years since
the financial crisis the banks have been
aggressively raising capital and now
here in the US our US banks are almost
near that limit of preferred securities
that can be counted towards their tier 1
capital calculations so what does that
mean to us as preferred investors today
well it means that the likelihood of
significant new supply coming to market
is very low as a result demand for the
securities that we already own should
likely increase due to scarcity over the
next couple years
so in summary for the preferred market
it's not just an asset class provides
our investors  attractive income but with the
fundamentals continue to be
strong and in addition the technicals
continue to move in favor of the
preferred securities investor now here
at Nuveen Asset Management there are two
things that we are concerned about we
look at preferred securities first the
sector concentration of financial
services and second interest rate risk
now we just talked about how strong the
fundamentals and the technicals are for
the asset class and fundamentals
especially today might actually argue
for having an overweight to banks and
to other companies within the financial
services sector however whenever we have
this much concentration to one
particular sector we advise investors to
limit their overall exposure within a
diversified portfolio now moving onto
interest rate risk
how do we manage that well here at
nuveen we favor securities that have
adjustable rate coupons you may have
heard of  floating-rate preferreds
floating-rate preferreds or fixed to
fixed preferred securities now we can
get into the details later about what
each one of those securities looks like
but from our perspective what's really
important is that those structures have
adjustable rate coupon an
adjustable-rate coupons or resettable
coupons help lower your duration profile
within an overall strategy so all else
equal compared to a preferred security
with a traditional fixed
coupon for life having a structure with
some sort of resettable coupon will help
low duration today and help mitigate
your duration extension risks down the
road so for investors that are concerned
about a rising interest rate environment
we have new being believed that there are
security structures that can help manage
that risk for our investors so in
summary we just want to tell our
investors or potential investors that we
think the fundamentals are strong for
the asset class that technicals continue
to move in favor of preferred securities
investors and for the two key risks
within the asset class we feel they're
very effective ways for managers to work
around that risk and to mitigate the
impact of those risks to our end
investors thank you
