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Natixis Canadian Preferred Share fund an attractive long-term option
3/20/2018 7:53:24 AM
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By Dave Paterson  | Wednesday, March 14, 2018


Since hitting a low in February 2016, preferred shares have been on a tear, with the S&P/TSX Preferred Share Index gaining 30% to date. This rebound has recovered most of the losses the asset class suffered in 2014 and 2015 after the Bank of Canada surprised the markets with a cut to its key overnight lending rate.

The Natixis Canadian Preferred Share Class invests in a diversified portfolio of preferred shares, but has the flexibility to hold cash or bonds depending on market conditions. Managed by Jeff Herrold, Dax Letham, and Ian Clare of J. Zechner Associates, the investment process is a mix of top-down economic analysis combined with rigorous, bottom-up credit analysis.

The economic analysis provides an overview of the expected economic and interest rate framework, and also helps provide insight into different industries. This approach helps set the stage for the bottom-up fundamental credit analysis, which involves understanding the financial health of the business, assessing its various risks, and management.

Given the potential illiquidity of the preferred market, knowing the valuation of each company is critical. This also helps the team assess the relative attractiveness of the preferred compared with a fixed income investment.

The portfolio is diversified, with the maximum position weight being capped at 5%. There is also diversification across sectors and preferred type (i.e., perpetuals, floaters, resets.) They are active in their approach and will position the portfolio to best benefit.

Top holdings as of Jan. 31 included preferred shares of AltaGas, TransCanada Corp., CIBC, National Bank, and Pembina Pipeline. The top 10 holdings of the fund together comprise 46% of total holdings.

Absolute performance has been less than exciting, with the Series A fund delivering a 3-year average annual compounded rate of return of 2.75% to Feb. 28, compared with 2.82% for the S&P/TSX Preferred Share Total Return Index. However, given the inefficiency in the preferred market, I believe you want to choose active management over passive index exposure. And given the Zechner team and its process, the fund’s small asset base, and its 1.60% MER, this is a very attractive option for the long-term.

Natixis Canadian Preferred Share Class CG Series A
Fund Company: NGAM Canada
Fund type: Preferred Share Fixed Income
FundGrade Rating: D (February)
Style: Market Capitalization Weighted
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Good
Managers: J. Zechner Associates: Jeff Herrold, Dax Letham, Ian Clare, since 2012
MER: 1.61%
Fund code: NXG5321 (Front-end load)
Minimum investment: $5,000

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.


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