re: Preferred Share Funds (FFC, FLC, PFD, PFO .. also RNP, PSF etc... also PFF, PGF)
well, the current yield spread between the 10yr Treasuries and preferred shares appears to be at a panic level high. This could turn out to be a great opportunity to generate low-risk but nonetheless material capital gains (!!) in the funds I mentioned. And that even in a slow-or-no growth environment !
Why is this ?
http://finance.yahoo.com/bonds
Because ... the historical average spread between 10yr Treasuries and the average Preferreds is 277bp. However, the 10yr treasury is at 2.15% while the average high grade financial prieferred yields upwards of 7% and no, I'm not even mentioning select European preferreds, where even the low-riskier stuff such as Dutch Bank ING's preferreds (ticker: IDG) are yielding almost 9%.
So the preferred spread these days is around 500bp - it should be almost half that range. Now the unlevered return of FFC is at this 7%+ level, too (taken from their 2011H1 report). If you fill in an expected yield compression in an environment where market risk is back to normalcy - the likely scenario where the VIX gets below mid 20ies soon - (ultimately resulting in 277bp preferred yield spread) you have room for FFC to get towards mid 20 level once again relatively easily. And to achieve such a 50% gain you won't even need any "growth" from the front of bank earnings
Note that while PFF, PGF are unlevered, they have more exposure to European bank issuers (approx. 25%) whereas FFC, FLC, PFD and PFO are levered but much more US centric (around 10% Eurobank exposure at FFC but mostly in UK banks HBSC, BCS and STD Banco Santander). PSF by Cohen and Steers is unlevered and similarly weighed but has a higher management fee (TER ratio).
best rgrds
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