In navigating through the $40-billion universe of Canadian preferred shares, Randy LeClair takes a top-down view.
"We look at where we are in the economic cycle," says LeClair, manager of the $47-million Manulife Preferred Income and chief investment officer at Burlington, Ont.-based Portland Investment Counsel Inc. "There are three stages: tightening, easing and clipping coupons. The worst case for any fixed-income manager, whether he runs bonds or preferred shares, is the tightening phase (when interest rates are rising)."
A 20-year industry veteran, LeClair notes that one year in every five to seven years can be brutal. "It generally lasts about 13 months," he says. "I've experienced four of them and that's the kind you have to watch for."
The final and longest phase is the current one: coupon clipping. "Fixed income is not going to hurt you, but it won't help either," says LeClair, adding that the next tightening phase could be two or three years away. "The way to add value is to look at relative value between securities."
LeClair runs a focused fund, holding 32 securities from 19 issuers. He screens securities by credit rating, such as P-1, P-2, P-3, as well as by type, such as "rate reset," "perpetual" and "floating rate."
"The type of preferred (in the portfolio) is defined by where we are in the economic cycle," says LeClair. "Then you start looking into sectors, and ask which one is the best value." Currently, about 62.5% of the fund is in financial services, 13% in utilities, 13.5% in energy and 7.7% in telecom services.
Equally important is liquidity, since rate-reset securities eventually expire. While the benchmark weight is 42% in the S&P/TSX Preferred Share Index, LeClair is cautious. The fund has an underweighted 35.4% in that area. His largest allocation is 42% in perpetual preferreds. In addition, he holds 5% in floating-rate preferreds, and about 12% in bonds.
In the rate-reset area, LeClair likes Co-operators General Insurance Co., whose preferred is yielding about 6.5%. "But it should get called out on its reset date, June 30, 2014," he says. "If they don't call it out on that date, it will be reset at 521 basis points over five-year Government of Canada bonds at the time. That's why we think Co-operators will call it out in 2014."
A Toronto native who grew up in Hamilton, Ont., LeClair had planned to become a chartered accountant after he graduated in 1983 from the University of Western Ontario with a BA in administrative and commercial studies. But the job market was poor so he was encouraged to go into the teaching profession.
By the time LeClair graduated from the University of Windsor with a bachelor of education, the job market in financial services picked up and he was recruited in 1985 by CIBC, joining the officer-in-training program. Over three years, he worked his way up the retail bank and was transferred to successively larger branches.
Meanwhile, LeClair developed an interest in investing when he took the Canadian Securities Course. He joined CUMIS, a financial-services provider to Canadian credit unions, where he helped to run a $300-million multi-asset portfolio. Subsequently, he moved to the Regional Municipality of Halton, where he spent seven years managing its bond portfolio.
LeClair had met long-time AIC manager Jonathan Wellum at CUMIS, and in 1998 followed him to AIC Ltd. Before long, LeClair was manager of several funds, including a Canadian bond fund and a global bond fund.
When Manulife Financial Corp. acquired the fund assets of AIC in September 2009, LeClair was named chief investment officer of Portland Investment Counsel, which continued to run some of the larger AIC funds.
Manulife Preferred Income was launched in April 2009. Single holdings are limited to around 7% of fund assets, with a maximum of 50 securities. Turnover has been modest at 24.7% for the 12 months ended June 30.
The fund returned 5.2% for the 12 months ended Dec. 31, compared with 11.3% for the median fund in the Canadian Dividend and Income Equity category. LeClair attributes the fund's fourth-quartile performance to the fact most funds in the category invest mainly in common shares, and aim for capital appreciation.
"We're more fixed-income based," says LeClair. "We wanted stability, and less volatility. Preferred shares are held back, because they often have an end date. When stocks do very well, the rest of the pack will lag."
Looking ahead, LeClair expects returns for preferreds to be around 4% to 5% in 2011. And he is also developing an exit strategy for the day when a flood of reset preferred shares will be called back and could drive yields lower.
"I hope to have these back doors available, and we could increase the perpetuals, or other types of preferreds, or add more bonds, or go to the international preferred-share market," says LeClair. "We'll focus on the area where we have most knowledge, the U.S. and the UK."
