The patience required for successful equity investing can be greatly enhanced through a reasonable exposure to preference shares, according to Overberg Asset Management (OAM).
Pref shares are a form of subordinated debt but rank senior to ordinary shares in the capital structure.
OAM said in its weekly overview of the economic and political landscape in South Africa that following several years of weak performance, the valuations of pref shares have become extremely compelling.
“SA’s big 4 banks have capital adequacy ratios in excess of 15%, making them amongst the best capitalised banks in the world. Moreover, with changes to Basel 3 regulations, pref shares will no longer count towards bank capital in the future. As a result, banks will be keen to redeem their pref shares, which now form an unnecessarily costly form of funding.”