Preferred Stock - Asset Class for ZIRP-Prosperity?

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MWKXJ
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Preferred Stock - Asset Class for ZIRP-Prosperity?

Post by MWKXJ » Thu May 04, 2017 3:21 pm

Curious if any here have looked into using preferred stock for the fifth-leg of a Golden Butterfly.

The following chart details the price of preferred stock in relation to historic interest rate changes:

Image

As expected, the price of preferred corresponds closely with interest rates, yet, also seems to be coupled to the outlook of the issuing company (note the smaller peaks and valleys corresponding with turns in the stock market). In other words, the asset class seems to be positively affected by lower rates and good economic conditions for equities (Harry Browne's "Prosperity"). This would appear to have been a good fit for the recent period of equity gains coupled with zero-interest rates. While sketchy in isolation, perhaps this asset class would be useful in paired with other asset classes in something like a Golden Butterfly ("Silver Moth"?).

If any here know of a good way to backtest this, please chime in. A cursory comparison at portfoliovisualizer.com (https://www.portfoliovisualizer.com/backtest-portfolio) of (SPY,PDT,TLT,SHY,GLD) with (SPY,VBR,TLT,SHY,GLD) shows the former having a higher US market correlation (.48 vs .34) and max drawdown (14.77% vs 12.31%), yet a higher Sharpe Ratio (.92 vs .86) and a higher CAGR (8.2% vs 7.69%). Keep in mind this is using the default range of data available (2005-2017); no attempt was made to Monte Carlo across starting years. Perhaps someone here knows of a better way to compare the historic results. Also, "PDT" was chosen because it is the oldest (1989) of the preferred stock CEFs listed in cefconnect.com's fund screener (http://www.cefconnect.com/closed-end-funds-screener). Others can be substituted, but all of the CEFs listed use leverage (ironically, perhaps this leverage is in the form of preferred stock).

The old warning of Ben Graham not to invest in preferred stock aside, perhaps there was some merit in preferred during recent period the market has-passed/is-passing through?
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