Just an interesting share class that I was reading about and was wondering if anyone had any further thoughts on the matter (and if anyone knew of a list of such shares).
I was reading the first quarter report for a closed end equity fund (which is currently trading at about a 10% discount to NAV) and was noting that in addition to the common shares, the fund has class B cumulative preferred shares outstanding to the amount of about 16% of NAV. The preferred shares pay 5.95% yield and when issued were non-callable for 5 years (which will be up in a few months). They are trading at a slight discount right now pushing their nominal yield to about 6.3%.
So I was thinking that, compared to more typical corporate bonds, these are pretty secure - the equity portfolio would have to lose over 80% of its value before the preferred would have trouble paying coupons.
Under 1940, funds need to maintain 200% asset coverage for preferred shares and in the event of a failure to maintain that coverage, the fund may be required to redeem the preferred at par - including being required to sell of portfolio securities and eliminate dividends on common to do so. ie. that 200% constitutes a mandated buffer to protect the preferred.
So anyway, the bottom line is that preferred on a diversified mutual fund looks very secure, perhaps more secure than preferred from any single company or even most corporate bonds. If one buys both the preferred and the common of the same fund, one is simply deleveraging the original fund, of course. But as a fixed-income component of a portfolio such shares sound like a pretty good deal.
Downsides: low trading volume - may be wide spreads or hard to sell no maturity date - if interest rates rise, one can't just wait until maturity and take back principal
Upsides: relatively high yield lots of principal protection perhaps more liquid than individual bonds since they are traded on NYSE voting rights (for what little they're worth)
I'd be especially interested in a list of such shares that are available out there.