Written by Summary
FPF is a closed-end fund that invests at least 80% of its portfolio in preferred securities.
The vehicle is overweight investment grade securities with a focus on banks, insurance companies and capital markets enterprises.
The fund is down more than -13% on a total return basis year-to-date from spread widening, portfolio duration drag and a move to a discount to NAV in market price.
designer491/iStock via Getty Images Thesis
First Trust Intermediate Duration Preferred & Income Fund ( FPF ) is a closed end fund that invests at least 80% of its portfolio in preferred securities. The fund’s mandate includes traditional preferred securities, hybrid preferred securities that have investment and economic characteristics of both preferred securities and debt securities, debt securities, convertible securities and contingent convertible securities. The fund has a 2013 inception date hence we only have 3- and 5-year trailing total return data which stands at 6.2% and 5.8% respectively. The fund focuses on preferred securities issued by banks, insurance companies and capital markets focused enterprises. Its credit rating profile is also set up accordingly with the fund overweight investment grade names. The fund sports a low duration of 3.95 years by investing over 78% of the portfolio in fixed-to-floating rate securities. Even though the fund has a low duration it has lost value as rates have gone higher and the fund has started trading to a discount to NAV. The fund is down more than -13% on a total return basis year-to-date. The fund has a 0.42 Sharpe ratio on a 5-year lookback and a 13.67 standard deviation. Outside the Covid-induced sell-off the fund only exposes -15% drawdowns on a 10-year lookback period. We are currently close to hitting another -15% drawdown for this vehicle. FPF has a nice historic trading range of $20-$25 and we are currently closing in fast on the lower bound of said range on the back of spread widening, duration induced NAV loss and a move from a premium to NAV to a discount to NAV. We feel FPF is a solid fund long term with a robust Sharpe ratio and low volatility and the current confluence of events have caused the price to trade towards the bottom of the range. The current level represents in our minds an attractive entry point, similarly to what we saw in 2018. We rate this fund a Buy and unless we have a full blown recession in the next year we expect the price to claw back its downward move. Holdings
The fund holds preferred securities mainly from banks, insurance companies and what is classified as capital markets enterprises: Industry Breakdown (Fund Fact Sheet) These top 3 sectors make up over 65% of the fund’s portfolio. As per the fund fact sheet the underlying portfolio is overweight investment grade securities: Portfolio Credit Quality (Fund Fact Sheet) The top names in the fund portfolio are as follows: Top 10 Holdings (Fund Fact Sheet) To note that while the top concentrations in the fund are represented by banks, insurance companies and capital markets enterprises the fund is not immune to the Russia-Ukraine conflict. One of the fund’s top holdings, Aercap, has recently experienced a massive stock price pummeling that has infected its preferred shares as well. Aercap is an aircraft leasing company, and given the above mentioned conflict it seems that 152 of its aircraft which are leased to Russian airlines might be gone forever as the carriers have refused to return the jets.
The fund does not have any outright Russia exposure but many financial services companies might need to record deep impairments depending on their exposure to Russia which in turn will dent their capital and potentially force lenders to raise additional capital or force preferred shares into loss taking capital structure positioning: Country Breakdown (Fund Fact Sheet) Most of the securities in the underlying portfolio are fixed-to-floating preferred stocks, which means that the fund is keeping a lid on duration via this type of allocation: Fixed vs Floating Components (Fund Fact Sheet) Fixed-to-floating rate securities are preferred securities that currently pay a fixed rate but at a certain point in time in the future they switch to a floating rate coupon. A large portion of the preferred space is structured this way. Performance
FPF is a buy-and-hold vehicle with a nice upwards sloping total return line: 10-Year Total Return (Seeking Alpha) The fund experienced a significant downswing during 2018 as well when rates were going higher and the market saw a […]
Written by Summary