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Preference shares are not bonds |
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Written by Wilfred Ling
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Monday, 08 September 2008 |
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I see many buy preference shares as if they are as safe as bonds. This is due to their poor financial literacy. Freddie and Fannie - the US two largest mortgage companies - have a debt (bond) rating of AAA but guess what is the rating for its preference shares? On 7 Sept, S&P cut its preference share rating to "C". "C" grade is known as "junk". See S&P cuts Freddie, Fannie stock ratings to junk. Many of us in Singapore does not understand what is the real meaning behind all these events. In the US, Freddie and Fannie - although are private enterprises - are often viewed as having the backing of the US government. This view is correct considering the US government has moved in to take over the two companies indefinitely. However, having government backing does not equal to safety in investing with such quasi government companies. Their preference shares are now rated "C" grade and common shares have plunge like a rock. Thus, it is important for people to realise that even government supported enterprises are not 100% safe. I see many of my clients who buy lots of such government supported enterprises thinking they are 100% safe. In the meantime, what should people do? This is easy: For those who have not started investing, this is the best time to start a regular saving plan (RSP). For those who are already into investing, this is the best time to review the portfolio. For those who hold cash, get a 90% insured account. Cash is only king if the account is insured otherwise the capital value of the "cash" is only as safe as the financial institution business soundness.
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