24 BARRON’S October 21, 2019
Mutual Funds
Photograph by David Vintiner
TalkingWithPhilippeBodereau,Manager,
PimcoPreferredandCapitalSecuritiesFund
Bankingon
PreferredStock
ByLewisBraham
WHO SAYS REGULATION DOESN’T BENEFIT INVESTORS? GROWTH-
stock investors might grumble about reduced profits from
banks that must adhere to the 2010 Dodd-Frank reforms and
other regulations. But for conservative investors who are
seeking stable income, such measures have proved to be
hugely beneficial.
“Bank fundamentals are the best they’ve been in de-
cades,” says Philippe Bodereau, manager of the Pimco Pre-
ferred and Capital Securities fund (ticker: PFANX), which
specializes in income-paying bank preferred stocks and their
European counterparts, known as Additional Tier-1, or AT1,
bank securities. “The post-2008-crisis regulatory push forced
[banks] to massively raise their capital and liquidity levels.
On average at most big European or U.S. banks, their capi-
tal levels that protect us against future losses have been mul-
tiplied by three to four times.”
Preferred stocks are hybrid securities, halfway between
common stocks and bonds. They pay fixed income, like a bond,
but often have no maturity dates, like a stock. In a bank’s capi-
tal structure, such shares are right above traditional common
stock, but below its debt—meaning that they carry more credit
risk. But with many banks’ balance sheets now rock-solid, pre-
ferred issues have proved to be strong and secure investments.
Pimco Preferred and Capital Securities’ 8.2% three-year
annualized return beats 96% of its peers in Morningstar’s Pre-
ferred Stock category. The fund, whose A shares carry a
3.75% front-end load, has notched a total return of 15.8% so
far this year.
Bodereau argues that the relative value of preferred stock,
especially European bank AT1s, is “quite compelling” when
compared with more conventional corporate debt. On average,
AT1 securities yield between 0.5 and 0.8 percentage point
more than high-yield bond and offer higher underlying credit
quality, he notes. Some 40% of AT1 securities are rated invest-
ment grade, meaning BBB or better—while the typical high-
yield bond is rated below BBB, he says.
Bodereau is uniquely qualified to run a fund in this special-
ized sector. He began his career in 1996 at J.P. Morgan in its
private-banking division, then became a senior banking ana-
lyst at Société Générale in London and Paris, eventually join-
ing Pimco in 2004 to become global head of financial research.
He is supported by 10 bank analysts—four in the U.S. and the
rest in Europe, Asia, and emerging markets.
Meanwhile, bond-fund behemoth Pimco is known for dig-
ging deep into credit and macroeconomic analysis. Both types
of analysis are essential for large banks, which have complex
balance sheets and are sensitive to broader economic trends.
That approach has been especially valuable in Europe, which
has weathered multiple sovereign debt crises, the continuing
Brexit saga, and political instability in nations such as Italy.
But Bodereau’s individual security analysis acts as an im-
portant counterbalance. Before the 2008 crisis, “if you were
just looking at the macroeconomic data for Ireland, it looked
“Bank
fundamentals
arethebest
they’vebeen
indecades.”
Philippe
Bodereau