Grinrod Bank aims to increase awareness of the preference share market in SA

In an effort to increase awareness of the preference share market in South Africa, Grindrod Bank presented an overview of this investment option to clients this week. For South African investors, investing in preference shares is an attractive option for those seeking income, tax efficiency (dividends from preference shares are currently tax exempt) and low risk to capital.

Grindrod Bank Fund Manager, Gareth Stobie, says, “Preference shares are higher ranking than ordinary shares. Because they are higher ranking, they carry preferential rights to dividends and capital..”

Grindrod Bank is involved in the preference share industry by way of two niche funds: The Grindrod Investments Trust and the Grindrod Diversified Preference Share Fund. In these funds, Grindrod has in excess of R1.6 billion worth of preference shares under management by a team that has a collective experience in this area of over 20 years. Stobie continues, “The investment objective of Grindrod’s Diversified Preference Share Fund is to provide investors with an above-average after-tax return in the form of dividends. This is achieved by diversifying the fund’s investments across various preference shares and other dividend yielding assets. A minimum of 75% of the assets are invested in listed preference shares as well as other preference share investments that are treated as non-equity investments. This fund is currently yielding approximately 13% after tax and before costs. For individuals this equates to a pre-tax equivalent of in excess of 21%.

Stobie explains that companies usually issue preference shares as they are a useful form of capital. They are most commonly used to bring down the after tax cost of funding, when it is not used in the production of taxable income. For banks, non-redeemable preference shares qualify as Tier 1 Capital, while redeemable preference shares can be used to fund other preference share transactions. Corporates typically use preference shares in mergers and acquisitions as well as for balance sheet restructuring.

He concludes, “Preference shares have a valuable role to play in a portfolio due to their tax efficient yield and their conservative nature. Listed preference shares are currently trading at very attractive yields and a fund like Grindrod’s Diversified Preference Share
Fund, which is a collective investment scheme, provides an easy and seamless mechanism for investment.”