split money

This article appears in the September 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Even with rapid growth in assets over the past several years, split-share corporations remain a small and lesser-known part of the equity income market. But they’ve become big enough to prompt Toronto-based Brompton Funds Ltd. to launch the Brompton Split Corp. Preferred Share ETF (TSX: SPLT), the first of its kind.

Split-share corporations raise capital by selling two types of shares: a class A equity share that typically pays no dividends but participates in capital appreciation, and a dividend-paying preferred share that’s essentially a fixed-income instrument. The underlying holdings of split-share corporations are dividend-paying common stocks, with financial services the most popular sector.

Combined assets of the more than 30 split-share corporations in Canada currently exceed $10 billion, of which half is in preferred-share classes. Brompton is one of the main issuers of split corporations.

An example of a well-diversified split corporation, and one of the new ETF’s holdings, is Brompton’s own Global Dividend Growth Split Corp. It holds North American and overseas stocks in a wide range of industries. Though most split corporations invest in several stocks, some hold only one.

Brompton’s Chris Cullen, senior vice-president and head of ETFs, said that over the past five years there’s been about 55%–60% growth in assets in the split-corporation preferred market.

“It’s growing in popularity and that brings some additional liquidity with it,” Cullen said. “You do need some liquidity to offer an actively managed ETF.”

Brompton’s new offering, which began trading on June 15 on the Toronto Stock Exchange, invests exclusively in split preferreds. Managed by Brompton’s chief investment officer Laura Lau and senior portfolio manager Michael Clare, the ETF recently had a dividend yield of 6.5% and a yield to maturity of 9.3%. The management fee is 0.5%.

At mid-year, the ETF held 17 split preferred issues. Five of them, constituting about 35% of the portfolio, are split preferreds created and managed by Brompton itself.

Brompton is the second-largest issuer of split preferreds, with a 24% market share, according to TD Securities Inc., so the ETF is overweighted in Brompton products.

TD Securities raised the potential for conflict of interest in a report: “Every dollar going into the [Brompton] ETF will benefit both the ETF and the split share underlying the ETF as it will apply buying pressure over the split share.”

Cullen said there’s no duplication of fees in holding Brompton split preferreds in the ETF, as management fees are levied only on class A shares. “None of the preferred shares that Brompton manages and that are in the SPLT portfolio are accruing a management fee.”

The Brompton ETF is also overweight in split preferreds issued by the leading player in that market, Toronto-based Quadravest Capital Management Inc., which has a 38% market share. Brompton recently held five Quadravest split preferreds, accounting for almost half the ETF portfolio.

Brompton’s remaining ETF holdings are mostly in preferred shares of Partners Value Split Corp. Toronto-based Partners holds shares of global alternative asset manager Brookfield Asset Management Ltd. Managed by a Brookfield entity, Partners is the third-largest split-corporation issuer, with 18% market share.

The new Brompton ETF also holds E Split Corp., which invests exclusively in shares of pipeline giant Enbridge Inc. This ETF is managed by Toronto-based Middlefield Capital Corp., the fifth-largest split-share issuer with a 4% market share.

Other split-share managers tracked by TD Securities are Toronto-based Mulvihill Capital Management Inc., in fourth place with a 14% share, along with Oakville, Ont.-based Harvest Portfolios Group Inc. and Toronto-based Purpose Investments Inc., each with 1% market share.

Mulvihill’s split preferreds include World Financial Split Corp., which holds mostly Canadian and U.S. large-cap financial services companies.

Harvest’s split offering is Big Pharma Split Corp. It invests in an equally weighted portfolio of large-cap pharmaceutical and biotechnology companies.

Big Bank Split Corp., managed by Purpose, invests in an equally weighted portfolio of Canada’s Big Six banks.

As an asset class, conventional preferred shares — and ETFs that invest in them — have been a dreary proposition for investors. The $994-million iShares S&P/TSX Canadian Preferred Share Index ETF, which offers broad representation of the corporate preferred market, reported a 0.8% annualized loss for the five years ended July 31. In the most recent 12 months, its loss was 7.9%. Since inception in April 2007, its annualized return is 1%.

Cullen said that as an alternative to conventional corporate preferreds, split preferreds have a place because of what he calls their superior risk/return characteristics. “They’ve been much more stable. They’re much shorter in duration. They’ve had much better returns over the difficult periods that we’ve experienced in the last several years than corporate preferreds.”

Split preferreds, Cullen said, are less subject to interest-rate risk because of their shorter duration: “They’re one of the few preferred share instruments that actually carry a term.”

Split preferreds generally have a scheduled termination date, usually every five years. The term can be extended at a new dividend rate that’s in line with current market conditions, with investors given the option to either redeem or continue to invest.

The maturity provision, Cullen said, “gives investors the power to decide whether or not to put their shares back and force the corporation to redeem them for the underlying asset value.”