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The Evolution of CoCos
How This New Form of Preferred Securities Can Help Diversify
Interest-Rate Risk (and a Case for Active Management)
The OTC market offers a much broader opportunity set to active managers than the
much smaller exchange-traded market. This larger investment universe includes a
wide diversity of securities of foreign companies (both USD and non-USD) not found
in the exchange-traded market, as well as securities of U.S. domiciled issuers. Of
particular note, within this over-the-counter universe, is an emerging subset of the
preferred securities market called Contingent Capital Securities, or CoCos.
Currently CoCos offer rates that compare favorably
with global investment-grade and even global highyield
bonds.
As we further detail in our whitepaper titled “Investing in CoCos,” available at
cohenandsteers.com, this new asset class presents new opportunities and high
income as well as risks. CoCos may carry higher credit risk than comparable
preferreds in the U.S., so CoCos require wide credit spreads commensurate with this
credit risk. This may make these securities more sensitive to the credit quality of the
issuer and less sensitive to interest rates. While most issuers are large, high-quality
institutions, we believe that the analysis of the credit risk within this emerging asset
class is geared to active managers.