Shifting Equity Allocations in a Low-Rate World: The Case for Preferred Shares

In a world where central banks continue to cut interest rates, investors are recalibrating their equity strategies to balance yield, risk, and growth. Goldman Sachs' 2025 Family Office Investment Insights report reveals a striking trend: family offices have increased their public equity allocations to 31% of portfolios, up from 28% in 2023, while private equity exposure has dipped to 21% from 26%, according to the Goldman Sachs report. This shift underscores a broader search for income-generating assets in an environment where traditional fixed-income yields remain depressed. Yet, the debate over common versus preferred shares-often overlooked in mainstream discussions-has taken on new urgency.

The Allure of Preferred Shares in Low-Rate Environments

Preferred shares, with their fixed dividend structures and priority in liquidation, are gaining traction as a middle ground between bonds and common equities. The family office report describes a tilt toward instruments that offer "structural resilience and higher risk-adjusted returns," a description that aligns closely with preferred stock. For instance, Goldman Sachs itself has issued multiple series of preferred shares with floating or fixed-rate reset features, such as Series A (3-month SOFR + spread, floor of 3.75%) and Series C (4.00% floor), which provide predictable income streams even as benchmark rates decline, as detailed on its preferred stock page.

In contrast, common shares-while offering growth potential through capital appreciation and voting rights-lack the yield stability that preferred shares deliver. This trade-off is critical in low-rate environments, where income-focused investors prioritize downside protection. As noted by the Saxo Bank guide, preferred stockholders receive dividends before common shareholders, making them "a favored choice for income-focused investors" during periods of economic uncertainty.

Strategic Allocation: Balancing Growth and Income

Goldman Sachs' 2025 outlook highlights a nuanced approach to equity allocation. While public equities remain central to long-term growth strategies, the firm's own issuance of high-yield preferred shares-such as the recently launched Series Z with a 6.850% fixed-rate reset-signals a strategic emphasis on yield, as noted in an Investing.com report. This duality reflects a broader trend among family offices: 38% plan to increase public equity allocations in 2025, while 26% aim to boost exposure to private credit, a sector that overlaps with the risk-return profile of preferred shares.

However, preferred shares are not without caveats. Many, like Goldman Sachs' Series A and C, are non-cumulative, meaning unpaid dividends do not accrue if the board suspends payments-a risk that becomes more pronounced during financial stress. Common shares, though less reliable for income, offer greater upside potential through capital gains and corporate governance influence. This dichotomy forces investors to weigh their tolerance for volatility against the need for consistent returns.

The Role of Macroeconomic Tailwinds

Goldman Sachs Research anticipates a "more benign" economic cycle in 2025, with equity returns projected at 10% annually, driven by earnings growth in the U.S. technology sector, according to Goldman Sachs research. In such an environment, the valuation premium for U.S. large-cap stocks-already stretched-could amplify the appeal of preferred shares as a hedge against overvaluation risks. For example, the firm's Series C preferred shares traded at a 4.60% discount to their liquidation value in mid-2024, offering a yield of over 6.5%-a compelling alternative to common stock in a market where earnings growth may outpace valuation gains.

Yet, the firm's equity strategies also caution against overreliance on any single instrument. The 2025 Family Office report emphasizes diversification across geographies and sectors, noting that 86% of family offices are investing in AI-driven public equities while 33% have entered cryptocurrencies. This suggests that preferred shares are most effective when integrated into a broader portfolio, complementing common equities and alternatives to balance growth and income.

Conclusion: A Hybrid Approach for Uncertain Times

As interest rates remain anchored at historic lows, the equity landscape demands a hybrid strategy that reconciles the growth potential of common shares with the income stability of preferred stock. Goldman Sachs' own capital structure-layering preferred shares with varying dividend features-provides a blueprint for this approach. For family offices and institutional investors alike, the key lies in aligning allocations with macroeconomic signals: leveraging preferred shares for yield and downside protection while retaining exposure to common equities for long-term appreciation.

In the end, the 2025 investment environment rewards those who navigate the tension between risk and reward with precision-a challenge that Goldman Sachs' insights position as both an opportunity and a necessity.