Finding value in ‘digital credit’ preferreds

A little-watched slice of the preferred market – shaped by cryptocurrency exposure, structural advantages and lingering investor skepticism – has created a rare opportunity to capture elevated income with potential upside from a mispriced “digital credit” niche, according to Fidelity Portfolio Manager Adam Kramer.

“Preferred stocks have tended to shine when the market has already priced in a lot of bad news,” explains Kramer, lead manager of Fidelity^® Multi-Asset Income Fund (FMSDX). “That’s not broadly the case today, though certain perpetual preferreds issued by cryptocurrency firms stand out to me.”

The fund is a flexible, income-oriented strategy that invests tactically across a broad spectrum of income-producing securities, ranging from investment-grade bonds to dividend-paying equities.

In helming the portfolio since 2015, Kramer, alongside Co-Managers Ford O’Neil, Ramona Persaud and Rick Gandhi, aims to create a risk profile matching that of the Composite index – a 50-50 split between U.S. equities and investment-grade bonds. They also have the flexibility to go outside the Composite to choose other income-producing asset classes, with the aim of improving the fund’s risk/reward trade-off over a full economic cycle.

Kramer points out that preferred shares generally pay a fixed dividend and rank above common stock but below bonds in a company’s capital structure.

These characteristics often make preferred shares relatively attractive during so-called “risk-off” markets, although such conditions have not persisted for an extended period in recent years.

“Recently, the broader preferred market simply hasn’t offered enough compensation for interest-rate risk, in my view,” he contends. “Yields are low and risk appears underpriced.”

By contrast, Kramer sees a compelling combination of factors in certain preferred issues, particularly attractive yields and floating-rate structures that can help reduce interest-rate sensitivity.

This is evident in the preferred shares of fund holdings Strategy, Strive and Bitmine Immersion Technologies – companies that hold Bitcoin or Ethereum on their balance sheets.

Additionally, he notes that these firms’ crypto holdings provide built-in buffers of unencumbered assets that have remained substantial, even after significant price swings in those assets.

Kramer also points to the potential for tax advantages. Specifically, distributions paid by some preferreds may be treated as a return of capital rather than ordinary or qualified dividends, which can be a more favorable outcome for the fund.

“So why hasn’t the market closed the valuation gap on these securities?” he asks. “I believe skepticism around Ethereum-linked assets has kept many investors on the sidelines, causing these securities to trade at meaningful discounts relative to more-traditional preferreds.”

Kramer concludes that such hesitation is exactly where the opportunity lies. Identifying idiosyncratic mispricing is central to the tactical strategy, enabling it to earn a premium yield while the broader market works through its doubts.

For specific fund information, including full holdings, please click on the fund trading symbol above. Securities mentioned were fund investments as of June 30, 2026.