Aviva preference shares

I'm in something of a quandary.  I find myself with cash to invest, but almost every asset class looks overvalued.  I don't want to pile everything into the markets, but staying in cash is guaranteed to lose money after inflation - I'd like to invest some of it.  So I've returned to an old favourite: preference shares.  I've held some sort of bank prefs for over 10 years, initially Lloyds and more recently Natwest (which I still hold).  This time I've diversified very slightly and gone for Aviva - AV.A 8.75% prefs to be precise, at £1.51.

What's the upside?  That's easy: 8.75% per year for eternity (a yield of 5.8% based on my purchase price).  It certainly won't be any better than that - the problem with prefs is that the upside is capped.

What are the risks?  There are a few:

- Inflation.  Any inflation is going to eat into the real return, and will also depress the capital value.

- Interest rates.  5.8% is attractive while you can't get more than 1-2% from a bank account, but if bank accounts start paying decent rates of interest again then preference shares look less appealing.  That will affect the capital value.

- Aviva previously tried to cancel their prefs at par (£1).  They backed down though, compensated shareholders who sold into a depressed market, and promised they wouldn't try to do exactly that again, so I think the chances of a recurrence are low.  They said: "Under current regulation the preference shares will no longer count as regulatory capital in 2026. Aviva will work towards obtaining regulatory approval for the preference shares, or a suitable substitute, to qualify as capital from 2026 onwards.   If as we approach 2026 Aviva needs to reconsider this position, it will do so after taking into account the fair market value of the preference shares at that time."

- If Aviva itself fails as a company then the prefs will likely be worthless, assuming ordinary shareholders are wiped out.

I think those risks are fairly modest, and apart from the last one the downside is limited.  Even if they get cancelled at par in 2026 I'll still have got my money back via dividends and the capital return, for instance.

For now I've invested a modest amount but I plan to keep an eye on prices of these and similar preference shares and may build a more substantial holding in the future.