Archive for the ‘Indices and ETFs’ Category

PSF.UN Merged Into FPR

Saturday, November 5th, 2016

First Asset Investment Management Inc. has announced:

that the merger of Preferred Share Investment Trust (TSX: PSF.UN) (the “Fund”) with First Asset Preferred Share ETF (the “First Asset ETF”) (TSX: FPR) was implemented after the close of business on November 1, 2016.

In connection with the Merger, each issued and outstanding unit of the Fund received 0.29955 Unit of the First Asset ETF.

According to FPR’s investment objectives:

First Asset Preferred Share ETF’s investment objective is to provide unitholders with regular distributions; and the opportunity for capital appreciation from the performance of a portfolio comprised primarily of preferred shares of North American issuers. This actively managed portfolio will be comprised primarily of investment grade preferred shares and to a lesser extent investment grade corporate debt and convertible bonds. At least 75% of the Preferred Shares and Corporate Debt in the portfolio of FPR shall be rated investment grade at the end of every reporting period (June 30th and December 31st).

This has the very sad, unfortunate and most lamentable effect of suppressing the performance history of PSF.UN. As reported in the MAPF Performance: September 2016 report, as of September 30, 2016, the historical performance looked like this:

Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are +0.11%, +2.45% and -1.67% for the past one, three and twelve months, respectively. The two-, three-, four- and five-year figures are -14.52%, -9.01%, -7.09% and -5.10%, respectively.

TXPL and Related Indices Discontinued

Friday, May 13th, 2016

When one checks the TXPL Index on the TMX website nowadays, the ‘overview’ section contains the following notice in large red letters:

This index has been discontinued effective April 29, 2016. Data displayed for this index is accurate as of the last trading day prior to discontinuation.

The same notice is displayed for the ‘year’ indices that provided data according to the term to reset of the various issues:

TXPL was developed in order to provide an index for BMO’s FixedReset ETF, ZPR, but this ETF hired a new index provider in October 2015. It would appear that those behind TXPL have been unsuccessful in finding a client to pay for the preparation of this index; or perhaps that there was a six-month notice period for cancellation of the contract.

I have not been able to find a formal announcement that goes beyond the bare bones on the TMX pages.

Jeff Herold, who manages NexGen Canadian Preferred Share Tax Managed Fund, comments:

As we move into May, we note the unmourned passing of the S&P/TSX Preferred Share Laddered Index. Created as a benchmark for the BMO S&P/TSX Laddered Preferred Share Index ETF, the index had no purpose once the ETF switched in October 2015 to a different index provided by Solactive. The switch allowed BMO to reduce expenses, have more frequent rebalancing, and simplify the ETF name to the BMO Laddered Preferred Share Index ETF. The changes just reinforce our conviction that bespoke indices created for unique ETF’s must be carefully evaluated for any informational value. Indices are generally not good prescriptions for how to invest, but can be used for clever marketing purposes.

TXPR / TXPL Rebalancing

Friday, January 15th, 2016

S&P Dow Jones Indices Canadian Index Operations has announced (on December 31, so this is rather late):

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Preferred Share Laddered Index Reviews. These changes will be effective at the open on Monday, January 18, 2016.

S&P/TSX PREFERRED SHARE INDEX – ADDITIONS
Symbol Issue Name CUSIP
ALA.PR.I ALTAGAS LTD. 5-YR RESET SERIES ‘I’ PR 021361 85 2
BAM.PF.H BROOKFIELD ASSET MANAGEMNT INC CL A PR SER 44 112585 48 4
BAM.PR.K BROOKFIELD ASSET MANAGEMNT INC CL A PR SER 13 112585 87 2
BCE.PR.Y BCE INC. 1ST PR SERIES ‘Y’ 05534B 85 1
BEP.PR.G BROOKFIELD RENEWABL ENGY PART LP A SR 7 PR UN G16258 13 2
BNS.PR.A BANK OF NOVA SCOTIA (THE) PR SERIES ’19’ 064149 73 5
BNS.PR.E BANK OF NOVA SCOTIA (THE) 5-YR NVCC PR SER 34 064149 55 2
BNS.PR.R BANK OF NOVA SCOTIA (THE)5-YR RESET PR SER 22 064149 69 3
EFN.PR.C ELEMENT FINANCIAL CORPORATION 6.5% PREF SERIES A 286181 83 9
EFN.PR.G ELEMENT FINANCIAL CORPORATION 6.5% PREF SERIES G 286181 78 9
FTS.PR.E FORTIS INC. 1ST PR SERIES ‘E’ 349553 80 0
GWO.PR.M GREAT-WEST LIFECO INC. 5.80% 1ST PR SERIES M 39138C 81 7
POW.PR.C POWER CORPORATION OF CANADA 5.80% SER ‘C’ PR 739239 87 9
PWF.PR.E POWER FINANCIAL CORP. SERIES ‘D’ 1ST PR 73927C 80 3
PWF.PR.I POWER FINANCIAL CORP. 6% SERIES ‘I’ 1ST PR 73927C 84 5
PWF.PR.L POWER FINANCIAL CORP. 5.10% SERIES ‘L’ 1ST PR 73927C 82 9
RY.PR.C ROYAL BANK OF CANADA 1ST PR SERIES ‘AC’ 780102 60 4
RY.PR.P ROYAL BANK OF CANADA 1ST PR NVCC SER ‘BJ’ 78013K 28 8
RY.PR.Q ROYAL BANK OF CANADA 5YR 1ST PR NVCC SER ‘BK’ 78013L 21 1
TD.PR.T TORONTO-DOMINION BANK(THE) FLTG RT PR SER T 891145 72 4
S&P/TSX PREFERRED SHARE LADDERED INDEX – ADDITIONS
Symbol Issue Name CUSIP
ALA.PR.I ALTAGAS LTD. 5-YR RESET SERIES ‘I’ PR 021361 85 2
BAM.PF.H BROOKFIELD ASSET MANAGEMNT INC CL A PR SER 44 112585 48 4
BEP.PR.G BROOKFIELD RENEWABL ENGY PART LP A SR 7 PR UN G16258 13 2
BIP.PR.B BROOKFIELD INFRASTRUCTURE PARTNR LP A PR SR 3 G16252 14 3
BNS.PR.E BANK OF NOVA SCOTIA (THE) 5-YR NVCC PR SER 34 064149 55 2
EFN.PR.A ELEMENT FINANCIAL CORPORATION 6.6% PR SER A 286181 87 0
EFN.PR.C ELEMENT FINANCIAL CORPORATION 6.5% PR SER A 286181 83 9
EFN.PR.E ELEMENT FINANCIAL CORPORATION 6.4% PR SER E 286181 81 3
EFN.PR.G ELEMENT FINANCIAL CORPORATION 6.50% PR SER G 286181 78 9
RY.PR.Q ROYAL BANK OF CANADA 5YR 1ST PR NVCC SER ‘BK’ 78013L 21 1

ZPR Hires New Benchmark Provider

Saturday, October 17th, 2015

Bank of Montreal has announced:

BMO Asset Management Inc. (BMO AM) today announced a change (ZPR Index Change) to the underlying index of BMO S&P/TSX Laddered Preferred Share Index ETF (Ticker: ZPR).

Currently, ZPR tracks the performance of the S&P/TSX Preferred Share Laddered Index. Effective on or about October 19, 2015, ZPR will start tracking the performance of the Solactive Canadian Preferred Share Index (Successor Index). An amendment to the offering documents of ZPR has been filed with the securities regulatory authorities, for which a receipt has been issued.

As a result of the ZPR Index Change, the current name of ZPR will change to BMO Laddered Preferred Share Index ETF.

In addition, the index provider will change to Solactive AG.The Solactive Canadian Preferred Share Index will provide investors with substantially the same exposure to the asset class to which ZPR is currently exposed. Since its creation in 2007, Solactive AG has become one of the key players in the indexing space. Solactive AG currently calculates indices for 175 clients in Europe, America and Asia with approximately USD$ 25 billion invested in products linked to its indices.

The ZPR Index Change is intended to provide investors of ZPR with substantially the same index exposure as the current index. The Successor Index aligns with the current investment objectives and strategy of ZPR. One notable but slight difference between the current index and Successor Index is the S&P/TSX Preferred Share Laddered Index is rebalanced on a quarterly basis while the Solactive Canadian Preferred Share Index is rebalanced on a monthly basis.

Solactive has been mentioned on PrefBlog once before, in connection with the now defunct CNPF:

The Solactive Canada Preferred Stock Index is admirably transparent. The indexing agent is Structured Solutions AG, which is based in Frankfurt. My, aren’t we getting international! They appear to do a lot of business with Global X, a New York based firm that has a hatful of thinly sliced ETFs.

The Solactive Laddered Canadian Preferred Share Index is similarly transparent making public a complete list of constituents together with the number of shares held in the index to six decimal places. Regrettably, they use Bloomberg symbols in their listing, presumably because brain-dead bank employees have no idea that information about anything is available anywhere else, but it’s no big deal. Hit yourself on the head with a hammer a few times, mumble something positive about ‘respect inna workplace’ and you’ll be able to translate the symbols to your preferred convention pretty easily. Mind you, there are no less than eight constituents with the symbol “ENBCN 4 12/31/49”, so you’ll have to do some guessing!

The Solactive Guideline describes index construction:

On each Adjustment Day each Index Component of the Solactive Laddered Canadian Preferred Share Index is weighted according to the Market Capitalization of the respective preferred share within the term buckets. The weights are capped twofold on a Selection day, whereas a cap on an issuer basis is applied of 12.5% per issuer on a selection day as well as a Cap of 20% per Maturity Bucket.

So the caps are a little higher than the 10% previously used.

“Solactive Laddered Canadian Preferred Share Index Universe” in respect of a Selection Day are instruments that fulfill the following criteria:
a) Defined as Preferred Share
b) Listed on the Toronto Stock Exchange
c) Incorporated in Canada
d) Trading in CAD
e) Only rate reset securities are eligible, which have rate reset dates frequency of five years or less
f) Floating Rate instruments are explicitly excluded
g) For instruments that are currently part of the Solactive Laddered Canadian Preferred Share Index a minimum Total Market capitalization of 50 m CAD. For instruments that are not part of the current composition of the Solactive Laddered Canadian Preferred Share Index a minimum Total Market capitalization of 100 m CAD is required
h) For instruments that are currently part of the Solactive Laddered Canadian Preferred Share Index a minimum Average daily value traded over the last 3 month of 50,000 CAD is required. For instruments that are not part of the current composition of the Solactive Laddered Canadian Preferred Share Index a minimum Average daily value traded over the last 3 month 100,000 CAD is required
i) Minimum ration of DBRS or S&P is P3 (low) or a minimum ration of Moodys above Baa3. If more than one of the rating agencies has issued a rating on the stock, the highest rating is used
j) Time to maturity of up to 6 years.

Looks like a bit of a rush job on the guideline. Ration?

Anyway, two of these elements confused me: first, I’m not sure what they mean by “Floating Rate instruments”. Does this include the BCE FixedFloaters and RatchetRates? (The answer is ‘no’; the constituent list includes “BCECN 3.11 12/31/49”, which is BCE.PR.F, a FixedFloater). Does it include FloatingResets? The term is not defined. Second, I am baffled by the stipulation that the Time to maturity is up to 6 years. The best guess I can come up with is that they mean Time to Next Exchange Date, which, since reset frequency is stipulated as being five years or less, means they just want to eliminate new issues with a long first-call-lockout-period.

There’s a bit of ambiguity in section “3.4 Dividends and other distributions” as well. The formula they provide makes sense if dividends are reinvested on the ex-date, but this is not made explicitly clear. This is not as pedantic a point as one might think: a lot of people simply can’t reinvest on the ex-date because they won’t get the money until a month later. Therefore, if they want to match the index exactly, they’ll have to borrow it and incur interest costs that will not be reflected in the index; this represents a bias against active managers. Not the biggest deal in the world, to be sure, but it’s there.

And finally we arrive at the interesting question of why BMO has changed index providers. It seems likely that Solactive is cheaper than S&P and it also seems likely that “BMO” is a much better name to use when selling a Canadian ETF than “S&P”. If I was running an index fund, I’d basically have to go with S&P to get the credibility, but BMO doesn’t have that problem. So, I’ll bet a nickel that part of the answer is short and sweet: it’s about the money.

A much more interesting possibility, however, is reporting vs. their benchmark. The fund is currently reporting its performance for past periods against the S&P index and detailed quantitative analysis by PrefBlog’s crack team of analysts has determined that performance, in absolute terms, since the inception date of Nov 14, 2012, has not been at levels that will help persuade granny to invest some of the old hard-earned. We also note from the guideline that:

The Index is based on 1000 at the close of trading on the start date, September 15th 2015

Historical figures have not been calculated and I’m not sure BMO would be allowed to use hypothetical, back-dated index calculations even if they were available. So while I have every confidence that BMO will comply with every jot, tittle and comma of the regulations regarding fund performance reporting, I also suspect that having a benchmark that only starts on September 15, 2015, will not only allow them to de-emphasize the results of the preceding three years, but that there is a pretty good chance that results measured from index inception are going to be pretty good.

TXPR & TXPL Index Revision, 14Q4

Friday, October 3rd, 2014

S&P Dow Jones Indices Canadian Index Operations has announced:

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Preferred Share Laddered Index Reviews. These changes will be effective at the open on Monday, October 20, 2014.

S&P/TSX Preferred Share Index [TXPR]
ADDITIONS
Symbol Issue Name CUSIP
ALA.PR.G ALTAGAS LTD. 5YR RESET SERIES ‘G’ PR 021361 88 6
AQN.PR.D ALGONQUIN POWER & UTILITIES CORP. SER ‘D’ PR 015857 50 1
BMO.PR.W BANK OF MONTREAL 5-YR RESET CL ‘B’ PR SER 31 063679 88 0
ENB.PF.E ENBRIDGE INC. PR SER ’13’ 29250N 57 6
ENB.PF.G ENBRIDGE INC. PR SER ’15’ 29250N 55 0
FTS.PR.M FORTIS INC. 1ST PR SERIES ‘M’ 349553 76 8
MFC.PR.M MANULIFE FINANCIAL CORP. CL 1 PR SER ’17’ 56501R 69 2
PPL.PR.G PEMBINA PIPELINE CORPORATION CL ‘A’ PR SER 7 706327 60 8
PWF.PR.H POWER FINANCIAL CORP. 5.75% SERIES ‘H’ 1ST PR 73927C 86 0
TA.PR.J TRANSALTA CORPORATION 1ST PR SER ‘G’
89346D 67 7
TD.PF.B TORONTO-DOMINION BANK(THE) CL ‘A’1ST PR SER 3 891145 67 4
DELETIONS
Symbol Issue Name CUSIP
BCE.PR.Y BCE INC. 1ST PR SERIES ‘Y’ 05534B 85 1
BPO.PR.H BROOKFIELD OFFICE PROP INC. CL AAA PR SER ‘H’ 112900 80 8
CCS.PR.C CO-OPERATORS GENERAL INSURANCE CO CL E PR ‘C’ 189906 40 7
CU.PR.D CANADIAN UTILITIES LIMITED 2ND PR SER ‘AA’ 136717 67 5
EMA.PR.E EMERA INCORPORATED PR SERIES ‘E’ 290876 70 5
NPI.PR.C NORTHLAND POWER INC. CUMLTV RST SERIES 3 PR 666511 60 5
REI.PR.C RIOCAN REAL ESTATE INVEST TR PR UNITS SER ‘C’ 766910 12 9
TD.PR.S TORONTO-DOMINION BANK (THE) 5-YR RESET PR S 891145 60 9

S&P/TSX Preferred Share Laddered Index [TXPL]
ADDITIONS
Symbol Issue Name CUSIP
ALA.PR.G ALTAGAS LTD. 5YR RESET SERIES ‘G’ PR 021361 88 6
AQN.PR.D ALGONQUIN POWER & UTILITIES CORP. SER ‘D’ PR 015857 50 1
BMO.PR.W BANK OF MONTREAL 5-YR RESET CL ‘B’ PR SER 31 063679 88 0
FTS.PR.M FORTIS INC. 1ST PR SERIES ‘M’ 349553 76 8
MFC.PR.M MANULIFE FINANCIAL CORP. CL 1 PR SER ’17’ 56501R 69 2
PPL.PR.G PEMBINA PIPELINE CORPORATION CL ‘A’ PR SER 7 706327 60 8
TA.PR.J TRANSALTA CORPORATION 1ST PR SER ‘G’ 89346D 67 7
TD.PF.B TORONTO-DOMINION BANK(THE) CL ‘A’1ST PR SER 3 891145 67 4

TXPR / TXPL Index Revision

Monday, July 7th, 2014

S&P Dow Jones Indices Canadian Index Operations has announced:

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Preferred Share Laddered Index Reviews. These changes will be effective at the open on Monday, July 21, 2014.

S&P/TSX Preferred Share Index

ADDITIONS
Symbol Issue Name CUSIP
BMO.PR.S Bank of Montreal 4.00% Class B Preferred Series 27 063679 40 1
BMO.PR.T Bank of Montreal 3.90% Class B Preferred Series 29 063679 60 9
BAM.PF.F Brookfield Asset Management Inc. 4.50% Class A Preferred Series 40 112585 53 4
CM.PR.O CIBC 3.90% Class A Preferred Series 39 136069 44 0
EMA.PR.F Emera Inc. 4.25% First Preferred Series F 290876 80 4
ENB.PF.C Enbridge Inc. 4.40% Preferred Series 11 29250N 59 2
GWO.PR.S Great-West Lifeco Inc. 5.25% First Preferred Series S 39138C 73 4
LB.PR.H Laurentian Bank of Canada 4.30% Class A Preferred Series 13 51925D 82 5
RY.PR.H Royal Bank of Canada 3.90% Preferred Series BB 78012H 56 7
TD.PF.A Toronto-Dominion Bank 3.90% Class A First Preferred Series 1 891145 69 0
DELETIONS
Symbol Issue Name CUSIP
AQN.PR.A Algonquin Power & Utilities Corp. 4.50% Preferred Series A 015857 30 3
BMO.PR.K Bank of Montreal 5.25% Class B Preferred Series 14 063671 14 3
BCE.PR.C BCE Inc. 3.55% First Preferred Series AC 05534B 78 6
BCE.PR.T BCE Inc. 3.39% First Preferred Series T 05534B 81 0
HSB.PR.D HSBC Bank Canada 5.00% Class 1 Preferred Series D 40427H 70 7
LB.PR.F Laurentian Bank of Canada 4.00% Class A Preferred Series 11 51925D 84 1

S&P/TSX Preferred Share Laddered Index

ADDITIONS
Symbol Issue Name CUSIP
BMO.PR.S Bank of Montreal 4.00% Class B Preferred Series 27 063679 40 1
BMO.PR.T Bank of Montreal 3.90% Class B Preferred Series 29 063679 60 9
BAM.PF.F Brookfield Asset Management Inc. 4.50% Class A Preferred Series 40 112585 53 4
CM.PR.O CIBC 3.90% Class A Preferred Series 39 136069 44 0
LB.PR.H Laurentian Bank of Canada 4.30% Class A Preferred Series 13 51925D 82 5
RY.PR.H Royal Bank of Canada 3.90% Preferred Series BB 78012H 56 7
TD.PF.A Toronto-Dominion Bank 3.90% Class A First Preferred Series 1 891145 69 0
DELETIONS
Symbol Issue Name CUSIP
BAM.PR.G Brookfield Asset Management Inc. 3.80% Class A Preferred Series 9 112585 60 9

It is interesting to see that BAM.PR.G will be deleted from TXPL. This issue is already dirt-cheap compared to its Strong Pair, BAM.PR.E, according to the calculator.

New S&P/TSX Preferred Share Sub-Indices?

Wednesday, March 26th, 2014

I was a little startled to find some new entries on the TMXMoney indices page:

S&P/TSX Preferred Share Current Year Laddered Index ^TXLC 954.15 -0.51 -0.05
S&P/TSX Preferred Share Year 1 Laddered Index ^TXL1 886.44 -0.72 -0.08
S&P/TSX Preferred Share Year 2 Laddered Index ^TXL2 872.91 -0.19 -0.02
S&P/TSX Preferred Share Year 3 Laddered Index ^TXL3 875.73 0.44 0.05
S&P/TSX Preferred Share Year 4 Laddered Index ^TXL4 948.92 0.37 0.04

Clicking the names provides the inclusion criteria – just as one would expect from the names, e.g.:

•Same as the S&P/TSX Preferred Share Laddered Index, except that preferred stocks are restricted to those with reset dates in the current calendar year.

The “methodology” and “fact sheet” buttons lead only to the TXPL methodology and fact sheet.

There are no references to these subindices on S&P’s TXPL web page.

Mr. Google knows nothing about these indices.

So it’s all very mysterious. I suspect that there’s a new ETF family in the works, now that ZPR has attracted $972-million in about sixteen months making every promoter in the country salivate while kicking themselves for not thinking of it first; and I’m sure that the Exchange doesn’t create these things on spec.

The other puzzle is: what useful purpose could these things serve? I would be more interested in a slicing of TXPL by credit quality (investment grade & junk) and Issue Reset Spread (so that the bands were, effectively, ‘likely call’, ‘likely extension’ and ‘maybe’, but I know nothing of sales techniques.

November 29 Tracking Error

Friday, December 6th, 2013

In the discussion of the performance of MAPF in November, I discussed the apparent tracking error of ZPR – which, as an index fund, should have minimal tracking error – and stated:

It will be remembered that I calculate performance using bid prices, while the bums at the Exchange and S&P use closing prices. This difference may well have been important under the current circumstances

So, it looks as if the jump in the index in the last two days is reasonable; and the unchanged NAV of ZPR in the last two days is what was reported by them. The scarcely credible indicated tracking error in the past two days may well be the exact truth; I will wait with bated breath for confirmation from the fund.

So ZPR has now updated its Tracking Error Chart and it looks like this:

ZPRTrackingError_131205
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It is plainly apparent that there is a surge in tracking error at the end of the month, but this is better quantified with a chart (prepared from their published raw data) that focuses on the difference of returns:

ZPR_TrackingErrorDifference
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This makes it pretty clear that there was a big pop in tracking error on November 29, which was in most part reversed on December 2. ZPR is chugging along with a monthly tracking error of about four and a half basis points, which is what it should be doing.

OK, so what could have caused a huge increase in tracking error like that? One possibility, which I suggested in the initial discussion, is that the fund could have received a large amount of cash at monthend, and either caused distortion in the market when investing it, or simply have been caught underinvested at a time when the market rocketted upwards. The first of these explanations can now be set aside, as the tracking error returned to normal after the explosion; the not consistent with the fairly modest moves in the HIMIPref™ indices on November 29.

That’s all I can think of at the moment as far as “real” fund and market activities are concerned, so we’ll turn to technical explanations that reflect mere reporting, as opposed to actual market activity.

If we obtain the TXPL methodology from the S&P TXPL web page, we find that:

The total return calculation includes stock dividends paid in kind, stock dividends paid with the securities of an issuer other than the issuer declaring such dividend, rights distributions, and cash distributions less than 4% of the underlying stock price based on the last traded board lot.

A dollar value is calculated for the distribution to be used in the total return index calculation.

For details on total return calculations, please refer to S&P Dow Jones Indices’ Index Mathematics Methodology.

If we refer to the S&P Dow Jones Indices’ Index Mathematics Methodology as suggested, we find that:

The total return construction differs from the price index and builds the index from the price index and daily total dividend returns.

This is really cute, because the document does not state explicitly how the price index is constructed. However, there are two references to “closing prices”:

Index maintenance – reflecting changes in shares outstanding, capital actions, addition or deletion of stocks to the index – should not change the level of the index. If the S&P 500 closes at 1250 and one stock is replaced by another, after the market close, the index should open at 1250 the next morning if all of the opening prices are the same as the previous day’s closing prices.

Divisor adjustments are made “after the close” meaning that after the close of trading the closing prices are used to calculate the new divisor based on whatever changes are being made.

There are no meaningful references in the document to “quote”, “quotation” or “VWAP”; it is therefore reasonable to assume that S&P uses the closing price as the basis for its calculations, while the HIMIPref™ indices use the closing bid. It is better procedure, by the way, to use the closing bid: this is consistent with IFRS accounting:

Long positions should be valued at the bid price and short positions should be valued at the asking price. Assets and liabilities with offsetting market risks may be valued at mid-market prices for the offsetting risk positions and at bid or asking prices for net positions as appropriate.

This is particularly the case for illiquid securities such as Canadian preferred shares. The “closing price” – also referred to as the “last sale price” – could refer to a transaction executed in the morning before a big move … or even several weeks before, if it’s really illiquid! Additionally, and especially for a single security, the so-called “fair value” under the “closing price” regime could move by 1% (or even more) simply according to whether the last trade was a hit or a lift. However, only huge companies such as Hymas Investment Management Inc. have the in-house expertise apply this knowledge – small shops like Standard & Poor’s simply can’t compete.

Anyway, it is useful to compare the difference between the two measures for November 28 (chosen more or less arbitrarily as a control date) and November 29. In the following chart, each security for which a close was reported by the Toronto Exchange was analyzed by dividing the close by the last bid, then subtracting one:

HIMIPrefCloseVsBid
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Obviously, there’s a big difference – not just in the average, but the entire distribution is skewed on the 29th. This leads us to conclude that a very large proportion of last trades on the 29th were at the asking price – this might be indicative of a big player taking a meaningful position on the last day of the month, while being willing to absorb the costs of the market spread. Or it could be random market fluctuation – but obviously a very rare one, given the reasonableness of the ZPR tracking error over time. The effect is too small and too broad to be anything nefarious, like high-closing … or if it is nefarious, it’s more complex than the usual manipulation!

The existence of the skew leads one to wonder whether the effect was:
(i) confined to a particular credit strata, and/or
(ii) confined to a particular structure.

To investigate this, I have analyzed the BMO-CM “50” index, largely on the grounds that this is easy for me.

BMOCM50_All
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The BMO-CM “50” is largely investment-grade (one reason why I like it!) and the effect appears to be proportional to that observed for the universe. The weighted average close/bid factor on the 28th is 1.0021 (that is to say, 21bp), while on the 29th it’s 43bp. This compares to unweighted averages for the universe of 26bp and 41bp; pretty close, I’d say, implying that the effect is much the same in this (mostly) investment-grade sample as it is for the universe.

We can draw more conclusions when we break down the results according to the sectors defined by the BMO-CM 50 analysts:

BMOCM50_Retractable
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BMOCM50_FloatingRate
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BMOCM50_StraightPerp
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BMOCM50_FixedReset
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Average last-trade / last-bid factors are:

BMO-CM “50” Sectors
Weighted Average
Last Trade / Last Bid
Difference from Unity
Sector November 28, 2013 November 29, 2013
Retractable 7bp 30bp
Floating Rate 38bp 43bp
Straight Perpetual 19bp 47bp
Fixed Reset 21bp 42bp

So, with the exception of Floating Rate (which is a very small sector; conclusions one way or another are hard to support) we may conclude that the effect is present irrespective of preferred share structure. We also note that volume was very heavy on November 29.

This in turn leads us to believe that there was some very heavy, broadly based buying pressure on November 29; this was probably not from ZPR, which did not have any meaningful jump in tracking error as of December 1 (I have an inquiry into the fund, seeking to veryify that it values itself at the closing bid); it might have been from CPD, which had no meaningful tracking error in November and values itself at the closing price; or it may have been somebody else entirely – index funds aren’t the only indexers!

Note that given the broad base of the buying, the indexer (or index fund) won’t have lost much against the index, but it will have absorbed much of the bid-ask spread; however – and this is the critical bit – the index will have also absorbed much of the bid-ask spread. However, his clients can at least be relieved that he didn’t go nuts; he absorbed the spread, but a reasonable spread, nothing like the CPD / POW.PR.C fiasco in January, 2010.

And, to my heartfelt relief, we may also conclude that MAPF will probably get a boost to its December performance vis a vis the indices (on the order of 60bp, if we can take ZPR as an indicator; or 20-odd bp if the BMO-CM “50” close/bid ratios are indicative), as the close/bid differential (probably!) returns to normal.

Update, 2013-12-6 The plot thickens! My contact at BMO tells me that the valuation of ZPR is at the closing price, not the closing bid, which knocks out the price / bid explanation of the increase in tracking error. He is checking to see if he can determine the source of the discrepency, but in the meantime, here’s another possibility…

Mutual Funds love to inform everybody that trades are reflected in the valuation as of the Trade Date, but I happen to know that this was very often not the case – at least, it was very often not the case back in 2008. Things may have changed in the interim, although I doubt it.

Many clients like to see that their funds are valued by external valuators, because this allows them to tick a box on their due-diligence checklist. However, there is at least one enormous external valuator (very big, and my goodness, they charge the earth for it, which is why I’ve never been a client) that does not actually do this. Reflecting trades on Trade Date would mean that the trade lists wouldn’t be available prior to 4:00pm; and not even then if you insist on including extended hours trading, so the staff wouldn’t be able to go home at five which is the whole point of working for a big company. Instead, trades are reflected in the valuation on date T+1. As I know from personal experience, morons are fond of telling people that this means there’s no point in investing client cash received on day T, but luckily my Assiduous Readers are not morons.

I don’t know who does the valuation for ZPR, because I’m not a B-School grad and therefore don’t make a fetish of ticky-boxes. But it is possible that whoever does the valuation does it in accordance with the delayed reflection of trades explained above.

So it is possible that at least part of the ZPR tracking error is due to this: if they had a big whack of cash to invest on the 29th and invested it towards the close (which distorted the closing price / bid relationship, as we have seen), these trades would not be reflected on their calculated NAV – the portfolio would still have contained the cash for valuation purposes. Readers will recall my earlier discussion of the tracking error problem:

The fund has been able to attract assets of about $912.8-million in the year-odd since inception; a huge gain of $75-million in November. I feel that the flows into and out of this fund are very important in determining the performance of its constituents. I suspect that the November flows had a strong effect on the performance of FixedResets over the month.

Mind you, this does not even attempt to explain all the error: TXPL gained 45bp on November 29, while the fund’s reported NAV was down 15bp. A 10% cash weight in the (apparent) portfolio would only result in a cash drag of 4-5bp over the single day (which would be recovered on the next valuation on T+1, in which the day T trades would be included). But it could be part of it.

TXPR / TXPL Index Revision

Friday, October 11th, 2013

Standard & Poor’s has announced:

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Venture Select Index Reviews. These changes will be effective at the open on Monday, October 21, 2013.

S&P/TSX Preferred Share Index

ADDITIONS
Symbol Issue Name CUSIP
BMO.PR.R BANK OF MONTREAL FLTG RATE CL ‘B’ PR SER 17 063671 77 0
BNS.PR.O BANK OF NOVA SCOTIA (THE) PR SERIES ’17’ 064149 75 0
FTS.PR.K FORTIS INC. 1ST PR SERIES ‘K’ 349553 78 4
L.PR.A LOBLAW COMPANIES LIMITED 2ND PR SERIES ‘A’ 539481 60 6
PPL.PR.A PEMBINA PIPELINE CORPORATION CL ‘A’ PR SER 1 706327 20 2
POW.PR.D POWER CORPORATION OF CANADA 5.00% SER ‘D’ PR 739239 86 1
POW.PR.A POWER CORPORATION OF CANADA 5.60% SER ‘A’ PR 739239 88 7
RY.PR.G ROYAL BANK OF CANADA 1ST PR NON-CUM SER ‘AG’ 780102 55 4
TD.PR.T TORONTO-DOMINION BANK(THE) FLTG RT PR SER T 891145 72 4
W.PR.H WESTCOAST ENERGY INC. 5.50% 1ST PR SERIES ‘7’ 95751D 88 8
DELETIONS
Symbol Issue Name CUSIP
CIU.PR.B CU INC. CUMULATIVE PR SERIES ‘2’ 22944C 30 4

S&P/TSX Preferred Share Laddered Index

ADDITIONS
Symbol Issue Name CUSIP
PPL.PR.A PEMBINA PIPELINE CORPORATION CL ‘A’ PR SER 1 706327 20 2

TXPR & TXPL Quarterly Revision

Friday, July 12th, 2013

S&P Dow Jones Indices Canadian Index Operations has announced:

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Venture Select Index Reviews. These changes will be effective at the open on Monday, July 22, 2013

S&P/TSX Preferred Share Index

ADDITIONS

Symbol Issue Name

CUSIP
BAM.PF.D BROOKFIELD ASSET MANAGEMNT INC CL A PR SER 37 112585 56 7
BAM.PR.J BROOKFIELD ASSET MANAGEMNT INC CL A PR SER 12 112585 88 0
BAM.PR.M BROOKFIELD ASSET MANAGEMNT INC CL A PR SER 17 112585 83 1
BAM.PR.R BROOKFIELD ASSET MANAGEMNT INC CL A PR SER 24 112585 74 0
BCE.PR.G BCE INC. 1ST PR SERIES ‘AG’ 05534B 73 7
BNS.PR.A BANK OF NOVA SCOTIA (THE) PR SERIES ’19’ 064149 73 5
BRF.PR.A BROOKFIELD RENEWABLE PWR PREF EQTY INC A PR 1 11283Q 20 6
BRF.PR.F BROOKFIELD RENEWABLE PWR PREF EQTY INC A PR 6 11283Q 70 1
CM.PR.M CANADIAN IMPERIAL BANK SERIES ’37’ PR 136069 46 5
CU.PR.G CANADIAN UTILITIES LIMITED 2ND PR SER ‘DD’ 136717 64 2
EMA.PR.E EMERA INC. PR SERIES ‘E’ 290876 70 5
ENB.PR.Y ENBRIDGE INC. PR SER ‘3’ 29250N 68 3
GWO.PR.G GREAT-WEST LIFECO INC. 5.20% 1ST PR SERIES G 39138C 88 2
GWO.PR.M GREAT-WEST LIFECO INC. 5.80% 1ST PR SERIES M 39138C 81 7
MFC.PR.K MANULIFE FINANCIAL CORP. CL 1 PR SER ’13’ 56501R 74 2
NPI.PR.A NORTHLAND POWER INC. SERIES 1 PR 666511 30 8
PWF.PR.O POWER FINANCIAL CORP. 5.80% SERIES ‘O’ 1ST PR 73927C 78 7
RY.PR.D ROYAL BANK OF CANADA 1ST PR NON-CUM SER ‘AD’ 780102 84 4
TD.PR.P TORONTO-DOMINION BANK (THE) CL ‘A’ 1ST PR P 891145 20 3
TD.PR.Q TORONTO-DOMINION BANK (THE) CL ‘A’ 1ST PR Q 891145 30 2

S&P/TSX Preferred Share Laddered Index

ADDITIONS

Symbol Issue Name

CUSIP
MFC.PR.K MANULIFE FINANCIAL CORP. CL 1 PR SER ’13’ 56501R 74 2