Archive for the ‘MAPF’ Category

MAPF Performance : March, 2020

Monday, April 6th, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close March 31, 2020, was $5.5596 after a distribution of 0.149833.

The fund’s performance was hurt in the month and the quarter by its holdings in Husky Energy preferreds, which have shockingly underperformed the market as discussed below. Husky, while under Review-Negative at DBRS remains classified as investment grade by that firm; a review by Standard & Poor’s resulted in a Negative Outlook assignment but the credit rating itself (P-3(high)) was unchanged, in contrast to other Canadian energy firms.

Returns to March 31, 2020
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month -25.14% -19.92% -20.14% N/A
Three Months -29.43% -23.46% -22.79% N/A
One Year -29.93% -21.65% -20.98% -21.32%
Two Years (annualized) -22.26% -15.67% -14.17% N/A
Three Years (annualized) -11.85% -8.60% -8.05% -8.52%
Four Years (annualized) -2.37% -1.35% +1.34% N/A
Five Years (annualized) -6.41% -4.12% -4.38% -4.80%
Six Years (annualized) -5.02% -3.74% -3.83% N/A
Seven Years (annualized) -4.49% -3.36% -3.62% N/A
Eight Years (annualized) -2.77% -2.23% -2.38% N/A
Nine Years (annualized) -2.24% -1.36% -1.64% N/A
Ten Years (annualized) +0.03% +0.00% -0.41% -0.90%
Eleven Years (annualized) +3.51% +2.16% +1.46%  
Twelve Years (annualized) +3.85% +0.71% +0.09%  
Thirteen Years (annualized) +3.42% +0.09%    
Fourteen Years (annualized) +3.57% +0.38%    
Fifteen Years (annualized) +3.85% +0.70%    
Sixteen Years (annualized) +3.98% +0.78%    
Seventeen Years (annualized) +5.82% +1.35%    
Eighteen Years (annualized) +5.28% +1.51%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees. I am advised that the “BMO50 is expected to be decommissioned at the end of 2020.”
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -%, -% and -%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is -%; five year is +%; ten year is +%

Figures from Morningstar are no longer conveniently available.

Manulife Preferred Income Class Adv has been terminated by Manulife. The performance of this fund was last reported here in March, 2018.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are -21.51%, -25.11% & -23.34%, respectively. Three year performance is -9.71%, five-year is -4.60%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -%, -% and -% for one-, three- and twelve months, respectively. Three year performance is -%; five-year is +%.

Acccording to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The last time Altamira Preferred Equity Fund’s performance was reported here was April, 2014; performance under the National Bank banner was first reported here May, 2014.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is -23.73% for the past twelve months. Two year performance is -16.66%, three year is -9.79%, five year is -5.90%.
Figures for Fiera Canadian Preferred Share Class Cg Series F, (formerly Natixis Canadian Preferred Share Class Series F) (formerly NexGen Canadian Preferred Share Tax Managed Fund) are -%, -% and -% for one-, three- and twelve-months, respectively. Three year performance is -%; five-year is -%
Figures for BMO Preferred Share Fund (advisor series) according to BMO are -%, -% and -% for the past one-, three- and twelve-months, respectively. Three year performance is -%; five-year is -%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are -21.68% for the past twelve months. The three-year figure is -8.93%; five years is -3.98%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR).

Performance for the fund was last reported here in September, 2016; the first report of unavailability was in October, 2016.

Figures for Lysander-Slater Preferred Share Dividend Fund (Class F) according to the company are -%, -% and -% for the past one, three and twelve months, respectively. Three year performance is -%, five-year is -%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are -19.45%, -22.32% and -22.11% for the past one, three and twelve months, respectively. Two year is -15.97% and three year performance is -9.68%.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available directly from Hymas Investment Management.

This has been the worst month for the BMO-CM “50” index since the beginning of my data for this index, December, 1992. The index return of -19.92% is nearly double that of the second-place November, 2008, which was a “mere” -10.70% in the depths of the Credit Crunch, and more than double the worst of the “Quantitative Easing” bloodbath which managed “only” -8.46%. Surprisingly, the year to month-end was only the second-worst I have on record, as the return to March 31, 2020 was -21.65%, while the return for the year ending 2016-2-29 was -22.09%.

What really sets this decline apart from other, though, is that it comes with a ferocity undampened by prior declines. The total return index level of 345.20 was first exceeded in January, 2010, meaning that the preferred share market has now had a negative total return for a holding period of ten years and two months.

bmocm50_rollingreturn_122moa
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The prior worst 122-month rolling return was for the period ended 2016-2-29, which marked a minimum at +2.09%; this period included both the Credit Crunch and the “Quantitative Easing” market hits; prior to then, the low had been at the depth of the Credit Crunch, November 2008, with a 122-month return of +7.78%. However, the current situation is the worst in our experience, with a cumulative total return of -0.25% for the 122 month period.

The preferred share market continues to be underpriced relative to other capital markets, leaving a lot of room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is extremely elevated (chart end-date 2020-3-20):

pl_200320_body_chart_1
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Note that the Seniority Spread was an incredible 515bp near month-end, ridiculously wider last month’s figure of 385bp. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September yielding 2.963%, about 411bp cheaper than the interest-equivalent figure of 7.07% for CIU.PR.A, which was then yielding about 5.44% as a dividend. Shaw Communications issued 30-year notes at 4.25% interest on December 5, 2019, when their FixedResets, SJR.PR.A, were yielding 6.59% dividends.

As has been noted, the increase in the Seniority Spread over the past one or two years has been due not to an increase in yield (drop in prices) of Straight Preferreds over the year, but largely because the yield of the Straight Preferreds has remained relatively constant while the yield of long-term corporate bonds has dropped dramatically. This month’s change breaks the pattern, as long-term corporate bond yields increased by 87bp through the measured period, while PerpetualDiscount Interest-Equivalent yields increased by an jaw-dropping 215bp.

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets has gone even deeper into what I consider ‘decoupled panic’ territory (chart end-date 2020-3-20):

pl_200320_body_chart_5
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In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

It seems clear that many market players are, wittingly or not, using FixedResets to speculate on future moves in the Canada 5-Year yield. This is excellent news for those who take market action based on fundamentals and the long term characteristics of the market because nobody can consistently time the markets. The speculators will, over the long run and in aggregate, lose money, handing it over to more sober investors.

It should be noted that I have been unable to explain the relatively strong performance of Floor issues during the 2018-19 downdraft relative to their non-Floor counterparts. See the discussions on PrefBlog at LINK, LINK and LINK.

I believe the bear-market outperformance by the Floor issues is a behavioural phenomenon with very little basis in fundamentals. When interest rates in general move, FixedReset prices should not change much (to a first approximation, for issues priced near par), since in Fixed Income investing it is spreads that are important, not absolute yields. There should be some effect on Floor issues, which should move up slightly in price as yields go down since the ‘option’ to receive the floor rate will become more valuable. Adjustments due to this effect should be fairly small, however – and over the past year issues with a floor, that started the period being expensive, have simply gotten even more expensive, relative to their non-floored counterparts.

And the tricky thing about behavioural models of investing is that they can lose their explanatory power very quickly when an investment fashion shifts, whereas fundamentals will always be effective. Just to give an example from the preferred share market – until the end of 2014, FixedResets were priced relative to each other according to their initial dividend; when the reset of TRP.PR.A shocked a lot of investors, relative pricing became much more dependent upon the Issue Reset Spread, a much more logical and fundamental property. This paradigm shift was discussed extensively in PrefLetter.

FixedReset (Discount) performance on the month was -22.62% vs. PerpetualDiscounts of -16.04% in March; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep, but it still appears to me that yields available on FixedResets are keeping the yields of PerpetualDiscounts up, even though a consistent valuation based on an expectation of declining interest rates would greatly increase the attractiveness of PerpetualDiscounts (in other words, PerpetualDiscounts are now priced off FixedResets rather than off Long-term Corporates):

himi_indexperf_200331
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Floaters had a poor month, returning -27.08% for March and the figure for the past twelve months has crashed to -33.31%. Look at the long-term performance:

himi_floaterperf_200331
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Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years. Now, however, it’s even worse. On March 31 the index level was 1454.8, a milestone first passed on 1997-7-30; a cumulative negative total return for 22 years and 8 months; at its low on March 18 the index level was 1253.7, first surpassed on 1996-1-4, a span of 24 years and over two months!

It seems clear that Floaters are used, wittingly or otherwise, as a vehicle for speculation on the policy rate and Canada Prime, while FixedResets are being used as a vehicle for speculation on the five-year Canada rate. In support of this idea, I present an Implied Volatility analysis of the TRP series of FixedResets as of February 28, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_200331
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The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $3.45 and $2.64 rich, respectively. These figures are a little higher than the 2.48 and 4.12 calculated last month figures; however, it should be noted that their floors have become effective since five-year Canadas dipped below 0.81% and 1.05%, respectively. We expect something of an increase in fair value as noted above; but these levels seem elevated!

It will also be noted that the spread of a notional non-callable TRP FixedReset priced at par has increased from 462bp last month to 541bp this month, while GOC-5 has declined from 1.07% to 0.57%.

I also show results for the BAM series of FixedResets, which includes three issues with dividend floors: BAM.PF.H (+417, Minimum 5.00%); BAM.PF.I (+386, Minimum 4.80%); and BAM.PF.J (+310, Minimum 4.75%); these issues are all rich compared to their non-floor siblings, being rich 0.45, 0.46 and 0.05, respectively, much more expensive than last month’s figures of 2.15, 3.32 and 4.19. In this case the guarantee rate “option” is now in the money and yet the issues are only being valued as ‘normal’ FixedResets. While this can be explained by suggesting that PerpetualDiscounts and FixedResets are being priced at the same levels, this cannot be reconciled to the richness of the TRP issues discussed above. The preferred share market throws up a new puzzle every month!

impvol_bam_200331
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It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has increased from 462bp last month to 557bp this month, while GOC-5 has declined from 1.07% to 0.57%. This is very similar to the effect seen for TRP. This is mercifully consistent with the TRP results.

Relative performance during the month was uncorrelated with Issue Reset Spreads for either the “Pfd-2 Group” or the “Pfd-3 Group” issues:

frperf_200331_1mo
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… and results over the quarter for the Pfd-2 Group were better correlated (22%) but uncorrelated for the Pfd-3 Group:

frperf_200331_3mo
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In both charts, there are four data points in the Pfd-2 Group that are well below the range of the remainder. These are the Husky Energy issues, HSE.PR.A, HSE.PR.C, HSE.PR.E and HSE.PR.G, which have also suffered from the Saudi-Russian oil price war.

As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. The same caution applies for an end to the overpricing of issues with a minimum rate guarantee. There could be a reversal, particularly if either Trump’s international trade policies or the economic damage wreaked by the coronavirus approaches the gloomier extreme of current forecasts. And, of course, I could be just plain wrong about the sustainability of the current environment.

On the other hand, I will pass on my observation that international interest in the Canadian preferred share market is increasing, as other Floating Rate indices globally are doing much better. Consider, for example the Solactive Australian Bank Senior Floating Rate Bond Index, which “provides exposure to the largest and most liquid floating rate debt securities issued by selected Australian banks. The index is comprised of investment grade floating rate debt securities denominated in AUD and calculated as a Total Return Index” (LINK although the index constituents currently all have a remaining term of less than five years), and the S&P U.S. Floating Rate Preferred Stock Index.

Yields on preferred shares of all stripes are extremely high compared to those available from other investments of similar quality. As I told John Heinzl in an eMail interview in late November, 2018, the best advice I can offer investors remains Shut up and clip your coupons!

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them), since paradigm shifts generally require a trigger (a Wile E. Coyote moment, as they say!) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
June 9.5313 6.41% 0.998 6.423% 1.0000 $0.6122
September 9.7129 6.56% 0.998 6.573% 1.0000 $0.6384
December, 2017 10.0566 6.06% 1.004 6.036% 1.0000 $0.6070
March, 2018 10.2701 6.22% 1.007 6.177% 1.0000 $0.6344
June 10.2518 6.22% 0.995 6.251% 1.0000 $0.6408
September 10.2965 6.62% 1.018 6.503% 1.0000 $0.6696
December, 2018 8.6875 7.16% 0.997 7.182% 1.0000 $0.6240
March, 2019 8.4778 7.09% 1.007 7.041% 1.0000 $0.5969
June 8.0896 7.33% 0.996 7.359% 1.0000 $0.5953
September 7.7948 7.96% 0.998 7.976% 1.0000 $0.6217
December, 2019 8.0900 6.03% 0.995 6.060% 1.0000 $0.4903
March, 2020 5.5596 7.04% 1.006 6.998% 1.0000 $0.3891
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or the Deemed Maturity date for insurers and insurance holding companies (see below)), in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

In November, 2019, the assumption of DeemedRetraction for insurance issues was cancelled in the wake of the IAIS decision included in ICS 2.0. This resulted in a large drop in the yield calculated for these issues

The Deemed Maturity date for insurers was set at 2022-1-31 at the commencement of the process in February, 2011. It was extended to 2025-1-31 in April, 2013 and to 2030-1-31 in December, 2018. In November, 2019, the assumption of DeemedRetraction was cancelled in the wake of the IAIS decision included in ICS 2.0.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
June 1.35% 0.69%
September 1.79% 0.97%
December, 2017 1.83% 1.00%
March, 2018 2.06% 1.08%
June 1.95% 1.22%
September 2.33% 1.55%
December, 2018 1.88% 1.65%
March, 2019 1.46% 1.66%
June 1.34% 1.66%
September 1.41% 1.66%
December, 2019 1.68% 1.68%
March, 2020 0.57% 0.21%

Although it is disappointing to see the estimated sustainable income declining over the quarter, this is explained by the precipitous drop in Canada yields, with the five-year rate down well over a point from year-end levels. As yields recover, the estimated sustainable income should also bounce back nicely.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from banks (and insurers, until November 2019), both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

MAPF Portfolio Composition: March, 2020

Saturday, April 4th, 2020

Turnover declined sharply in March to 15%. Very wide spreads largely prevented optimization trading, while there were enough knowledgeable participants in the market to prevent price differences between similar issues from getting far enough out of line to overcome that hurdle.

The fund’s trading will probably be higher in the future than has been normal for the past several years, since the extreme segmentation in the marketplace that I complained about for so long is now effectively ended. Low-Reset insurance issues were considered so cheap relative to their peers that a large portion of the fund’s holdings were effectively frozen. However, this differentiating factor is no longer considered applicable.

I am no longer making any adjustments for special qualities of insurance issues but note that this policy may change again in the future – a requirement for a Principal Loss Absorbency Mechanism (PLAM), whereby any security included in Tier 1 Capital will be wiped out prior to a government bail-out, even if technical bankruptcy is avoided, remains good public policy; it is a disgrace that the IAIS has rejected this principle and even worse that OSFI argued strenuously against it. I will continue to read notifications from these two entities with great interest, but while it is within the realm of possibility that ICS 2.0 will be revised following the expiry of the current five-year testing period, I can’t say I have any great confidence in the wisdom of the bureaucrats. However, it is a positive move that the increase in the limit for preferred share issuance was increased from 10% of the capital requirement to 15%; but this increase may only be met with issues having a PLAM.

Sectoral distribution of the MAPF portfolio on March 31 was as follows:

MAPF Sectoral Analysis 2020-3-31
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0.9% 5.68% 14.38
OpRet 0% N/A N/A
SplitShare 0% N/A N/A
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 6.0% 6.32% 13.43
Fixed-Reset Discount 41.3% 7.36% 12.15
Deemed-Retractible 0.4% 6.57% 13.12
FloatingReset 8.2% 5.04% 15.44
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 0% N/A N/A
FixedReset Insurance non-NVCC 28.6% 6.52% 12.92
Scraps – Ratchet 1.5% 9.66% 11.59
Scraps – FixedFloater 0.0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 1.0% 9.05% 3.87
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 12.7% 8.12% 11.15
Scraps – DeemedRet 0% N/A N/A
Scraps – FloatingReset 0.0% N/A N/A
Scraps – FR Premium 0% N/A N/A
Scraps – Bank non-NVCC 0% N/A N/A
Scraps – Ins non-NVCC 0% N/A N/A
Cash -0.6% 0.00% 0.00
Total 100% 7.04% 12.60
Totals and changes will not add precisely due to rounding. Cash is included in totals with duration and yield both equal to zero.
The various “Scraps” indices include issues with a DBRS rating of Pfd-3(high) or lower and issues with an Average Trading Value (calculated with HIMIPref™ methodology, which is relatively complex) of less than $25,000. The issues considered “Scraps” are subdivided into indices which reflect those of the main indices.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 in the case of banks or normally in the case of insurers and insurance holding companies, in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis and IAIS Says No To DeemedRetractions for the recent change in policy with respect to insurers.

Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue and by a further five years in December, 2018; the estimate was eliminated in November. However, the distinctions are being kept because it is useful to distinguish insurance issues from others.

Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 0.57%, a constant 3-Month Bill rate of 0.21% and a constant Canada Prime Rate of 2.45%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2020-3-31
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 27.7%
Pfd-2 29.4%
Pfd-2(low) 28.3%
Pfd-3(high) 6.6%
Pfd-3 5.5%
Pfd-3(low) 2.2%
Pfd-4(high) 0%
Pfd-4 0%
Pfd-4(low) 0.8%
Pfd-5(high) 0%
Pfd-5 0.0%
Cash -0.6%
Totals will not add precisely due to rounding.
The fund holds a position in AZP.PR.B, which is rated P-4(low) by S&P and is unrated by DBRS; it is included in the Pfd-4(low) total.
The fund holds a position in BIP.PR.E and BIP.PR.F, which are rated P-2(low) by S&P and are unrated by DBRS; these are included in the Pfd-2(low) total.
A position held in EMA.PR.C is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3.
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

Liquidity Distribution is:

MAPF Liquidity Analysis 2020-3-31
Average Daily Trading Weighting
<$50,000 3.7%
$50,000 – $100,000 20.4%
$100,000 – $200,000 59.0%
$200,000 – $300,000 3.5%
>$300,000 14.0%
Cash -0.6%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight
<100bp 0%
100-149bp 8.8%
150-199bp 16.3%
200-249bp 8.6%
250-299bp 39.0%
300-349bp 13.8%
350-399bp 1.4%
400-449bp 1.8%
450-499bp 0.0%
500-549bp 1.2%
550-599bp 0%
>= 600bp 0%
Undefined 9.2%

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

Range MAPF Weight
Currently Floating 10.6%
0-1 Year 21.7%
1-2 Years 9.6%
2-3 Years 27.8%
3-4 Years 9.3%
4-5 Years 14.4%
5-6 Years 0%
>6 Years 0%
Not Floating Rate 6.8%

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of July 31, 2017, and published in the August, 2017, PrefLetter. It is fair to say:

  • MAPF credit quality is much better
  • MAPF liquidity is lower
  • MAPF Yield is higher
  • Weightings
    • MAPF is less exposed to Straight Perpetuals
    • Neither portfolio is exposed to Operating Retractibles (there aren’t too many of those any more!)
    • MAPF is a little more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF is higher weighted in FixedResets, with a greater emphasis on lower-spread issues

MAPF Performance : February, 2020

Saturday, March 7th, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close February 28, 2020, was $7.6268.

Returns to February 28, 2020
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month -6.27% -4.33% -3.38% N/A
Three Months -1.06% -1.49% -0.92% N/A
One Year -7.91% -3.30% -1.51% -2.10%
Two Years (annualized) -10.50% -6.24% -4.27% N/A
Three Years (annualized) -1.87% -0.98% -0.30% -0.83%
Four Years (annualized) +7.32% +6.76% +6.71% N/A
Five Years (annualized) -0.64% +0.24% -0.08% -0.53%
Six Years (annualized) -0.08% +0.00% -0.01% N/A
Seven Years (annualized) -0.35% -0.12% -0.32% N/A
Eight Years (annualized) +0.69% +0.50% +0.35% N/A
Nine Years (annualized) +0.91% +1.18% +0.91% N/A
Ten Years (annualized) +2.72% +2.18% +1.77% +1.26%
Eleven Years (annualized) +6.56% +4.27% +3.63%  
Twelve Years (annualized) +5.98% +2.35% +1.74%  
Thirteen Years (annualized) +5.79% +1.84%    
Fourteen Years (annualized) +5.85% +2.02%    
Fifteen Years (annualized) +5.84% +2.15%    
Sixteen Years (annualized) +6.04% +2.24%    
Seventeen Years (annualized) +7.34% +2.68%    
Eighteen Years (annualized) +6.98% +2.65%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees. I am advised that the “BMO50 is expected to be decommissioned at the end of 2020.”
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -3.88%, -1.76% and -2.34%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is -0.16%; five year is +0.25%; ten year is +2.27%

Figures from Morningstar are no longer conveniently available.

Manulife Preferred Income Class Adv has been terminated by Manulife. The performance of this fund was last reported here in March, 2018.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are -4.40%, -1.56% & -3.90%, respectively. Three year performance is -1.50%, five-year is +0.07%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -4.36%, -1.47% and -3.88% for one-, three- and twelve months, respectively. Three year performance is -1.40%; five-year is +0.12%.

Acccording to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The last time Altamira Preferred Equity Fund’s performance was reported here was April, 2014; performance under the National Bank banner was first reported here May, 2014.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is -3.99% for the past twelve months. Two year performance is -6.43%, three year is -1.55%, five year is -1.39%.
Figures for Fiera Canadian Preferred Share Class Cg Series F, (formerly Natixis Canadian Preferred Share Class Series F) (formerly NexGen Canadian Preferred Share Tax Managed Fund) are -3.99%, -0.63% and -4.24% for one-, three- and twelve-months, respectively. Three year performance is -2.95%; five-year is -0.79%
Figures for BMO Preferred Share Fund (advisor series) according to BMO are -4.13%, -2.02% and -5.72% for the past one-, three- and twelve-months, respectively. Three year performance is -4.10%; five-year is -2.63%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are -2.71% for the past twelve months. The three-year figure is -1.12%; five years is +0.24%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR).

Performance for the fund was last reported here in September, 2016; the first report of unavailability was in October, 2016.

Figures for Lysander-Slater Preferred Share Dividend Fund (Class F) according to the company are -4.77%, -1.33% and -4.85% for the past one, three and twelve months, respectively. Three year performance is -2.23%, five-year is -0.64%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are -3.55%, -1.35% and -4.08% for the past one, three and twelve months, respectively. Two year is -6.81% and three year performance is -2.36%.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available directly from Hymas Investment Management.

The preferred share market continues to be underpriced relative to other capital markets, leaving a lot of room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is extremely elevated (chart end-date 2020-2-12):

pl_200214_body_chart_1
Click for Big

Note that the Seniority Spread was 385bp near month-end, equal to last month’s figure. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September yielding 2.963%, about 411bp cheaper than the interest-equivalent figure of 7.07% for CIU.PR.A, which was then yielding about 5.44% as a dividend. Shaw Communications issued 30-year notes at 4.25% interest on December 5, 2019, when their FixedResets, SJR.PR.A, were yielding 6.59% dividends.

As has been noted, the increase in the Seniority Spread over the past one or two years has been due not to an increase in yield (drop in prices) of Straight Preferreds over the year, but because the yield of the Straight Preferreds has remained relatively constant while the yield of long-term corporate bonds has dropped dramatically.

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2020-2-12):

pl_200214_body_chart_5
Click for Big

In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

It seems clear that many market players are, wittingly or not, using FixedResets to speculate on future moves in the Canada 5-Year yield. This is excellent news for those who take market action based on fundamentals and the long term characteristics of the market because nobody can consistently time the markets. The speculators will, over the long run and in aggregate, lose money, handing it over to more sober investors.

It should be noted that I have been unable to explain the very strong performance of Floor issues during the 2018-19 downdraft relative to their non-Floor counterparts. See the discussions on PrefBlog at LINK, LINK and LINK.

I believe the bear-market outperformance by the Floor issues is a behavioural phenomenon with very little basis in fundamentals. When interest rates in general move, FixedReset prices should not change much (to a first approximation, for issues priced near par), since in Fixed Income investing it is spreads that are important, not absolute yields. There should be some effect on Floor issues, which should move up slightly in price as yields go down since the ‘option’ to receive the floor rate will become more valuable. Adjustments due to this effect should be fairly small, however – and over the past year issues with a floor, that started the period being expensive, have simply gotten even more expensive, relative to their non-floored counterparts.

And the tricky thing about behavioural models of investing is that they can lose their explanatory power very quickly when an investment fashion shifts, whereas fundamentals will always be effective. Just to give an example from the preferred share market – until the end of 2014, FixedResets were priced relative to each other according to their initial dividend; when the reset of TRP.PR.A shocked a lot of investors, relative pricing became much more dependent upon the Issue Reset Spread, a much more logical and fundamental property. This paradigm shift was discussed extensively in PrefLetter.

FixedReset (Discount) performance on the month was -6.10% vs. PerpetualDiscounts of -1.39% in January; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep, but it still appears to me that yields available on FixedResets are keeping the yields of PerpetualDiscounts up, even though a consistent valuation based on an expectation of declining interest rates would greatly increase the attractiveness of PerpetualDiscounts (in other words, PerpetualDiscounts are now priced off FixedResets rather than off Long-term Corporates):

himi_indexperf_200228
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Floaters had a poor month, returning -8.54% for February and the figure for the past twelve months has deteriorated to -14.12%. Look at the long-term performance:

himi_floaterperf_200228
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Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years.

It seems clear that Floaters are used, wittingly or otherwise, as a vehicle for speculation on the policy rate and Canada Prime, while FixedResets are being used as a vehicle for speculation on the five-year Canada rate. In support of this idea, I present an Implied Volatility analysis of the TRP series of FixedResets as of February 28, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_200228
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The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $2.48 and $4.12 rich, respectively. These figures are a little higher than last month’s figures; note the fact that their floors will not become effective unless five-year Canadas dip below 0.81% and 1.05%, respectively. As we approach these levels (as of month-end) and even pierce them (as of time of writing), we would expect something of an increase in fair value as noted above; but these levels seem elevated!

It will also be noted that the spread of a notional non-callable TRP FixedReset priced at par has increased from 434bp last month to 462bp this month, while GOC-5 has declined from 1.28% to 1.07%.

Lest this be considered a fluke, I also show results for the BAM series of FixedResets, which includes three issues with dividend floors: BAM.PF.H (+417, Minimum 5.00%); BAM.PF.I (+386, Minimum 4.80%); and BAM.PF.J (+310, Minimum 4.75%); these issues are all rich compared to their non-floor siblings, being rich 2.15, 3.32 and 4.19, respectively, much more expensive than last month’s figures of 1.07, 2.59 and 3.39. Note that we would expect all issues to be somewhat expensive according to this analysis, since the guarantee rate is rapidly being approached and (as of month-end) pierced by one of the issues.

impvol_bam_200228
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It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has increased from 424bp last month to 462bp this month, while GOC-5 has declined from 1.28% to 1.07%. This is very similar to the effect seen for TRP.

Relative performance during the month was weakly correlated with Issue Reset Spreads for the “Pfd-2 Group” (10%) and the “Pfd-3 Group” (11%) issues:

frperf_200228_1mo
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… and results over the quarter were poorly correlated (below 10%):

frperf_200228_3mo
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As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. The same caution applies for an end to the overpricing of issues with a minimum rate guarantee. There could be a reversal, particularly if either Trump’s international trade policies or the novel coronavirus cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment.

On the other hand, I will pass on my observation that international interest in the Canadian preferred share market is increasing, as other Floating Rate indices globally are doing much better. Consider, for example the Solactive Australian Bank Senior Floating Rate Bond Index, which “provides exposure to the largest and most liquid floating rate debt securities issued by selected Australian banks. The index is comprised of investment grade floating rate debt securities denominated in AUD and calculated as a Total Return Index” (LINK although the index constituents currently all have a remaining term of less than five years), and the S&P U.S. Floating Rate Preferred Stock Index.

Yields on preferred shares of all stripes are extremely high compared to those available from other investments of similar quality. As I told John Heinzl in an eMail interview in late November, 2018, the best advice I can offer investors remains Shut up and clip your coupons!

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them), since paradigm shifts generally require a trigger (a Wile E. Coyote moment, as they say!) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
June 9.5313 6.41% 0.998 6.423% 1.0000 $0.6122
September 9.7129 6.56% 0.998 6.573% 1.0000 $0.6384
December, 2017 10.0566 6.06% 1.004 6.036% 1.0000 $0.6070
March, 2018 10.2701 6.22% 1.007 6.177% 1.0000 $0.6344
June 10.2518 6.22% 0.995 6.251% 1.0000 $0.6408
September 10.2965 6.62% 1.018 6.503% 1.0000 $0.6696
December, 2018 8.6875 7.16% 0.997 7.182% 1.0000 $0.6240
March, 2019 8.4778 7.09% 1.007 7.041% 1.0000 $0.5969
June 8.0896 7.33% 0.996 7.359% 1.0000 $0.5953
September 7.7948 7.96% 0.998 7.976% 1.0000 $0.6217
December, 2019 8.0900 6.03% 0.995 6.060% 1.0000 $0.4903
February, 2020 7.6268 5.88% 0.994 5.915% 1.0000 $0.4511
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or the Deemed Maturity date for insurers and insurance holding companies (see below)), in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

In November, 2019, the assumption of DeemedRetraction for insurance issues was cancelled in the wake of the IAIS decision included in ICS 2.0. This resulted in a large drop in the yield calculated for these issues

The Deemed Maturity date for insurers was set at 2022-1-31 at the commencement of the process in February, 2011. It was extended to 2025-1-31 in April, 2013 and to 2030-1-31 in December, 2018. In November, 2019, the assumption of DeemedRetraction was cancelled in the wake of the IAIS decision included in ICS 2.0.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
June 1.35% 0.69%
September 1.79% 0.97%
December, 2017 1.83% 1.00%
March, 2018 2.06% 1.08%
June 1.95% 1.22%
September 2.33% 1.55%
December, 2018 1.88% 1.65%
March, 2019 1.46% 1.66%
June 1.34% 1.66%
September 1.41% 1.66%
December, 2019 1.68% 1.68%
February, 2020 1.07% 1.47%

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from banks (and insurers, until November 2019), both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

MAPF Portfolio Composition : February, 2020

Saturday, March 7th, 2020

Turnover came off its peak in February but remained high at 29% in January. The trading came mainly during the market’s strong period up to February 21; there was relatively little when coronavirus fears sent the market plunging.

The fund’s trading will probably be higher in the future than has been normal for the past several years, since the extreme segmentation in the marketplace that I complained about for so long is now effectively ended. Low-Reset insurance issues were considered so cheap relative to their peers that a large portion of the fund’s holdings were effectively frozen. However, this differentiating factor is no longer considered applicable.

I am no longer making any adjustments for special qualities of insurance issues but note that this policy may change again in the future – a requirement for a Principal Loss Absorbency Mechanism (PLAM), whereby any security included in Tier 1 Capital will be wiped out prior to a government bail-out, even if technical bankruptcy is avoided, remains good public policy; it is a disgrace that the IAIS has rejected this principle and even worse that OSFI argued strenuously against it. I will continue to read notifications from these two entities with great interest, but while it is within the realm of possibility that ICS 2.0 will be revised following the expiry of the current five-year testing period, I can’t say I have any great confidence in the wisdom of the bureaucrats. However, it is a positive move that the increase in the limit for preferred share issuance was increased from 10% of the capital requirement to 15%; but this increase may only be met with issues having a PLAM.

Sectoral distribution of the MAPF portfolio on February 28 was as follows:

MAPF Sectoral Analysis 2020-2-28
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0.5% 6.83% 12.66
OpRet 0% N/A N/A
SplitShare 0% N/A N/A
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 5.4% 5.32% 15.00
Fixed-Reset Discount 45.1% 6.00% 13.74
Deemed-Retractible 0.4% 5.38% 14.95
FloatingReset 8.8% 6.18% 13.71
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 0% N/A N/A
FixedReset Insurance non-NVCC 29.0% 5.39% 14.77
Scraps – Ratchet 1.5% 7.73% 13.39
Scraps – FixedFloater 0.0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 0.8% 5.13 4.04
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 8.0% 7.19% 12.22
Scraps – DeemedRet 0% N/A N/A
Scraps – FloatingReset 0.0% N/A N/A
Scraps – FR Premium 0% N/A N/A
Scraps – Bank non-NVCC 0% N/A N/A
Scraps – Ins non-NVCC 0% N/A N/A
Cash +0.6% 0.00% 0.00
Total 100% 5.88% 13.81
Totals and changes will not add precisely due to rounding. Cash is included in totals with duration and yield both equal to zero.
The various “Scraps” indices include issues with a DBRS rating of Pfd-3(high) or lower and issues with an Average Trading Value (calculated with HIMIPref™ methodology, which is relatively complex) of less than $25,000. The issues considered “Scraps” are subdivided into indices which reflect those of the main indices.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 in the case of banks or normally in the case of insurers and insurance holding companies, in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis and IAIS Says No To DeemedRetractions for the recent change in policy with respect to insurers.

Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue and by a further five years in December, 2018; the estimate was eliminated in November. However, the distinctions are being kept because it is useful to distinguish insurance issues from others.

Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 1.07% and a constant 3-Month Bill rate of 1.47%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2020-2-28
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 27.4%
Pfd-2 27.4%
Pfd-2(low) 34.3%
Pfd-3(high) 1.6%
Pfd-3 5.3%
Pfd-3(low) 2.5%
Pfd-4(high) 0%
Pfd-4 0%
Pfd-4(low) 0.8%
Pfd-5(high) 0%
Pfd-5 0.0%
Cash +0.6%
Totals will not add precisely due to rounding.
The fund holds a position in AZP.PR.B, which is rated P-4(low) by S&P and is unrated by DBRS; it is included in the Pfd-4(low) total.
The fund holds a position in EMA.PR.C, BIP.PR.E and BIP.PR.F, which are rated P-2(low) by S&P and are unrated by DBRS; these are included in the Pfd-2(low) total.
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

Liquidity Distribution is:

MAPF Liquidity Analysis 2020-2-28
Average Daily Trading Weighting
<$50,000 3.3%
$50,000 – $100,000 31.1%
$100,000 – $200,000 40.4%
$200,000 – $300,000 13.6%
>$300,000 10.9%
Cash +0.6%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight
<100bp 0%
100-149bp 11.9%
150-199bp 16.6%
200-249bp 20.4%
250-299bp 30.0%
300-349bp 8.7%
350-399bp 0%
400-449bp 2.0%
450-499bp 0.0%
500-549bp 1.3%
550-599bp 0%
>= 600bp 0%
Undefined 9.2%

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

Range MAPF Weight
Currently Floating 10.7%
0-1 Year 9.1%
1-2 Years 12.6%
2-3 Years 29.7%
3-4 Years 10.4%
4-5 Years 20.3%
5-6 Years 0%
>6 Years 0%
Not Floating Rate 7.2%

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of July 31, 2017, and published in the August, 2017, PrefLetter. It is fair to say:

  • MAPF credit quality is much better
  • MAPF liquidity is lower
  • MAPF Yield is higher
  • Weightings
    • MAPF is less exposed to Straight Perpetuals
    • Neither portfolio is exposed to Operating Retractibles (there aren’t too many of those any more!)
    • MAPF is a little more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF is higher weighted in FixedResets, with a greater emphasis on lower-spread issues

MAPF Performance : January, 2020

Sunday, February 2nd, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close January 31, 2020, was $8.1370.

Returns to January 31, 2020
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +0.58% -0.09% +0.06% N/A
Three Months +5.98% 4.08% +3.75% N/A
One Year +0.62% +2.98% +4.06% +3.43%
Two Years (annualized) -7.99% -4.65% -3.12% N/A
Three Years (annualized) +0.69% +1.25% +1.35% +0.82%
Four Years (annualized) +8.56% +6.69% +6.64% N/A
Five Years (annualized) +0.70% +1.08% +0.65% +0.19%
Six Years (annualized) +1.37% +0.89% +0.71% N/A
Seven Years (annualized) +0.65% +0.60% +0.26% N/A
Eight Years (annualized) +1.43% +1.03% +0.76% N/A
Nine Years (annualized) +1.77% +1.77% +1.41% N/A
Ten Years (annualized) +3.27% +2.68% +2.14% +1.63%
Eleven Years (annualized) +7.05% +4.54% +3.84%  
Twelve Years (annualized) +6.86% +2.87% +2.21%  
Thirteen Years (annualized) +6.37% +2.22%    
Fourteen Years (annualized) +6.31% +2.36%    
Fifteen Years (annualized) +6.28% +2.44%    
Sixteen Years (annualized) +6.60% +2.57%    
Seventeen Years (annualized) +7.72% +2.92%    
Eighteen Years (annualized) +7.44% +2.91%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees. I am advised that the “BMO50 is expected to be decommissioned at the end of 2020.”
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -0.04%, +3.70% and +3.57%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is +1.67%; five year is +1.09%; ten year is +2.70%

Figures from Morningstar are no longer conveniently available.

Manulife Preferred Income Class Adv has been terminated by Manulife. The performance of this fund was last reported here in March, 2018.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are -0.20%, +4.50% & +2.59%, respectively. Three year performance is +0.53%, five-year is +0.97%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -0.17%, +4.51% and +2.47% for one-, three- and twelve months, respectively. Three year performance is +0.64%; five-year is +1.01%.

Acccording to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The last time Altamira Preferred Equity Fund’s performance was reported here was April, 2014; performance under the National Bank banner was first reported here May, 2014.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is +2.11% for the past twelve months. Two year performance is -4.96%, three year is +0.24%, five year is -0.64%.
Figures for Fiera Canadian Preferred Share Class Cg Series F, (formerly Natixis Canadian Preferred Share Class Series F) (formerly NexGen Canadian Preferred Share Tax Managed Fund) are +0.09%, +4.84% and +1.36% for one-, three- and twelve-months, respectively. Three year performance is -1.14%; five-year is +0.14%
Figures for BMO Preferred Share Fund (advisor series) according to BMO are -0.15%, +3.40% and +0.15% for the past one-, three- and twelve-months, respectively. Three year performance is -2.37%; five-year is -1.75%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are +2.79% for the past twelve months. The three-year figure is +0.77%; five years is +0.92%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR).

Performance for the fund was last reported here in September, 2016; the first report of unavailability was in October, 2016.

Figures for Lysander-Slater Preferred Share Dividend Fund (Class F) according to the company are -0.47%, +5.13% and +1.90% for the past one, three and twelve months, respectively. Three year performance is -0.02%, five-year is +0.44%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are N/A, +3.29% and +1.07% for the past one, three and twelve months, respectively. Two year is -5.66% and three year performance is -0.67%.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available directly from Hymas Investment Management.

The preferred share market continues to be underpriced relative to other capital markets, leaving a lot of room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is extremely elevated (chart end-date 2020-1-10):

pl_200110_body_chart_1
Click for Big

Note that the Seniority Spread is now about 385bp, a sharp widening from the last month’s figure of 360bp. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September yielding 2.963%, about 411bp cheaper than the interest-equivalent figure of 7.07% for CIU.PR.A, which was then yielding about 5.44% as a dividend. Shaw Communications issued 30-year notes at 4.25% interest on December 5, 2019, when their FixedResets, SJR.PR.A, were yielding 6.59% dividends.

As has been noted, the increase in the Seniority Spread over the past one or two years has been due not to an increase in yield (drop in prices) of Straight Preferreds over the year, but because the yield of the Straight Preferreds has remained relatively constant while the yield of long-term corporate bonds has dropped dramatically.

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2020-1-10):

pl_200110_body_chart_5
Click for Big

In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

It seems clear that many market players are, wittingly or not, using FixedResets to speculate on future moves in the Canada 5-Year yield. This is excellent news for those who take market action based on fundamentals and the long term characteristics of the market because nobody can consistently time the markets. The speculators will, over the long run and in aggregate, lose money, handing it over to more sober investors.

It should be noted that I have been unable to explain the very strong performance of Floor issues during the 2018-19 downdraft relative to their non-Floor counterparts. See the discussions on PrefBlog at LINK, LINK and LINK.

I believe the bear-market outperformance by the Floor issues is a behavioural phenomenon with very little basis in fundamentals. When interest rates in general move, FixedReset prices should not change much (to a first approximation), since in Fixed Income investing it is spreads that are important, not absolute yields. There should be some effect on Floor issues, which should move up slightly in price as yields go down since the ‘option’ to receive the floor rate will become more valuable. Adjustments due to this effect should be fairly small, however – and over the past year issues with a floor, that started the period being expensive, have simply gotten even more expensive, relative to their non-floored counterparts.

And the tricky thing about behavioural models of investing is that they can lose their explanatory power very quickly when an investment fashion shifts, whereas fundamentals will always be effective. Just to give an example from the preferred share market – until the end of 2014, FixedResets were priced relative to each other according to their initial dividend; when the reset of TRP.PR.A shocked a lot of investors, relative pricing became much more dependent upon the Issue Reset Spread, a much more logical and fundamental property. This paradigm shift was discussed extensively in PrefLetter.

FixedReset (Discount) performance on the month was +0.08% vs. PerpetualDiscounts of +1.23% in January; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep, but it still appears to me that yields available on FixedResets are keeping the yields of PerpetualDiscounts up, even though a consistent valuation based on an expectation of declining interest rates would greatly increase the attractiveness of PerpetualDiscounts (in other words, PerpetualDiscounts are now priced off FixedResets rather than off Long-term Corporates):

himi_indexperf_200131
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Floaters had a poor month, returning -4.25% for January, compared to their performance of -7.21% in January, 2019, and the figure for the past twelve months remains awful at -9.83%. Look at the long-term performance:

himi_floaterperf_200131
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Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years.

It seems clear that Floaters are used, wittingly or otherwise, as a vehicle for speculation on the policy rate and Canada Prime, while FixedResets are being used as a vehicle for speculation on the five-year Canada rate. In support of this idea, I present an Implied Volatility analysis of the TRP series of FixedResets as of December 31, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_200131
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The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $1.85 and $3.97 rich, respectively. These are comparable to last month’s figures; note the fact that their floor will not become effective unless five-year Canadas dip below 0.81% and 1.05%, respectively. We’re still above those levels!

Lest this be considered a fluke, I also show results for the BAM series of FixedResets, which includes three issues with dividend floors: BAM.PF.H (+417, Minimum 5.00%); BAM.PF.I (+386, Minimum 4.80%); and BAM.PF.J (+310, Minimum 4.75%); these issues are all rich compared to their non-floor siblings, being 1.07, 2.59 and 3.39 expensive, respectively, much narrower last month’s figures of 2.01, 3.63 and 5.11. Note that we would expect BAM.PF.J to be somewhat expensive according to this analysis, since the guarantee has been prospectively triggered.

impvol_bam_200131
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Relative performance during the month was weakly correlated with Issue Reset Spreads for the “Pfd-2 Group” (12%) and the “Pfd-3 Group” issues were not correlated:

frperf_200131_1mo
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… and results over the quarter were poorly correlated (below 10%):

frperf_200131_3mo
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As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. The same caution applies for an end to the overpricing of issues with a minimum rate guarantee. There could be a reversal, particularly if either Trump’s international trade policies or the novel coronavirus cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment.

On the other hand, I will pass on my observation that international interest in the Canadian preferred share market is increasing, as other Floating Rate indices globally are doing much better. Consider, for example the Solactive Australian Bank Senior Floating Rate Bond Index, which “provides exposure to the largest and most liquid floating rate debt securities issued by selected Australian banks. The index is comprised of investment grade floating rate debt securities denominated in AUD and calculated as a Total Return Index” (LINK although the index constituents currently all have a remaining term of less than five years), and the S&P U.S. Floating Rate Preferred Stock Index.

Yields on preferred shares of all stripes are extremely high compared to those available from other investments of similar quality. As I told John Heinzl in an eMail interview in late November, 2018, the best advice I can offer investors remains Shut up and clip your coupons!

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them), since paradigm shifts generally require a trigger (a Wile E. Coyote moment, as they say!) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
June 9.5313 6.41% 0.998 6.423% 1.0000 $0.6122
September 9.7129 6.56% 0.998 6.573% 1.0000 $0.6384
December, 2017 10.0566 6.06% 1.004 6.036% 1.0000 $0.6070
March, 2018 10.2701 6.22% 1.007 6.177% 1.0000 $0.6344
June 10.2518 6.22% 0.995 6.251% 1.0000 $0.6408
September 10.2965 6.62% 1.018 6.503% 1.0000 $0.6696
December, 2018 8.6875 7.16% 0.997 7.182% 1.0000 $0.6240
March, 2019 8.4778 7.09% 1.007 7.041% 1.0000 $0.5969
June 8.0896 7.33% 0.996 7.359% 1.0000 $0.5953
September 7.7948 7.96% 0.998 7.976% 1.0000 $0.6217
December, 2019 8.0900 6.03% 0.995 6.060% 1.0000 $0.4903
January, 2020 8.1370 5.72% 0.999 5.726% 1.0000 $0.4659
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or the Deemed Maturity date for insurers and insurance holding companies (see below)), in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

In November, 2019, the assumption of DeemedRetraction for insurance issues was cancelled in the wake of the IAIS decision included in ICS 2.0. This resulted in a large drop in the yield calculated for these issues

The Deemed Maturity date for insurers was set at 2022-1-31 at the commencement of the process in February, 2011. It was extended to 2025-1-31 in April, 2013 and to 2030-1-31 in December, 2018. In November, 2019, the assumption of DeemedRetraction was cancelled in the wake of the IAIS decision included in ICS 2.0.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
June 1.35% 0.69%
September 1.79% 0.97%
December, 2017 1.83% 1.00%
March, 2018 2.06% 1.08%
June 1.95% 1.22%
September 2.33% 1.55%
December, 2018 1.88% 1.65%
March, 2019 1.46% 1.66%
June 1.34% 1.66%
September 1.41% 1.66%
December, 2019 1.68% 1.68%
January, 2020 1.33% 1.64%

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from banks (and insurers, until November 2019), both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

MAPF Portfolio Composition : January, 2020

Sunday, February 2nd, 2020

Turnover remained high at 43% in January; the market’s strength during the first part of the month was matched by weakness in the latter part, creating a good trading environment.

The fund’s trading will probably be higher in the future than has been normal for the past several years, since the extreme segmentation in the marketplace that I have been complaining about for so long is now effectively ended. Low-Reset insurance issues were considered so cheap relative to their peers that a large portion of the fund’s holdings were effectively frozen. However, this differentiating factor is no longer considered applicable.

I am no longer making any adjustments for special qualities of insurance issues but note that this policy may change again in the future – a requirement for a Principal Loss Absorbency Mechanism, whereby any security included in Tier 1 Capital will be wiped out prior to a government bail-out, even if technical bankruptcy is avoided, remains good public policy; it is a disgrace that the IAIS has rejected this principle and even worse that OSFI argued strenuously against it. I will continue to read notifications from these two entities with great interest, but while it is within the realm of possibility that ICS 2.0 will be revised following the expiry of the current five-year testing period, I can’t say I have any great confidence in the wisdom of the bureaucrats.

Sectoral distribution of the MAPF portfolio on January 31 was as follows:

MAPF Sectoral Analysis 2020-1-31
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0% N/A N/A
OpRet 0% N/A N/A
SplitShare 0% N/A N/A
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 10.2% 5.26% 15.00
Fixed-Reset Discount 50.8% 5.71% 14.28
Deemed-Retractible 1.9% 5.25% 15.07
FloatingReset 5.7% 5.97% 13.91
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 0% N/A N/A
FixedReset Insurance non-NVCC 20.8% 5.39% 14.79
Scraps – Ratchet 1.5% 7.14% 14.01
Scraps – FixedFloater 0.0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 1.2% 4.88 4.07
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 7.0% 7.01% 12.51
Scraps – DeemedRet 0% N/A N/A
Scraps – FloatingReset 0.8% 7.99% 11.36
Scraps – FR Premium 0% N/A N/A
Scraps – Bank non-NVCC 0% N/A N/A
Scraps – Ins non-NVCC 0% N/A N/A
Cash +0.1% 0.00% 0.00
Total 100% 5.72% 14.17
Totals and changes will not add precisely due to rounding. Cash is included in totals with duration and yield both equal to zero.
The various “Scraps” indices include issues with a DBRS rating of Pfd-3(high) or lower and issues with an Average Trading Value (calculated with HIMIPref™ methodology, which is relatively complex) of less than $25,000. The issues considered “Scraps” are subdivided into indices which reflect those of the main indices.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 in the case of banks or normally in the case of insurers and insurance holding companies, in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis and IAIS Says No To DeemedRetractions for the recent change in policy with respect to insurers.

Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue and by a further five years in December, 2018; the estimate was eliminated in November. However, the distinctions are being kept because it is useful to distinguish insurance issues from others.

Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 1.33% and a constant 3-Month Bill rate of 1.64%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2020-1-31
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 31.7%
Pfd-2 29.3%
Pfd-2(low) 28.3%
Pfd-3(high) 2.1%
Pfd-3 5.1%
Pfd-3(low) 2.4%
Pfd-4(high) 0%
Pfd-4 0%
Pfd-4(low) 0.8%
Pfd-5(high) 0%
Pfd-5 0.0%
Cash +0.1%
Totals will not add precisely due to rounding.
The fund holds a position in AZP.PR.C (tendered for conversion to AZP.PR.B), which is rated P-4(low) by S&P and is unrated by DBRS; it is included in the Pfd-4(low) total.
The fund holds a position in EMA.PR.C and BIP.PR.E, which are rated P-2(low) by S&P and are unrated by DBRS; these are included in the Pfd-2(low) total.
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

Liquidity Distribution is:

MAPF Liquidity Analysis 2020-1-31
Average Daily Trading Weighting
<$50,000 4.9%
$50,000 – $100,000 19.9%
$100,000 – $200,000 37.2%
$200,000 – $300,000 6.6%
>$300,000 31.3%
Cash +0.1%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight
<100bp 0%
100-149bp 9.1%
150-199bp 13.0%
200-249bp 25.6%
250-299bp 26.8%
300-349bp 1.9%
350-399bp 5.4%
400-449bp 1.8%
450-499bp 0.0%
500-549bp 1.3%
550-599bp 0%
>= 600bp 0%
Undefined 14.9%

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

Range MAPF Weight
Currently Floating 8.0%
0-1 Year 9.5%
1-2 Years 7.8%
2-3 Years 16.4%
3-4 Years 26.6%
4-5 Years 18.4%
5-6 Years 0%
>6 Years 0%
Not Floating Rate 13.4%

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of July 31, 2017, and published in the August, 2017, PrefLetter. It is fair to say:

  • MAPF credit quality is much better
  • MAPF liquidity is lower
  • MAPF Yield is higher
  • Weightings
    • MAPF is less exposed to Straight Perpetuals
    • Neither portfolio is exposed to Operating Retractibles (there aren’t too many of those any more!)
    • MAPF is a little more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF is higher weighted in FixedResets, with a greater emphasis on lower-spread issues

MAPF Performance: December 2019

Sunday, January 5th, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close December 31, 2019, was $8.0900 after giving effect to a dividend distribution of 0.118132.

Returns to December 31, 2019
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +4.95% +3.07% +2.48% N/A
Three Months +5.30% +4.42% +3.89% N/A
One Year -1.99% +2.12% +3.48% +2.87%
Two Years (annualized) -6.07% -3.34% -2.39% N/A
Three Years (annualized) +2.39% +3.14% +2.68% +2.19%
Four Years (annualized) +4.53% +4.38% +3.74% N/A
Five Years (annualized) -0.62% +0.16% -0.30% -0.74%
Six Years (annualized) +1.47% +0.98% +0.85% N/A
Seven Years (annualized) +0.65% +0.66% +0.34% N/A
Eight Years (annualized) +2.09% +1.25% +0.98% N/A
Nine Years (annualized) +2.06% +1.96% +1.50% N/A
Ten Years (annualized) +3.40% +2.75% +2.10% +1.57%
Eleven Years (annualized) +7.96% +4.93% +4.15%  
Twelve Years (annualized) +6.93% +2.96% +2.21%  
Thirteen Years (annualized) +6.24% +2.22%    
Fourteen Years (annualized) +6.29% +2.37%    
Fifteen Years (annualized) +6.26% +2.46%    
Sixteen Years (annualized) +6.70% +2.68%    
Seventeen Years (annualized) +8.12% +2.95%    
Eighteen Years (annualized) +7.72% +3.03%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees.
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are +2.24%, +3.94% and +3.34%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is +2.84%; five year is +0.54%; ten year is +2.79%

Figures from Morningstar are no longer conveniently available.

Manulife Preferred Income Class Adv has been terminated by Manulife. The performance of this fund was last reported here in March, 2018.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are +3.18%, +4.99% & +2.35%, respectively. Three year performance is +2.10%, five-year is +0.23%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +3.21%, +5.01% and +2.30% for one-, three- and twelve months, respectively. Three year performance is +2.25%; five-year is +0.22%.

Acccording to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The last time Altamira Preferred Equity Fund’s performance was reported here was April, 2014; performance under the National Bank banner was first reported here May, 2014.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is +1.77% for the past twelve months. Two year performance is -3.97%, three year is +1.82%, five year is -2.10%.
Figures for Fiera Canadian Preferred Share Class Cg Series F, (formerly Natixis Canadian Preferred Share Class Series F) (formerly NexGen Canadian Preferred Share Tax Managed Fund) are +3.40%, +4.32% and -0.81% for one-, three- and twelve-months, respectively. Three year performance is +0.04%; five-year is +0.04%
Figures for BMO Preferred Share Fund (advisor series) according to BMO are +2.36%, +3.64% and -0.59% for the past one-, three- and twelve-months, respectively. Three year performance is -1.01%; five-year is -2.47%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are +2.50% for the past twelve months. The three-year figure is +2.71%; five years is +0.11%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR).

Performance for the fund was last reported here in September, 2016; the first report of unavailability was in October, 2016.

Figures for Lysander-Slater Preferred Share Dividend Fund (Class F) according to the company are +4.10%, +5.79% and +2.00% for the past one, three and twelve months, respectively. Three year performance is +0.72%, five-year is +0.22%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are +2.28%, +3.43% and +0.44% for the past one, three and twelve months, respectively. Two year is -4.84% and three year performance is +0.73%.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available directly from Hymas Investment Management.

The preferred share market continues to be underpriced relative to other capital markets, leaving a lot of room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is extremely elevated (chart end-date 2019-12-13):

pl_191213_body_chart_1
Click for Big

Note that the Seniority Spread is now about 360bp, a narrowing from the November 27 figure of 370bp. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September yielding 2.963%, about 411bp cheaper than the interest-equivalent figure of 7.07% for CIU.PR.A, which was then yielding about 5.44% as a dividend. Shaw Communications issued 30-year notes at 4.25% interest on December 5, 2019, when their FixedResets, SJR.PR.A, were yielding 6.59% dividends.

As has been noted, the increase in the Seniority Spread over the past year has been due not to an increase in yield (drop in prices) of Straight Preferreds over the year, but because the yield of the Straight Preferreds has remained relatively constant while the yield of long-term corporate bonds has dropped dramatically.

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2019-12-13):

pl_191213_body_chart_5
Click for Big

In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

It seems clear that many market players are, wittingly or not, using FixedResets to speculate on future moves in the Canada 5-Year yield. This is excellent news for those who take market action based on fundamentals and the long term characteristics of the market because nobody can consistently time the markets. The speculators will, over the long run and in aggregate, lose money, handing it over to more sober investors.

It should be noted that I have been unable to explain the very strong performance of Floor issues during the 2018-19 downdraft relative to their non-Floor counterparts. See the discussions on PrefBlog at LINK, LINK and LINK.

I believe the bear-market outperformance by the Floor issues is a behavioural phenomenon with very little basis in fundamentals. When interest rates in general move, FixedReset prices should not change much (to a first approximation), since in Fixed Income investing it is spreads that are important, not absolute yields. There should be some effect on Floor issues, which should move up slightly in price as yields go down since the ‘option’ to receive the floor rate will become more valuable. Adjustments due to this effect should be fairly small, however – and over the past year issues with a floor, that started the period being expensive, have simply gotten even more expensive, relative to their non-floored counterparts.

And the tricky thing about behavioural models of investing is that they can lose their explanatory power very quickly when an investment fashion shifts, whereas fundamentals will always be effective. Just to give an example from the preferred share market – until the end of 2014, FixedResets were priced relative to each other according to their initial dividend; when the reset of TRP.PR.A shocked a lot of investors, relative pricing became much more dependent upon the Issue Reset Spread, a much more logical and fundamental property.

FixedReset (Discount) performance on the month was +3.44% vs. PerpetualDiscounts of +0.57% in December; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep, but it still appears to me that yields available on FixedResets are keeping the yields of PerpetualDiscounts up, even though a consistent valuation based on an expectation of declining interest rates would greatly increase the attractiveness of PerpetualDiscounts:

himi_indexperf_191231
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Floaters had a very strong month, returning +9.56% for December in contrast with their performance of -5.71% —in December, 2018, but the figure for the past twelve months remains awful at -12.62%. Look at the long-term performance:

himi_floaterperf_191231
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Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years.

It seems clear that Floaters are used, wittingly or otherwise, as a vehicle for speculation on the policy rate and Canada Prime, while FixedResets are being used as a vehicle for speculation on the five-year Canada rate. In support of this idea, I present an Implied Volatility analysis of the TRP series of FixedResets as of December 31, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_191231
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The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $1.94 and $3.97 rich, respectively. These are significant decreases from last month; note the fact that their floor will not become effective unless five-year Canadas dip below 0.81% and 1.05%, respectively. We’re still above those levels and perhaps people are beginning to believe we’ll stay there!

Lest this be considered a fluke, I also show results for the BAM series of FixedResets, which includes three issues with dividend floors: BAM.PF.H (+417, Minimum 5.00%); BAM.PF.I (+386, Minimum 4.80%); and BAM.PF.J (+310, Minimum 4.75%); these issues are all rich compared to their non-floor siblings, being 2.01, 3.63 and 5.11 expensive, respectively, wider in aggregate thatn last month’s figures of $2.07, $3.43 and $4.84.

impvol_bam_191231
Click for Big

Relative performance during the month was well-correlated with Issue Reset Spreads for both the “Pfd-2 Group” (21%) and the “Pfd-3 Group” (27%) issues:

fr_191231_1moperf
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… but results over the quarter were poorly correlated (below 10%):

fr_191231_3moperf
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Insurance issues appear to have returns entirely uncorrelated with their Issue Reset Spread.

As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. The same caution applies for an end to the overpricing of issues with a minimum rate guarantee. There could be a reversal, particularly if Trump’s international trade policies cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment.

On the other hand, I will pass on my observation that international interest in the Canadian preferred share market is increasing, as other Floating Rate indices globally are doing much better. Consider, for example the Solactive Australian Bank Senior Floating Rate Bond Index, which “provides exposure to the largest and most liquid floating rate debt securities issued by selected Australian banks. The index is comprised of investment grade floating rate debt securities denominated in AUD and calculated as a Total Return Index” (LINK although the index constituents currently all have a remaining term of less than five years), and the S&P U.S. Floating Rate Preferred Stock Index.

Yields on preferred shares of all stripes are extremely high compared to those available from other investments of similar quality. As I told John Heinzl in an eMail interview in late November, 2018, the best advice I can offer investors remains Shut up and clip your coupons!

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen!

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
June 9.5313 6.41% 0.998 6.423% 1.0000 $0.6122
September 9.7129 6.56% 0.998 6.573% 1.0000 $0.6384
December, 2017 10.0566 6.06% 1.004 6.036% 1.0000 $0.6070
March, 2018 10.2701 6.22% 1.007 6.177% 1.0000 $0.6344
June 10.2518 6.22% 0.995 6.251% 1.0000 $0.6408
September 10.2965 6.62% 1.018 6.503% 1.0000 $0.6696
December, 2018 8.6875 7.16% 0.997 7.182% 1.0000 $0.6240
March, 2019 8.4778 7.09% 1.007 7.041% 1.0000 $0.5969
June 8.0896 7.33% 0.996 7.359% 1.0000 $0.5953
September 7.7948 7.96% 0.998 7.976% 1.0000 $0.6217
December, 2019 8.0900 6.03% 0.995 6.060% 1.0000 $0.4903
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or the Deemed Maturity date for insurers and insurance holding companies (see below)), in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

In November, 2019, the assumption of DeemedRetraction for insurance issues was cancelled in the wake of the IAIS decision included in ICS 2.0. This resulted in a large drop in the yield calculated for these issues

The Deemed Maturity date for insurers was set at 2022-1-31 at the commencement of the process in February, 2011. It was extended to 2025-1-31 in April, 2013 and to 2030-1-31 in December, 2018. In November, 2019, the assumption of DeemedRetraction was cancelled in the wake of the IAIS decision included in ICS 2.0.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
June 1.35% 0.69%
September 1.79% 0.97%
December, 2017 1.83% 1.00%
March, 2018 2.06% 1.08%
June 1.95% 1.22%
September 2.33% 1.55%
December, 2018 1.88% 1.65%
March, 2019 1.46% 1.66%
June 1.34% 1.66%
September 1.41% 1.66%
December, 2019 1.68% 1.68%

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

MAPF Portfolio Composition: December, 2019

Thursday, January 2nd, 2020

Turnover surged to 44% in December; the market strong during the month, with buying interest exceeding what must have been significant tax-loss selling pressure, making the market very liquid with good day-to-day volatility for some issues.

The fund’s trading will probably be higher in the future than has been normal for the past several years, since the extreme segmentation in the marketplace that I have been complaining about for so long is now effectively ended. Low-Reset insurance issues have been considered so cheap relative to their peers that the fund’s holdings were effectively frozen. However, this differentiating factor is no longer considered applicable.

I am no longer making any adjustments for special qualities of insurance issues but note that this policy may change again in the future – a requirement for a Principal Loss Absorbency Mechanism, whereby any security included in Tier 1 Capital will be wiped out prior to a government bail-out, even if technical bankruptcy is avoided, remains good public policy; it is a disgrace that the IAIS has rejected this principle and even worse that OSFI argued strenuously against it. I will continue to read notifications from these two entities with great interest, but while it is within the realm of possibility that ICS 2.0 will be revised following the expiry of the current five-year testing period, I can’t say I have any great confidence in the wisdom of the bureaucrats.

Sectoral distribution of the MAPF portfolio on December 31 was as follows:

MAPF Sectoral Analysis 2019-12-31
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0% N/A N/A
OpRet 0% N/A N/A
SplitShare 0% N/A N/A
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 0% N/A N/A
Fixed-Reset Discount 57.6% 6.00% 13.96
Deemed-Retractible 0% N/A N/A
FloatingReset 4.4% 5.89% 14.05
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 0% N/A N/A
FixedReset Insurance non-NVCC 28.9% 5.77% 14.37
Scraps – Ratchet 1.5% 7.14% 14.01
Scraps – FixedFloater 0.0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 0% N/A N/A
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 6.4% 7.55% 12.03
Scraps – DeemedRet 0% N/A N/A
Scraps – FloatingReset 0.8% 8.09% 11.29
Scraps – FR Premium 0% N/A N/A
Scraps – Bank non-NVCC 0% N/A N/A
Scraps – Ins non-NVCC 0% N/A N/A
Cash +0.5% 0.00% 0.00
Total 100% 6.03% 13.87
Totals and changes will not add precisely due to rounding. Cash is included in totals with duration and yield both equal to zero.
The various “Scraps” indices include issues with a DBRS rating of Pfd-3(high) or lower and issues with an Average Trading Value (calculated with HIMIPref™ methodology, which is relatively complex) of less than $25,000. The issues considered “Scraps” are subdivided into indices which reflect those of the main indices.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 in the case of banks or normally in the case of insurers and insurance holding companies, in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis and IAIS Says No To DeemedRetractions for the recent change in policy with respect to insurers.

Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue and by a further five years in December, 2018; the estimate was eliminated in November..

Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 1.68% and a constant 3-Month Bill rate of 1.68%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2019-12-31
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 37.1%
Pfd-2 29.3%
Pfd-2(low) 24.5%
Pfd-3(high) 2.0%
Pfd-3 3.5%
Pfd-3(low) 2.3%
Pfd-4(high) 0%
Pfd-4 0%
Pfd-4(low) 0.7%
Pfd-5(high) 0%
Pfd-5 0.0%
Cash +0.5%
Totals will not add precisely due to rounding.
The fund holds a position in AZP.PR.C (tendered for conversion to AZP.PR.B), which is rated P-4(low) by S&P and is unrated by DBRS; it is included in the Pfd-4(low) total.
The fund holds a position in EMA.PR.C, which are rated P-2(low) by S&P and is unrated by DBRS; it is included in the Pfd-2(low) total.
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

Liquidity Distribution is:

MAPF Liquidity Analysis 2019-12-31
Average Daily Trading Weighting
<$50,000 4.7%
$50,000 – $100,000 13.0%
$100,000 – $200,000 36.1%
$200,000 – $300,000 2.3%
>$300,000 43.4%
Cash +0.5%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight
<100bp 0%
100-149bp 18.4%
150-199bp 11.4%
200-249bp 29.1%
250-299bp 25.6%
300-349bp 4.6%
350-399bp 5.8%
400-449bp 1.8%
450-499bp 0.0%
500-549bp 1.3%
550-599bp 0%
>= 600bp 0%
Undefined 2.0%

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

Range MAPF Weight
Currently Floating 6.6%
0-1 Year 5.3%
1-2 Years 23.0%
2-3 Years 11.3%
3-4 Years 30.9%
4-5 Years 22.5%
5-6 Years 0%
>6 Years 0%
Not Floating Rate +0.5%

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of July 31, 2017, and published in the August, 2017, PrefLetter. It is fair to say:

  • MAPF credit quality is much better
  • MAPF liquidity is lower
  • MAPF Yield is higher
  • Weightings
    • MAPF is much less exposed to Straight Perpetuals
    • Neither portfolio is exposed to Operating Retractibles (there aren’t too many of those any more!)
    • MAPF is equally exposed to SplitShares (that is to say, currently no exposure)
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF is significantly higher weighted in FixedResets, with a much greater emphasis on lower-spread and insurance issues

MAPF Performance : November, 2019

Sunday, December 8th, 2019

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close November 29, 2019, was $7.8207. Performance was adversely affected in November, 2019, as the assumption of DeemedRetraction was cancelled in the wake of the IAIS decision included in ICS 2.0. This was probably a major factor in recent underperformance of low-spread Insurance issues, in which the portfolio is overweighted.

On a brighter note, this cancellation of this assumption means that the preferred share universe has become much more homogeneous and I anticipate a higher level of trading in the future.

Returns to November 29, 2019
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +0.40% +1.07% +1.18% N/A
Three Months +3.53% +4.92% +4.76% N/A
One Year -9.34% -2.71% -0.62% -1.27%
Two Years (annualized) -8.28% -4.87% -3.56% N/A
Three Years (annualized) +2.64% +3.31% +3.05% +2.54%
Four Years (annualized) +3.79% +4.17% +3.69% N/A
Five Years (annualized) -1.54% -0.51% -0.85% -1.30%
Six Years (annualized) +0.38% +0.20% +0.19% N/A
Seven Years (annualized) +0.11% +0.36% +0.13% N/A
Eight Years (annualized) +1.59% +1.06% +0.84% N/A
Nine Years (annualized) +1.47% +1.61% +1.22% N/A
Ten Years (annualized) +3.06% +2.64% +2.06% +1.52%
Eleven Years (annualized) +9.04% +5.23% +4.58%  
Twelve Years (annualized) +6.89% +2.75% +2.11%  
Thirteen Years (annualized) +5.92% +2.00%    
Fourteen Years (annualized) +5.97% +2.17%    
Fifteen Years (annualized) +6.00% +2.34%    
Sixteen Years (annualized) +6.54% +2.57%    
Seventeen Years (annualized) +7.82% +2.87%    
Eighteen Years (annualized) +7.27% +2.85%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees.
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are +1.47%, +4.97% and +0.17%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is +3.09%; five year is +0.07; ten year is +2.71%

Figures from Morningstar are no longer conveniently available.

Manulife Preferred Income Class Adv has been terminated by Manulife. The performance of this fund was last reported here in March, 2018.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are +1.48%, +5.64% & -2.99%, respectively. Three year performance is +2.27%, five-year is -0.42%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +1.44%, +5.71% and -3.09% for one-, three- and twelve months, respectively. Three year performance is +2.44%; five-year is -0.47%.

Acccording to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The last time Altamira Preferred Equity Fund’s performance was reported here was April, 2014; performance under the National Bank banner was first reported here May, 2014.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is -3.55% for the past twelve months. Two year performance is -5.39%, three year is +2.45%, five year is -2.84%.
Figures for Fiera Canadian Preferred Share Class Cg Series F, (formerly Natixis Canadian Preferred Share Class Series F) (formerly NexGen Canadian Preferred Share Tax Managed Fund) are +1.29%, +4.12% and -4.66% for one-, three- and twelve-months, respectively. Three year performance is -0.37%; five-year is -0.63%
Figures for BMO Preferred Share Fund (advisor series) according to BMO are +1.17%, +4.82% and -5.15% for the past one-, three- and twelve-months, respectively. Three year performance is -0.80%; five-year is -2.98%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are -2.08% for the past twelve months. The three-year figure is +3.16%; five years is -0.46%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR).

Performance for the fund was last reported here in September, 2016; the first report of unavailability was in October, 2016.

Figures for Lysander-Slater Preferred Share Dividend Fund (Class F) according to the company are +1.46%, +5.77% and -3.66% for the past one, three and twelve months, respectively. Three year performance is +0.72%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are +0.99%, +4.33% and -3.68% for the past one, three and twelve months, respectively. Two year is -6.00% and three year performance is +1.13%.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

The preferred share market continues to suffer, leaving a lot of room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is extremely elevated (chart end-date 2019-11-08):

pl_191108_body_chart_1)
Click for Big

Note that the Seniority Spread was 370bp on November 27, a widening from the October 30 figure of 355bp. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September yielding 2.963%, about 411bp cheaper than the interest-equivalent figure of 7.07% for CIU.PR.A, which was then yielding about 5.44% as a dividend. Shaw Communications issued 30-year notes at 4.25% interest on December 5, when their FixedResets, SJR.PR.A, were yielding 6.59% dividends.

As has been noted, the increase in the Seniority Spread over the past year has been due not to an increase in yield (drop in prices) of Straight Preferreds over the year, but because the yield of the Straight Preferreds has remained relatively constant while the yield of long-term corporate bonds has dropped dramatically.

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2019-11-8):

pl_191108_body_chart_5
Click for Big

In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

It seems clear that many market players are, wittingly or not, using FixedResets to speculate on future moves in the Canada 5-Year yield. This is excellent news for those who take market action based on fundamentals and the long term characteristics of the market because nobody can consistently time the markets. The speculators will, over the long run and in aggregate, lose money, handing it over to more sober investors.

It should be noted that I have been unable to explain the very strong performance of Floor issues over the past year relative to their non-Floor counterparts. See the discussions on PrefBlog at LINK, LINK and LINK.

I believe the bear-market outperformance by the Floor issues is a behavioural phenomenon with very little basis in fundamentals. When interest rates in general move, FixedReset prices should not change much (to a first approximation), since in Fixed Income investing it is spreads that are important, not absolute yields. There should be some effect on Floor issues, which should move up slightly in price as yields go down since the ‘option’ to receive the floor rate will become more valuable. Adjustments due to this effect should be fairly small, however – and over the past year issues with a floor, that started the period being expensive, have simply gotten even more expensive, relative to their non-floored counterparts.

And the tricky thing about behavioural models of investing is that they can lose their explanatory power very quickly when an investment fashion shifts, whereas fundamentals will always be effective. Just to give an example from the preferred share market – until the end of 2014, FixedResets were priced relative to each other according to their initial dividend; when the reset of TRP.PR.A shocked a lot of investors, relative pricing became much more dependent upon the Issue Reset Spread, a much more logical and fundamental property.

FixedReset (Discount) performance on the month was +1.45% vs. PerpetualDiscounts of +0.96% in November; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep, but it still appears to me that yields available on FixedResets are keeping the yields of PerpetualDiscounts up, even though a consistent valuation based on an expectation of declining interest rates would greatly increase the attractiveness of PerpetualDiscounts:

himi_indexperf_191129
Click for Big

Floaters continued to recover, returning +2.83% for November but the figure for the past twelve months remains horrific at -24.80. Look at the long-term performance:

himi_floaterperf_191129
Click for Big

Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years.

It seems clear that Floaters are used, wittingly or otherwise, as a vehicle for speculation on the policy rate and Canada Prime, while FixedResets are being used as a vehicle for speculation on the five-year Canada rate. In support of this idea, I present an Implied Volatility analysis of the TRP series of FixedResets as of November 29, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_191129
Click for Big

The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $2.82 and $4.73 rich, respectively. These are modest decreases from last month, despite the fact that their floor will not become effective unless five-year Canadas dip below 0.81% and 1.05%, respectively. For all the gloom, we’re still above those levels!

Lest this be considered a fluke, I also show results for the BAM series of FixedResets, which includes three issues with dividend floors: BAM.PF.H (+417, Minimum 5.00%); BAM.PF.I (+386, Minimum 4.80%); and BAM.PF.J (+310, Minimum 4.75%); these issues are all rich compared to their non-floor siblings, being 2.01, 3.63 and 5.11 expensive, respectively, wider in aggregate thatn last month’s figures of $2.07, $3.43 and $4.84.

impvol_bam_191129
Click for Big

Relative performance during the month was not correlated with Issue Reset Spreads for either “Pfd-2 Group” or “Pfd-3 Group” issues:

fr_191129_1moperf
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… and results over the quarter were similar (Pfd-3 Group correlation was 11%):

fr_191129_3moperf
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In both charts the poor performance of the low-spread insurance issues may be observed. These issues are GWO.PR.N (Issue Reset Spread 130bp, 1-Month performance -2.91%); IFC.PR.A (172bp, -1.46%); MFC.PR.F (141bp, -0.69%); and SLF.PR.G (141bp, -0.59%). There are sufficient MFC FixedReset issues to do an Implied Volatility Analysis:

impvol_mfc_191129
Click for Big

If anything, MFC.PR.F now appears to be somewhat cheap to its peers, indicating that if its recent weakness is due to speculators dumping their positions, there is little reason to fear continued relative declines.

As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. The same caution applies for an end to the overpricing of issues with a minimum rate guarantee. There could be a reversal, particularly if Trump’s international trade policies cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment.

On the other hand, I will pass on my observation that international interest in the Canadian preferred share market is increasing, as other Floating Rate indices globally are doing much better. Consider, for example the Solactive Australian Bank Senior Floating Rate Bond Index, which “provides exposure to the largest and most liquid floating rate debt securities issued by selected Australian banks. The index is comprised of investment grade floating rate debt securities denominated in AUD and calculated as a Total Return Index” (LINK although the index constituents currently all have a remaining term of less than five years), and the S&P U.S. Floating Rate Preferred Stock Index.

Yields on preferred shares of all stripes are extremely high compared to those available from other investments of similar quality. As I told John Heinzl in an eMail interview in late November, 2018, the best advice I can offer investors remains Shut up and clip your coupons!

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen!

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
June 9.5313 6.41% 0.998 6.423% 1.0000 $0.6122
September 9.7129 6.56% 0.998 6.573% 1.0000 $0.6384
December, 2017 10.0566 6.06% 1.004 6.036% 1.0000 $0.6070
March, 2018 10.2701 6.22% 1.007 6.177% 1.0000 $0.6344
June 10.2518 6.22% 0.995 6.251% 1.0000 $0.6408
September 10.2965 6.62% 1.018 6.503% 1.0000 $0.6696
December, 2018 8.6875 7.16% 0.997 7.182% 1.0000 $0.6240
March, 2019 8.4778 7.09% 1.007 7.041% 1.0000 $0.5969
June 8.0896 7.33% 0.996 7.359% 1.0000 $0.5953
September 7.7948 7.96% 0.998 7.976% 1.0000 $0.6217
November, 2019 7.8207 6.18% 1.004 6.155% 1.0000 $0.4814
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or the Deemed Maturity date for insurers and insurance holding companies (see below)), in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

In November, 2019, the assumption of DeemedRetraction was cancelled in the wake of the IAIS decision included in ICS 2.0.

The Deemed Maturity date for insurers was set at 2022-1-31 at the commencement of the process in February, 2011. It was extended to 2025-1-31 in April, 2013 and to 2030-1-31 in December, 2018. In November, 2019, the assumption of DeemedRetraction was cancelled in the wake of the IAIS decision included in ICS 2.0.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
June 1.35% 0.69%
September 1.79% 0.97%
December, 2017 1.83% 1.00%
March, 2018 2.06% 1.08%
June 1.95% 1.22%
September 2.33% 1.55%
December, 2018 1.88% 1.65%
March, 2019 1.46% 1.66%
June 1.34% 1.66%
September 1.41% 1.66%
November, 2019 1.51% 1.67%

The large drop this month in the projected sustainable yield is due to the fact that in November, 2019, the assumption of DeemedRetraction was cancelled in the wake of the IAIS decision included in ICS 2.0.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

MAPF Portfolio Composition : November, 2019

Thursday, December 5th, 2019

Turnover remained high at 20% in November; the market was volatile during the month and the IAIS announcement abandoning the drive towards DeemedRetractions also had an effect.

The fund’s trading will probably be higher in the future than has been normal for the past several years, since the extreme segmentation in the marketplace that I have been complaining about for so long is now effectively ended. Low-Reset insurance issues have been considered so cheap relative to their peers that the fund’s holdings were effectively frozen. However, this differentiating factor is no longer considered applicable.

I am no longer making any adjustments for special qualities of insurance issues but note that this policy may change again in the future – a requirement for a Principal Loss Absorbency Mechanism, whereby any security included in Tier 1 Capital will be wiped out prior to a government bail-out, even if technical bankruptcy is avoided, remains good public policy; it is a disgrace that the IAIS has rejected this principle and even worse that OSFI argued strenuously against it. I will continue to read notifications from these two entities with great interest, but while it is within the realm of possibility that ICS 2.0 will be revised following the expiry of the current five-year testing period, I can’t say I have any great confidence in the wisdom of the bureaucrats.

Sectoral distribution of the MAPF portfolio on November 29 was as follows:

MAPF Sectoral Analysis 2019-11-29
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0.4% 6.32% 13.34
OpRet 0% N/A N/A
SplitShare 0% N/A N/A
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 0% N/A N/A
Fixed-Reset Discount 37.6% 6.31% 13.50
Deemed-Retractible 0% N/A N/A
FloatingReset 10.54% 6.28% 13.56
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 0% N/A N/A
FixedReset Insurance non-NVCC 41.7% 5.66% 14.48
Scraps – Ratchet 1.5% 7.29% 13.85
Scraps – FixedFloater 0.0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 0% N/A N/A
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 7.9% 7.49% 11.93
Scraps – DeemedRet 0% N/A N/A
Scraps – FloatingReset 0.8% 8.24% 11.03
Scraps – FR Premium 0% N/A N/A
Scraps – Bank non-NVCC 0% N/A N/A
Scraps – Ins non-NVCC 0% N/A N/A
Cash -0.4% 0.00% 0.00
Total 100% 6.18% 13.83
Totals and changes will not add precisely due to rounding. Cash is included in totals with duration and yield both equal to zero.
The various “Scraps” indices include issues with a DBRS rating of Pfd-3(high) or lower and issues with an Average Trading Value (calculated with HIMIPref™ methodology, which is relatively complex) of less than $25,000. The issues considered “Scraps” are subdivided into indices which reflect those of the main indices.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company or the regulator. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 in the case of banks or normally in the case of insurers and insurance holding companies, in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis and IAIS Says No To DeemedRetractions for the recent change in policy with respect to insurers.

Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue and by a further five years in December, 2018; the estimate was eliminated in November..

Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 1.51% and a constant 3-Month Bill rate of 1.67%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2019-11-29
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 35.7%
Pfd-2 28.0%
Pfd-2(low) 26.4%
Pfd-3(high) 2.5%
Pfd-3 3.4%
Pfd-3(low) 3.6%
Pfd-4(high) 0%
Pfd-4 0%
Pfd-4(low) 0%
Pfd-5(high) 0.8%
Pfd-5 0.0%
Cash -0.4%
Totals will not add precisely due to rounding.
The fund holds a position in AZP.PR.C, which is rated P-5(high) by S&P and is unrated by DBRS; it is included in the Pfd-5(high) total.
The fund holds a position in EMA.PR.C and EMA.PR.F, which are rated P-2(low) by S&P and is unrated by DBRS; it is included in the Pfd-2(low) total.
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

Liquidity Distribution is:

MAPF Liquidity Analysis 2019-11-29
Average Daily Trading Weighting
<$50,000 8.5%
$50,000 – $100,000 45.9%
$100,000 – $200,000 25.3%
$200,000 – $300,000 5.6%
>$300,000 15.1%
Cash -0.4%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight
<100bp 0%
100-149bp 27.9%
150-199bp 19.0%
200-249bp 17.7%
250-299bp 23.8%
300-349bp 1.7%
350-399bp 5.2%
400-449bp 1.9%
450-499bp 0.0%
500-549bp 1.3%
550-599bp 0%
>= 600bp 0%
Undefined 1.5%

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

Range MAPF Weight
Currently Floating 13.2%
0-1 Year 16.1%
1-2 Years 26.1%
2-3 Years 9.7%
3-4 Years 28.6%
4-5 Years 6.7%
5-6 Years 0%
>6 Years 0%
Not Floating Rate -0.4%

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of July 31, 2017, and published in the August, 2017, PrefLetter. It is fair to say:

  • MAPF credit quality is much better
  • MAPF liquidity is lower
  • MAPF Yield is higher
  • Weightings
    • MAPF is much less exposed to Straight Perpetuals
    • Neither portfolio is exposed to Operating Retractibles (there aren’t too many of those any more!)
    • MAPF is equally exposed to SplitShares (that is to say, currently no exposure)
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF is significantly higher weighted in FixedResets, with a much greater emphasis on lower-spread and insurance issues