Archive for the ‘MAPF’ Category

MAPF Performance : October, 2020

Wednesday, November 4th, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close October 30, 2020, was $7.3270.

Disappointing performance was recorded by TRP.PR.B, PPL.PR.E, PPL.PR.O, TRP.PR.D and CF.PR.C, all returning less than -4% with a total weight in the portfolio of 7.4%. Strong performance was achieved by IFC.PR.C, MFC.PR.G, HSE.PR.G, SLF.PR.G and HSE.PR.C, all returning more than 4.00%, with a total portfolio weight of 15.6% at month-end.

Quote quality improved somewhat this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices decreasing from 1.71% to 0.96%.

Returns to October 30, 2020
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +0.57% -0.59% -0.38% N/A
Three Months +5.09% +5.02% +4.32% N/A
One Year +1.27% +2.08% +2.19% +1.59%
Two Years (annualized) -8.46% -4.17% -2.86% N/A
Three Years (annualized) -5.02% -2.71% -1.83% -2.42%
Four Years (annualized) +2.30% +2.54% +2.36% N/A
Five Years (annualized) +3.19% +3.19% +2.89% +2.35%
Six Years (annualized) -0.90% -0.16% -0.42% N/A
Seven Years (annualized) +0.53% +0.49% +0.48% N/A
Eight Years (annualized) +0.31% +0.47% +0.26% N/A
Nine Years (annualized) +1.46% +1.10% +0.88% N/A
Ten Years (annualized) +1.55% +1.62% +1.23% +0.75%
Eleven Years (annualized) +3.20% +2.71% +2.17%  
Twelve Years (annualized) +7.46% +3.88% +3.26%  
Thirteen Years (annualized) +6.39% +2.55% +3.01%  
Fourteen Years (annualized) +5.69% +2.00%    
Fifteen Years (annualized) +5.73% +2.20%    
Sixteen Years (annualized) +5.77% +2.31%    
Seventeen Years (annualized) +6.32% +2.50%    
Eighteen Years (annualized) +7.35% +2.77%    
Nineteen Years (annualized) +6.88% +2.80%    
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 -0.56%, +4.19% and +1.64%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is -1.57%; five year is +2.76%; ten year is +1.75%

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 -0.47%, +4.42% & +1.07%, respectively. Three year performance is -3.56%, five-year is +2.42%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -0.56%, +4.31% and +1.31% for one-, three- and twelve months, respectively. Three year performance is -3.40%; five-year is +2.58%.

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 +0.64% for the past twelve months. Two year performance is -5.50%, three year is -3.64%, five year is +1.92%.
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 no longer available as the Fund is now the property of Canoe Financial. The last reported performance for the merged fund was May 2020.
Figures for BMO Preferred Share Fund (advisor series) according to BMO are -0.26%, +4.19% and +1.93% for the past one-, three- and twelve-months, respectively. Two year performance is -5.72%; three year is -4.61%; five-year is +0.26%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are +0.62% for the past twelve months. The three-year figure is -3.24%; five years is +3.09%
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 -0.65%, +3.28% and -5.56% for the past one, three and twelve months, respectively. Three year performance is -6.32%, five-year is -0.03%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are +0.04%, +3.80% and +0.82% for the past one, three and twelve months, respectively. Two year performance is -5.16%, three-year is -3.91%
Figures for the RBC Canadian Preferred Share ETF (RPF) as reported by Morningstar are -0.50%, +3.80% and +1.08% for the past one, three and twelve months, respectively. Three-year performance is -4.12%

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 2020-10-9:

pl_201009_body_chart_1
Click for Big

Note that the Seniority Spread was recorded at 370bp at month-end, a significant narrowing from the 395bp at September month-end. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September, 2019 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. CIU issued another bond in late September, 2020, yielding 2.609%, which was 399bp cheaper than the interest-equivalent figure of 6.60% for CIU.

… 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 2020-10-9):

pl_201009_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 – sometimes it just takes a little time! 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 +0.37% vs. PerpetualDiscounts of +0.16% in October; 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_201030
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Floaters performed poorly, returning -6.96% for October and the figure for the past twelve months remains awful at -20.49%. Look at the long-term performance:

himi_floaterperf_201030
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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. Worse, on March 31, 2020, 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 October 30, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_201030
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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 $4.59 and $5.50 rich, respectively. These figures are much wider than the 3.44 and 3.95 calculated last month’s figures. The floors have become effective since five-year Canadas dipped below 0.81% and 1.05%, respectively.

It will also be noted that the spread of a notional non-callable TRP FixedReset priced at par has widened significantly from 479bp last month to 439bp this month, while GOC-5 has increased from 0.35% to 0.38%.

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%); surprisingly, these issues are all rich compared to their non-floor siblings, being rich 0.48, rich 1.24, and rich 0.85 respectively, respectively, much more expensive than last month’s figures of rich 0.12, cheap 0.16 and cheap 0.16.

impvol_bam_201030
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It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has widened; 465bp last month to 475bp this month, while GOC-5 has increased from 0.35% to 0.38%.

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

frperf_201030_1mo
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… and no correlations for the three-month period either:

frperf_201030_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 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 5.5596 7.04% 1.006 6.998% 1.0000 $0.3891
June 6.3568 6.10% 0.9900 6.162% 1.0000 $0.3917
September 7.2852 5.32% 1.00 5.320% 1.0000 $0.3876
October, 2020 7.3270 5.27% 0.998 5.281% 1.0000 $0.3869
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%
June 0.37% 0.21%
September 0.35% 0.14%
October, 2020 0.38% 0.09%

I 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 : October, 2020

Monday, November 2nd, 2020

Turnover increased in October to 14%.

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 October 30 was as follows:

MAPF Sectoral Analysis 2020-10-30
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 14.5% 5.01% 15.43
Fixed-Reset Discount 36.7% 4.99% 15.32
Insurance – Straight 1.3% 4.91% 15.61
FloatingReset 0% N/A N/A
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 3.7% 2.28% 1.24
FixedReset Insurance non-NVCC 24.1% 4.41% 16.30
Scraps – Ratchet 1.2% 6.60% 16.27
Scraps – FixedFloater 0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 1.2% 5.52% 3.66
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 17.2% 7.87% 11.48
Scraps – Insurance Straight 0% N/A N/A
Scraps – FloatingReset 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 0.2% 0.00% 0.00
Total 100% 5.27% 14.25
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 were 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.

The name of this subindex has been changed to "Insurance Straight" as of November, 2020

Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 0.38%, a constant 3-Month Bill rate of 0.09% 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.

An additional wrinkle to the division into sub-indices is the fact that some issues are classed here as FixedResets, even though for analytical purposes they are classified as Straights – this is due to the fact that these particular issues reset with a floor rate which is (given the current level of the GOC 5-Year bond) currently expected to be effective.

For MAPF, these issues are BIP.PR.D, BIP.PR.E, BIP.PR.F and ECN.PR.C, with a combined portfolio weight of 4.6%. The total portfolio is therefore 78.3% “Floating”, which means the rates will reset periodically based upon the GOC-5, T-Bill or Canada Prime levels.

Credit distribution is:

MAPF Credit Analysis 2020-10-30
DBRS Rating MAPF Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 37.8%
Pfd-2 22.8%
Pfd-2(low) 19.6%
Pfd-3(high) 10.4%
Pfd-3 5.2%
Pfd-3(low) 2.2%
Pfd-4(high) 1.0%
Pfd-4 0%
Pfd-4(low) 0.8%
Pfd-5(high) 0%
Pfd-5 0.0%
Cash +0.2%
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.D, 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 2020-10-30
Average Daily Trading MAPF Weighting
<$50,000 19.2%
$50,000 – $100,000 34.4%
$100,000 – $200,000 39.1%
$200,000 – $300,000 6.0%
>$300,000 1.2%
Cash +0.2%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight
<100bp 0%
100-149bp 8.4%
150-199bp 7.8%
200-249bp 10.4%
250-299bp 38.9%
300-349bp 4.0%
350-399bp 9.0%
400-449bp 1.8%
450-499bp 0.0%
500-549bp 1.4%
550-599bp 0%
>= 600bp 0%
Undefined 18.3%

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 1.2%
0-1 Year 7.1%
1-2 Years 13.0%
2-3 Years 10.9%
3-4 Years 17.1%
4-5 Years 33.5%
5-6 Years 0%
>6 Years 0%
Not Floating Rate 17.1%

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.

MAPF Performance : September, 2020

Sunday, October 4th, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close September 30, 2020, was $7.2852 after a distribution of 0.103820.

The market was essentially flat over the month, with price declines offsetting dividend receipts.

Disappointing performance was recorded by HSE.PR.G, HSE.PR.C, BPO.PR.R and BPO.PR.N, all returning less than -10% with a total weight in the portfolio of 9.0%, but note that each of these issues were strong performers in August. Strong performance was achieved by PWF.PR.S, ECN.PR.C, SLF.PR.D and SLF.PR.C, all returning more than 4.00%, with a total portfolio weight of 8.8% at month-end.

Quote quality deteriorated sharply this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices increasing from 0.44% to 1.71%. Note that the market rose sharply in the month’s last half-hour of trading, so a certain amount of deterioration was expected.

Returns to September 30, 2020
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month -1.28% +0.09% +0.16% N/A
Three Months +16.24% +12.70% +11.40% N/A
One Year +0.62% +2.93% +2.78% +2.15%
Two Years (annualized) -10.59% -5.49% -4.02% N/A
Three Years (annualized) -4.12% -1.66% -1.07% -1.66%
Four Years (annualized) +2.54% +3.23% +3.05% N/A
Five Years (annualized) +3.79% +4.37% +4.12% +3.57%
Six Years (annualized) -0.88% +0.03% -0.28% N/A
Seven Years (annualized) +0.55% +0.61% +0.53% N/A
Eight Years (annualized) +0.34% +0.59% +0.34% N/A
Nine Years (annualized) +1.64% +1.23% +1.01% N/A
Ten Years (annualized) +1.75% +1.88% +1.42% +0.93%
Eleven Years (annualized) +2.93% +2.59% +2.09%  
Twelve Years (annualized) +6.89% +3.20% +2.65%  
Thirteen Years (annualized) +6.03% +2.41% +2.45%  
Fourteen Years (annualized) +5.68% +2.09%    
Fifteen Years (annualized) +5.70% +2.21%    
Sixteen Years (annualized) +5.78% +2.40%    
Seventeen Years (annualized) +6.33% +2.55%    
Eighteen Years (annualized) +7.61% +2.81%    
Nineteen Years (annualized) +6.92% +2.83%    
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 -0.25%, +11.62% and +2.40%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is -0.86%; five year is +3.60%; ten year is +1.95%

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 -0.52%, +12.51% & +1.82%, respectively. Three year performance is -2.77%, five-year is +3.55%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -0.60%, +12.38% and +2.19% for one-, three- and twelve months, respectively. Three year performance is -2.56%; five-year is +3.74%.

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 +0.95% for the past twelve months. Two year performance is -6.53%, three year is -2.89%, five year is +3.41%.
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 no longer available as the Fund is now the property of Canoe Financial. The last reported performance for the merged fund was May 2020.
Figures for BMO Preferred Share Fund (advisor series) according to BMO are -0.47%, +12.68% and +2.27% for the past one-, three- and twelve-months, respectively. Two year performance is -7.03%; three year is -3.97%; five-year is +1.31%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are +1.18% for the past twelve months. The three-year figure is -2.26%; five years is +4.17%
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 -0.07%, +9.50% and -4.79% for the past one, three and twelve months, respectively. Three year performance is -5.34%, five-year is +0.72%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are -0.55%, +10.17% and +0.91% for the past one, three and twelve months, respectively. Two year performance is -6.67%, three-year is -3.35%
Figures for the RBC Canadian Preferred Share ETF (RPF) as reported by Morningstar are -0.69%, +12.64% and +1.31% for the past one, three and twelve months, respectively. Three-year performance is -3.47%

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 2020-9-11:

pl_200911_body_chart_1
Click for Big

Note that the Seniority Spread was recorded at 395bp at month-end, a significant narrowing from the 415bp shortly after August month-end. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September, 2019 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. CIU issued another bond in late September, 2020, yielding 2.609%, which was 399bp cheaper than the interest-equivalent figure of 6.60% for CIU.

… 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 2020-8-14):

pl_200911_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 – sometimes it just takes a little time! 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 -1.00% vs. PerpetualDiscounts of +2.54% in September; 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_200930
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Floaters performed poorly, returning -2.15% for September but the figure for the past twelve months remains awful at -13.70%. Look at the long-term performance:

himi_floaterperf_200930
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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. Worse, on March 31, 2020, 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 September 30, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_200930
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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 $3.44 and $3.95 rich, respectively. These figures are wider than the 3.15 and 3.55 calculated last month’s figures. The floors have become effective since five-year Canadas dipped below 0.81% and 1.05%, respectively.

It will also be noted that the spread of a notional non-callable TRP FixedReset priced at par has widened slightly from 439bp last month to 444bp this month, while GOC-5 has declined from 0.40% to 0.35%.

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%); surprisingly, these issues are all rich compared to their non-floor siblings, being rich 0.12, cheap 0.16, cheap 0.16 respectively, respectively, similar to last month’s figures of cheap 0.25, rich 0.37 and cheap 0.04.

impvol_bam_200930
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It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has widened slightly; 454bp last month to 465bp this month, while GOC-5 has declined from 0.40% to 0.35%.

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

frperf_200930_1mo
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… but the three-month period showed some correlation for the Pfd-2 Group (14%):

frperf_200930_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 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 5.5596 7.04% 1.006 6.998% 1.0000 $0.3891
June 6.3568 6.10% 0.9900 6.162% 1.0000 $0.3917
September, 2020 7.2852 5.32% 1.00 5.320% 1.0000 $0.3876
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%
June 0.37% 0.21%
September, 2020 0.35% 0.14%

I 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 : September, 2020

Saturday, October 3rd, 2020

Turnover decreased in September to 8%.

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 September 30 was as follows:

MAPF Sectoral Analysis 2020-9-30
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 17.9% 5.04% 15.35
Fixed-Reset Discount 29.9% 5.03% 15.31
Deemed-Retractible 4.9% 4.92% 15.64
FloatingReset 0% N/A N/A
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 3.3% 2.72% 1.31
FixedReset Insurance non-NVCC 24.5% 4.45% 16.28
Scraps – Ratchet 1.3% 6.42% 16.42
Scraps – FixedFloater 0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 1.2% 5.63% 3.72
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 17.2% 7.81% 11.62
Scraps – DeemedRet 0% N/A N/A
Scraps – FloatingReset 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 0.0% 0.00% 0.00
Total 100% 5.32% 14.36
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 0.35%, a constant 3-Month Bill rate of 0.14% 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.

An additional wrinkle to the division into sub-indices is the fact that some issues are classed here as FixedResets, even though for analytical purposes they are classified as Straights – this is due to the fact that these particular issues reset with a floor rate which is (given the current level of the GOC 5-Year bond) currently expected to be effective.

For MAPF, these issues are BIP.PR.D, BIP.PR.E, BIP.PR.F and ECN.PR.C, with a combined portfolio weight of 4.7%. The total portfolio is therefore 71.4% “Floating”, which means the rates will reset periodically based upon the GOC-5, T-Bill or Canada Prime levels.

Credit distribution is:

MAPF Credit Analysis 2020-9-30
DBRS Rating MAPF Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 41.6%
Pfd-2 19.2%
Pfd-2(low) 19.6%
Pfd-3(high) 10.1%
Pfd-3 4.6%
Pfd-3(low) 3.1%
Pfd-4(high) 1.0%
Pfd-4 0%
Pfd-4(low) 0.8%
Pfd-5(high) 0%
Pfd-5 0.0%
Cash +0.0%
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.D, 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 2020-9-30
Average Daily Trading MAPF Weighting
<$50,000 22.8%
$50,000 – $100,000 42.2%
$100,000 – $200,000 28.8%
$200,000 – $300,000 5.1%
>$300,000 1.2%
Cash +0%
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 2.9%
200-249bp 11.0%
250-299bp 35.8%
300-349bp 4.1%
350-399bp 8.7%
400-449bp 1.8%
450-499bp 0.0%
500-549bp 1.4%
550-599bp 0%
>= 600bp 0%
Undefined 25.2%

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 2.3%
0-1 Year 9.5%
1-2 Years 13.1%
2-3 Years 10.3%
3-4 Years 12.1%
4-5 Years 28.8%
5-6 Years 0%
>6 Years 0%
Not Floating Rate 23.9%

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.

MAPF Performance : August 2020

Saturday, September 5th, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close August 31, 2020, was $7.4849.

The fine performance of the preferred share market can be ascribed to July’s announcement of the “LRCN” securities by RBC, as discussed in the July Report, which was followed up by a mass redemption of Royal Bank’s NVCC non-compliant issues in August. Note that I am very dubious regarding the fundamentals of this effect and take the view that the Canadian preferred share market has been ridiculously cheap for some time but that some players were waiting for some good news, however minor, before jumping back into the market.

Portfolio performance was enhanced by the holdings in three issues with total returns exceeding +15%: LB.PR.J, HSE.PR.C and TD.PF.D, with a total weight at month-end of 3%; there were a further five issues with returns exceeding 10%: FFH.PR.G, PPL.PR.S, BPO.PR.R, BPO.PR.N and HSE.PR.G, with a total month-end weight of 11.7%. Disappointments included IFC.PR.A, GWO.PR.N, SLF.PR.G and IFC.PR.C, all returning less than 2% with a total month-end weight of 10.8%.

Quote quality improved this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices decreasing from about 0.83% to 0.44%.

Returns to August 31, 2020
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +5.85% +5.55% +4.55% N/A
Three Months +21.57% +17.09% +15.58% N/A
One Year +5.18% +6.50% +6.04% +5.43%
Two Years (annualized) -10.10% -5.71% -4.25% N/A
Three Years (annualized) -3.39% -1.13% -0.67% -1.23%
Four Years (annualized) +2.98% +3.18% +2.98% N/A
Five Years (annualized) +2.64% +3.11% +2.91% +2.36%
Six Years (annualized) -0.78% -0.11% -0.41% N/A
Seven Years (annualized) +0.87% +0.67% +0.57% N/A
Eight Years (annualized) +0.63% +0.63% +0.37% N/A
Nine Years (annualized) +1.02% +1.19% +0.90% N/A
Ten Years (annualized) +2.32% +2.12% +1.63% +1.13%
Eleven Years (annualized) +2.95% +2.49% +2.02%  
Twelve Years (annualized) +6.72% +2.97% +2.39%  
Thirteen Years (annualized) +6.08% +2.30% +2.20%  
Fourteen Years (annualized) +5.88% 2.16%    
Fifteen Years (annualized) +5.89% +2.26%    
Sixteen Years (annualized) +5.93% +2.43%    
Seventeen Years (annualized) +6.60% +2.63%    
Eighteen Years (annualized) +7.23% +2.83%    
Nineteen Years (annualized) +7.22% +2.86%    
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 +5.05%, +16.31% and +6.01%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is -0.37%; five year is +3.03%; ten year is +2.19%

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 +5.46%, +17.74% & +6.26%, respectively. Three year performance is -2.01%, five-year is +2.73%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +5.53%, +17.71% and +6.80% for one-, three- and twelve months, respectively. Three year performance is -1.80%; five-year is +2.92%.

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 +5.44% for the past twelve months. Two year performance is -6.34%, three year is -2.01%, five year is +2.19%.
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 no longer available as the Fund is now the property of Canoe Financial. The last reported performance for the merged fund was May 2020.
Figures for BMO Preferred Share Fund (advisor series) according to BMO are +4.95%, +18.05% and +6.37% for the past one-, three- and twelve-months, respectively. Two year performance is -7.16%; three year is -3.36%; five-year is +0.31%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are +4.31% for the past twelve months. The three-year figure is -1.78%; five years is +3.23%
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 +4.03%, +13.22% and -0.83% for the past one, three and twelve months, respectively. Three year performance is -4.93%, five-year is -0.19%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are +4.33%, +14.47% and +4.68% for the past one, three and twelve months, respectively. Two year performance is -6.69%, three-year is -2.70%
Figures for the RBC Canadian Preferred Share ETF (RPF) as reported by Morningstar are +5.03%, +18.58% and +5.82% for the past one, three and twelve months, respectively. Three-year performance is -2.32%

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 2020-8-14:

pl_200814_body_chart_1
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Note that the Seniority Spread was recorded at 415bp shortly after month-end a sharp narrowing from the 450bp near July month-end. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September, 2019 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; at the end of May, 2020, Pembina issued 30-year notes at 4.67% at a time when their FixedResets were yielding between 6.92% and 8.22% as 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.

… 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 2020-8-14):

pl_200814_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 – sometimes it just takes a little time! 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 +5.59% vs. PerpetualDiscounts of +3.94% in July; 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_200831
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Floaters performed well, returning +10.12% for July but the figure for the past twelve months remains awful at -20.42%. Look at the long-term performance:

himi_floaterperf_200831
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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. Worse, on March 31, 2020, 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 August 31, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_200831
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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 $3.15 and $3.55 rich, respectively. These figures are wider than the 2.99 and 2.30 calculated last month’s figures. The floors have become effective since five-year Canadas dipped below 0.81% and 1.05%, respectively.

It will also be noted that the spread of a notional non-callable TRP FixedReset priced at par has declined slightly from 457bp last month to 439bp this month, while GOC-5 has increased from 0.32% to 0.40%.

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%); surprisingly, these issues are all rich compared to their non-floor siblings, being cheap 0.25, rich 0.37, cheap 0.04 respectively, respectively, cheapening up markedly from last month’s figures of rich 0.36, rich 0.24 and rich 0.78, and very sharply from June’s figures of rich 1.99, rich 2.06 and rich 1.58.

impvol_bam_200831
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It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has declined sharply; 477bp last month to 454bp this month, while GOC-5 has increased from 0.32% to 0.40%.

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

frperf_200831_1mo
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… and results for the three-month period were the same:

frperf_200831_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 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 5.5596 7.04% 1.006 6.998% 1.0000 $0.3891
June 6.3568 6.10% 0.9900 6.162% 1.0000 $0.3917
August, 2020 7.4849 5.32% 0.993 5.358% 1.0000 $0.4010
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%
June 0.37% 0.21%
August, 2020 0.40% 0.14%

I 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 : August 2020

Wednesday, September 2nd, 2020

Turnover increased slightly in August to 13%.

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 August 31 was as follows:

MAPF Sectoral Analysis 2020-8-31
HIMI Indices Sector Weighting YTW ModDur BMO-CM "50" Weighting
Ratchet 0% N/A N/A 0%
FixFloat 0% N/A N/A 0%
Floater 0% N/A N/A 0.7%
OpRet 0% N/A N/A 0%
SplitShare 0% N/A N/A 0%
Interest Rearing 0% N/A N/A 0%
PerpetualPremium 0% N/A N/A 1.2%
PerpetualDiscount 16.9% 5.21% 15.11 6.8%
Fixed-Reset Discount 27.5% 5.07% 15.20 35.5%
Deemed-Retractible 8.7% 5.11% 15.34 12.8%
FloatingReset 0% N/A N/A 0.6%
FixedReset Premium 0% N/A N/A 8.2%
FixedReset Bank non-NVCC 0% N/A N/A 0%
FixedReset Insurance non-NVCC 25.1% 4.49% 16.38 5.6%
Scraps – Ratchet 1.3% 6.39% 16.38 2.2%
Scraps – FixedFloater 0% N/A N/A 1.2%
Scraps – Floater 0% N/A N/A 0.5%
Scraps – OpRet 0% N/A N/A 0%
Scraps – SplitShare 0% N/A N/A 0%
Scraps – PerpPrem 0% N/A N/A 1.9%
Scraps – PerpDisc 0% N/A N/A 0%
Scraps – FR Discount 19.8% 7.01% 12.51 22.7%
Scraps – DeemedRet 0% N/A N/A 0%
Scraps – FloatingReset 0% N/A N/A 0%
Scraps – FR Premium 0% N/A N/A 0%
Scraps – Bank non-NVCC 0% N/A N/A 0%
Scraps – Ins non-NVCC 0% N/A N/A 0%
Cash 0.7% 0.00% 0.00 0%
Total 100% 5.32% 14.83 100%
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 0.40%, a constant 3-Month Bill rate of 0.14% 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.

An additional wrinkle to the division into sub-indices is the fact that some issues are classed here as FixedResets, even though for analytical purposes they are classified as Straights – this is due to the fact that these particular issues reset with a floor rate which is (given the current level of the GOC 5-Year bond) currently expected to be effective.

For MAPF, these issues are BIP.PR.D, BIP.PR.E, BIP.PR.F and ECN.PR.C, with a combined portfolio weight of 4.5%. The total portfolio is therefore 69.1% “Floating”, which means the rates will reset periodically based upon the GOC-5, T-Bill or Canada Prime levels.

For the BMO-CM “50” index, these issues are ALA.PR.I, BIP.PR.D, BPO.PR.C and PPL.PR.M, with a combined weight of 7.5%. The total index is therefore 69.7% “Floating”.

Credit distribution is:

MAPF Credit Analysis 2020-8-31
DBRS Rating MAPF Weighting BMO-CM “50” Weighting
Pfd-1 0 0
Pfd-1(low) 0 0
Pfd-2(high) 37.0% 31.5%
Pfd-2 22.0% 25.5%
Pfd-2(low) 19.3% 14.4%
Pfd-3(high) 11.7% 13.3%
Pfd-3 5.3% 13.3%
Pfd-3(low) 2.2% 1.9%
Pfd-4(high) 1.1% 0
Pfd-4 0% 0
Pfd-4(low) 0.8% 0
Pfd-5(high) 0% 0
Pfd-5 0.0% 0
Cash +0.7% 0
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.D, 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.
The Index holds a position in BIP.PR.D which is rated P-2(low) by S&P and is unrated by DBRS; this is included in the Pfd-2(low) total.

Liquidity Distribution is:

MAPF Liquidity Analysis 2020-8-31
Average Daily Trading MAPF Weighting BMO-CM “50” Weighting
<$50,000 22.0% 1.1%
$50,000 – $100,000 37.2% 19.7%
$100,000 – $200,000 34.8% 53.0%
$200,000 – $300,000 2.3% 20.9%
>$300,000 3.0% 5.2%
Cash +0.7% 0%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight BMO-CM “50” Weight
<100bp 0% 0%
100-149bp 6.7% 0.5%
150-199bp 2.8% 3.8%
200-249bp 10.2% 34.6%
250-299bp 34.1% 7.7%
300-349bp 3.4% 5.2%
350-399bp 10.1% 7.3%
400-449bp 2.5% 6.0%
450-499bp 0.0% 6.1%
500-549bp 2.5% 1.4%
550-599bp 0% 0%
>= 600bp 0% 0%
Undefined 27.6% 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 BMO-CM “50” Weight
Currently Floating 1.3% 4.0%
0-1 Year 8.4% 10.3%
1-2 Years 24.3% 16.9%
2-3 Years 10.7% 5.3%
3-4 Years 10.4% 29.0%
4-5 Years 28.6% 11.7%
5-6 Years 0% 0%
>6 Years 0% 0%
Not Floating Rate 26.3% 22.8%

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.

MAPF Performance: July, 2020

Sunday, August 2nd, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close July 31, 2020, was $7.0713.

Excellent performance by the fund was led by FixedResets with low Issue Reset Spreads. The fund held positions in ten issues with performance for the month in excess of 15%, comprising about 37% of the portfolio at month-end, all FixedResets with spreads ranging from 130bp (GWO.PR.N, returning +16.00%) to 338bp (CM.PR.R, returning +19.93%).

The fine performance of the preferred share market can be ascribed to the approval and issuance of the “LRCN” securities by RBC, as discussed below.

Quote quality remained steady this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices increasing slightly from about 0.8% to 0.83%.

Returns to July 31, 2020
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +11.24% +6.68% +6.38% N/A
Three Months +14.54% +8.44% +8.66% N/A
One Year -6.46% -3.64% -2.60% -3.19%
Two Years (annualized) -12.34% -7.95% -5.99% N/A
Three Years (annualized) -5.28% -3.25% -2.38% -2.95%
Four Years (annualized) +2.09% +2.13% +2.13% N/A
Five Years (annualized) +0.36% +1.25% +1.20% +0.69%
Six Years (annualized) -1.57% -0.90% -1.03% N/A
Seven Years (annualized) -0.08% -0.23% -0.22% N/A
Eight Years (annualized) +0.18% +0.02% -0.14% N/A
Nine Years (annualized) +0.47% +0.50% +0.34% N/A
Ten Years (annualized) +1.90% +1.70% +1.31% +0.80%
Eleven Years (annualized) +3.07% +2.41% +1.90%  
Twelve Years (annualized) +6.72% +2.75% +2.22%  
Thirteen Years (annualized) +5.59% +1.92% +2.05%  
Fourteen Years (annualized) +5.59% 1.83%    
Fifteen Years (annualized) +5.52% +1.91%    
Sixteen Years (annualized) +5.63% +2.11%    
Seventeen Years (annualized) +6.39% +2.33%    
Eighteen Years (annualized) +6.77% +2.55%    
Nineteen Years (annualized) +7.00% +2.62%    
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 +6.52%, +8.92% and -3.21%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is -2.23%; five year is +1.29%; ten year is +1.31%

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 +7.24%, +9.41% & -4.53%, respectively. Three year performance is -4.06%, five-year is +0.85%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +7.13%, +9.12% and -4.26% for one-, three- and twelve months, respectively. Three year performance is -3.87%; five-year is +1.02%.

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 -4.49% for the past twelve months. Two year performance is -8.26%, three year is -3.97%, five year is +0.18%.
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 no longer available as the Fund is now the property of Canoe Financial. The last reported performance for the merged fund was May 2020.
Figures for BMO Preferred Share Fund (advisor series) according to BMO are +7.87%, +9.90% and -4.33% for the past one-, three- and twelve-months, respectively. Two year performance is -9.01%; three year is -5.26%; five-year is -1.31%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are -4.03% for the past twelve months. The three-year figure is -3.50%; five years is +1.58%
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 +5.33%, +6.50% and -10.58% for the past one, three and twelve months, respectively. Three year performance is -6.38%, five-year is -1.38%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are +6.18%, +7.88% and -4.24% for the past one, three and twelve months, respectively. Two year performance is -8.36%, three-year is -4.38%

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 2020-7-10):

pl_200710_body_chart_1
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Note that the Seniority Spread was recorded at 450bp shortly before month-end a slight widening from the 440bp near June month-end. As a good practical example of the spreads between markets, consider that CIU issued a long-term bond in early September, 2019 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; at the end of May, 2020, Pembina issued 30-year notes at 4.67% at a time when their FixedResets were yielding between 6.92% and 8.22% as 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.

… 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 2020-7-10):

pl_200710_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 – sometimes it just takes a little time! 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 +9.20% vs. PerpetualDiscounts of +2.51% in July; 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_200731
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Floaters performed well, returning +10.12% for July but the figure for the past twelve months remains awful at -20.42%. Look at the long-term performance:

himi_floaterperf_200731
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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. Worse, on March 31, 2020, 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 July 31, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_200731
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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 $2.99 and $2.30 rich, respectively. These figures are much narrower than the 4.39 and 4.18 calculated last month’s figures; this reflects underperformance of these two issues relative to their siblings over the past month. The floors have become effective since five-year Canadas dipped below 0.81% and 1.05%, respectively.

It will also be noted that the spread of a notional non-callable TRP FixedReset priced at par has declined slightly from 481bp last month to 457bp this month, while GOC-5 has been declined from 0.37% to 0.32%.

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 0.36, 0.24 and 0.78 respectively, respectively, cheapening up markedly from last month’s figures of 1.99, 2.06 and 1.58

impvol_bam_200731
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It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has declined sharply; 526bp last month to 477bp this month, while GOC-5 has declined from 0.36% to 0.32%.

Relative performance during the month was correlated with Issue Reset Spreads for the “Pfd-2 Group” (20%) but not for the “Pfd-3 Group” issues:

frperf_200731_1mo
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… while results over the quarter for the Pfd-2 Group were uncorrelated but weakly correlated for the Pfd-3 Group (11%) – however, the correlation for the latter group is unduly influenced by the performance of ECN.PR.A (6.50%+544M650, +45.03%):

frperf_200731_3mo
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Disaggregating the one-month performance for the Pfd-2 group reveals stronger correlations (banks, 43%; insurance 21%; general 25%):

frperf_200731_1mo_detail
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This fine performance by bank and insurance issues may be presumed to be due to OSFI’s approval of the LRCN structure for bank Alternative Tier 1 Capital. This new type of instrument was discussed on PrefBlog on July 15, July 16, July 17 and July 22. Briefly, the bank will issue preferred shares to a separate, but consolidated, entity and this entity will then issue 60-year notes to institutional investors – retail is not encouraged to participate. These notes may be counted as Tier 1 Capital, up to an allowable limit on the total.

There is (or, perhaps, was?) some argument that this alternative route to Alternative Tier 1 Capital (since the introduction of the NVCC rules, issuance has been restricted to preferred shares) will lead to a reduction of future supply and therefore to an increase in prices, with some pundits speculating that there could be wholesale redemption of bank issues currently trading far below par.

As explained in my links above, I’m pleased that future supply will be somewhat reduced, but highly skeptical that prices should be responding in a significant way to this news; and even more skeptical about the ‘wholesale redemption’ part of the story! As it stands, the TXPR Total Return index gained 6.76% from the close July 14 to the close July 16, and finished the month with a total gain of 6.38% … so if you weren’t holding preferreds on those two days, you missed all the fun!

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 5.5596 7.04% 1.006 6.998% 1.0000 $0.3891
June 6.3568 6.10% 0.9900 6.162% 1.0000 $0.3917
July, 2020 7.0713 5.49% 0.997 5.507% 1.0000 $0.3894
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%
June 0.37% 0.21%
July, 2020 0.34% 0.17%

I 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 : July, 2020

Saturday, August 1st, 2020

Turnover remained steady in July at 10%.

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 July 31 was as follows:

MAPF Sectoral Analysis 2020-7-31
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0.1% 5.29% 14.99
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 13.0% 5.55% 14.60
Fixed-Reset Discount 32.6% 5.09% 15.17
Deemed-Retractible 3.9% 5.38% 14.86
FloatingReset 1.3% 5.26% 15.05
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 0% N/A N/A
FixedReset Insurance non-NVCC 28.6% 4.49% 16.15
Scraps – Ratchet 1.2% 6.96% 15.57
Scraps – FixedFloater 0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 0.5% 8.6% 3.04
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 19.0% 7.69% 11.61
Scraps – DeemedRet 0% N/A N/A
Scraps – FloatingReset 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 0.3% 0.00% 0.00
Total 100% 5.49% 14.65
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 0.34%, a constant 3-Month Bill rate of 0.17% 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 2020-7-31
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 34.6%
Pfd-2 25.1%
Pfd-2(low) 19.8%
Pfd-3(high) 11.2%
Pfd-3 5.1%
Pfd-3(low) 2.1%
Pfd-4(high) 1.0%
Pfd-4 0%
Pfd-4(low) 0.8%
Pfd-5(high) 0%
Pfd-5 0.0%
Cash +0.3%
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.D, 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 2020-7-31
Average Daily Trading Weighting
<$50,000 21.5%
$50,000 – $100,000 30.3%
$100,000 – $200,000 38.2%
$200,000 – $300,000 2.9%
>$300,000 6.7%
Cash +0.3%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight
<100bp 0%
100-149bp 7.3%
150-199bp 4.0%
200-249bp 10.2%
250-299bp 35.0%
300-349bp 10.2%
350-399bp 9.8%
400-449bp 2.4%
450-499bp 0.0%
500-549bp 2.3%
550-599bp 0%
>= 600bp 0%
Undefined 18.6%

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 7.7%
0-1 Year 8.6%
1-2 Years 20.4%
2-3 Years 13.6%
3-4 Years 7.7%
4-5 Years 24.6%
5-6 Years 0%
>6 Years 0%
Not Floating Rate 17.3%

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 similar
  • 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 similarly 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 : June 2020

Sunday, July 5th, 2020

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close June, 2020, was $6.3568 after a dividend distribution of 0.119146.

Performance for the month was hurt by the fund’s relatively low holdings of low-spread bank issues – see discussion below on the insights obtained by disaggregating the 1-month performance of the Pfd-2 Group.

Quote quality declined slightly this this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices increasing from about 0.6% to 0.8%.

Returns to June 30, 2020
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +3.25% +3.99% +3.92% N/A
Three Months +16.48% +14.28% +15.02% N/A
One Year -15.49% -8.31% -7.24% -7.80%
Two Years (annualized) -16.44% -10.38% -8.33% N/A
Three Years (annualized) -7.97% -4.77% -4.02% -4.55%
Four Years (annualized) +0.30% +1.39% +1.45% N/A
Five Years (annualized) -2.69% -0.83% -0.87% -1.36%
Six Years (annualized) -3.34% -1.96% -1.99% N/A
Seven Years (annualized) -1.80% -1.21% -1.24% N/A
Eight Years (annualized) -0.84% -0.70% -0.78% N/A
Nine Years (annualized) -0.76% -0.12% -0.26% N/A
Ten Years (annualized) +1.11% +1.23% +0.86% +0.34%
Eleven Years (annualized) +2.76% +2.22% +1.63%  
Twelve Years (annualized) +5.57% +2.02% +1.50%  
Thirteen Years (annualized) +4.77% +1.51% +1.39%  
Fourteen Years (annualized) +4.81% +1.38%    
Fifteen Years (annualized) +4.79% +1.47%    
Sixteen Years (annualized) +5.10% +1.78%    
Seventeen Years (annualized) +5.94% +1.93%    
Eighteen Years (annualized) +6.01% +2.25%    
Nineteen Years (annualized) +6.48% +2.30%    
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 +3.94%, +14.87% and -7.72%, respectively, according to Globe & Mail / Fundata after all fees & expenses. Three year performance is -3.98%; five year is -0.75%; ten year is +1.35%

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 +4.10%, +15.11% & -9.56%, respectively. Three year performance is -5.78%, five-year is -1.23%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +4.12%, +15.10% and -13.40% for one-, three- and twelve months, respectively. Three year performance is -5.55%; five-year is -1.07%.

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 -10.22% for the past twelve months. Two year performance is -11.09%, three year is -5.89%, five year is -2.41%.
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 +4.26%, +15.65% and -9.88% for the past one-, three- and twelve-months, respectively. Two year performance is -11.89%; three year is -7.38%; five-year is -3.49%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F (PPS) are -8.93% for the past twelve months. The three-year figure is -5.13%; five years is -0.53%
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 +3.32%, +11.92% and -13.90% for the past one, three and twelve months, respectively. Three year performance is -7.67%, five-year is -2.88%.
Figures for the Desjardins Canadian Preferred Share Fund A Class (A Class), as reported by the company are +3.33%, +14.00% and -8.56% for the past one, three and twelve months, respectively. Two year performance is -10.55%, three-year is -5.93%

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 2020-6-12):

pl_200508_body_chart_1
Click for Big

Note that the Seniority Spread was recorded at 440bp shortly before month-end a slight (and possibly spurious) narrowing from the incredible 445bp near May month-end. 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; at the end of May, 2020, Pembina issued 30-year notes at 4.67% at a time when their FixedResets were yielding between 6.92% and 8.22% as 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.

… 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 2020-6-12):

pl_200508_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 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 – sometimes it just takes a little time! 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 +3.24% vs. PerpetualDiscounts of +2.31% in May; 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_200630
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Floaters underperformed FixedResets, returning +2.51% for June and the figure for the past twelve months remains awful at -25.00%. Look at the long-term performance:

himi_floaterperf_200630
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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. Worse, on March 31, 2020, 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 May 29, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

impvol_trp_200630
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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 $4.39 and $4.18 rich, respectively. These figures are wider than the 4.10 and 3.38 calculated last month’s 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 declined slightly from 489bp last month to 481bp this month, while GOC-5 has been steady, moving from 0.36% to 0.37%.

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 1.99, 2.06 and 1.58 respectively, respectively, cheapening up a bit from last month’s figures of 2.17, 2.28 and 2.07

impvol_bam_200630
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It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has remained fairly steady; 517bp last month to 526bp this month, while GOC-5 has declined from 0.45% to 0.36%.

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

frperf_200630_1mo
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… and results over the quarter for the Pfd-2 Group were better correlated (26%) but uncorrelated for the Pfd-3 Group:

frperf_200630_3mo
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Disaggregating the one-month performance for the Pfd-2 group reveals an unusual pattern:

frperf_200630_1mo_pfd2disaggClick for Big

Bank issues with Issue Reset Spreads at the low end of their range performed unusually well and led to an unusual pattern in which the slope of the regression line for bank issues has a difference sign than that for insurance issues. I do not believe that this behaviour will continue.

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 5.5596 7.04% 1.006 6.998% 1.0000 $0.3891
June, 2020 6.3568 6.10% 0.9900 6.162% 1.0000 $0.3917
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%
June, 2020 0.37% 0.21%

I 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 : June 2020

Saturday, July 4th, 2020

Turnover declined in June to 10%.

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 June 30 was as follows:

MAPF Sectoral Analysis 2020-6-30
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0.1% 5.70% 14.35
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 11.4% 5.56% 14.56
Fixed-Reset Discount 38.8% 5.60% 14.42
Deemed-Retractible 1.9% 5.68% 14.42
FloatingReset 7.2% 4.83% 15.81
FixedReset Premium 0% N/A N/A
FixedReset Bank non-NVCC 0% N/A N/A
FixedReset Insurance non-NVCC 21.4% 5.28% 14.69
Scraps – Ratchet 1.3% 7.82% 14.39
Scraps – FixedFloater 0% N/A N/A
Scraps – Floater 0% N/A N/A
Scraps – OpRet 0% N/A N/A
Scraps – SplitShare 0.5% 8.6% 3.04
Scraps – PerpPrem 0% N/A N/A
Scraps – PerpDisc 0% N/A N/A
Scraps – FR Discount 19.1% 8.43% 10.98
Scraps – DeemedRet 0% N/A N/A
Scraps – FloatingReset 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 -1.0% 0.00% 0.00
Total 100% 6.10% 14.00
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 0.37%, 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 2020-6-30
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 31.5%
Pfd-2 28.4%
Pfd-2(low) 20.7%
Pfd-3(high) 11.2%
Pfd-3 4.9%
Pfd-3(low) 2.3%
Pfd-4(high) 0%
Pfd-4 0%
Pfd-4(low) 0.8%
Pfd-5(high) 0%
Pfd-5 0.0%
Cash -1.0%
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.D, 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 2020-6-30
Average Daily Trading Weighting
<$50,000 13.5%
$50,000 – $100,000 38.4%
$100,000 – $200,000 37.8%
$200,000 – $300,000 6.0%
>$300,000 5.2%
Cash -1.0%
Totals will not add precisely due to rounding.

The distribution of Issue Reset Spreads is:

Range MAPF Weight
<100bp 0%
100-149bp 6.9%
150-199bp 4.7%
200-249bp 8.8%
250-299bp 38.6%
300-349bp 13.6%
350-399bp 9.6%
400-449bp 2.6%
450-499bp 0.0%
500-549bp 1.5%
550-599bp 0%
>= 600bp 0%
Undefined 13.6%

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 20.3%
0-1 Year 16.8%
1-2 Years 17.5%
2-3 Years 19.4%
3-4 Years 8.7%
4-5 Years 4.9%
5-6 Years 0%
>6 Years 0%
Not Floating Rate 12.3%

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 similar
  • 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 similarly 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