PrefBlog

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close February 26, 2021, was $9.4553.

Five issues held throughout the month returned between 0% and 1%: BMO.PR.Q, CU.PR.G, BNS.PR.H, FTN.PR.A and INE.PR.A, with a total weight in the portfolio (at month-end) of 14.1%. Star performers were SLF.PR.G, TRP.PR.B and IFC.PR.A, returning between 15% and 20%, with a total portfolio weight of 8.2%.

Insurance issues received a boost this month with the announcement of Manulife LRCNs (additional commentary February 11.

Quote quality was poor this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices increasing from 0.52% to 1.19%.

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 2021-2-12):

Click for Big

Note that the Seniority Spread was recorded at 330bp just before month-end, significantly narrower than the 355bp on February 3. 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 is still deep in ‘decoupled panic’ territory (chart end-date 2021-2-12):

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.

In this connection, it is useful to review some recent commentary regarding the preferred share market. Rob Carrick recently published a column with the title Rob Carrick: Does it make sense to use preferred shares as a bond substitute?, in which he gave a nod to the old shibboleth:

But does it truly make sense to substitute prefs for bonds? Not if you subscribe to the idea that the main point of bonds is not to generate income and returns, but rather to act as a portfolio life preserver when the stock market turns ugly.

… but then noted the crucial point:

Perpetuals are somewhat less touchy, but they’re not to be counted on in a stock market crash.

This distinction is meaningless to investors who are all about income and fine with portfolios that bounce around in price.

As I never get tired of repeating, Fixed Income portfolio management is a process that largely consists of balancing Security of Income vs. Security of Principal. These are opposing forces; the more you have of one, the less you’ll have of the other. And preferred shares are way, way over to the “security of income” pole. So in bad times … Shut up and Clip Your Coupons!

Financial Wisdom Forum’s long-running thread on preferred shares recently featured a series of posts which often deprecated preferred shares with some participants advocating market timing:

The thing about prefs is that timing is everything. You buy them when they’re being thrown out with the bathwater and you’ll be golden.
…
Yes, there’s money to be made, but only if the shares are in the order of a 30% discount.
…
If you care about total return, preferred shares probably aren’t for you, (unless of course you are interested in trading them or you have a crystal ball regarding interest rates).

If you want something that pays a decent, tax efficient dividend, in a non-registered account, and share price isn’t important, then straight perpetual preferred shares are probably fine (caveat for a few years with respect to NVCC – will no longer qualify as Tier 1 Capital post 2022). Suitable for the retired. Anything else – not so much. They all seem to favour the issuer.
…
Sure the market value is volatile but I don’t plan on selling so it doesn’t matter to me, barring default.

The part I’d like to focus on is:

Yes, there’s money to be made, but only if the shares are in the order of a 30% discount.

This is close – but not quite – to stating an essential point about Fixed Income investing: total returns are asymmetrical: you can lose a lot more than you can win. This is why credit quality is so important – a bankruptcy, or even a mere impairment, is going to take you a long way down the ‘bad side’ of the asymmetrical probability curve. But another point, often ignored, is that this implies that discounted issues are, all else being equal, better investments than premium issues: in good times, discounted issues can win a lot more than premium issues, which are tethered to their par value due to considerations of maturity or possible redemption. In bad times, they’ll lose a little more, since discounted issues have no ‘buffer’ to insulate them, while premium issues (and, to a lesser extent, issues trading modestly below par) have such a buffer that absorbs a portion of the shock – this is easier to understand in terms option values and volatility theory, as the negative value of the embedded option is reduced as the issue moves further away from par.

The implication for MAPF is that there is a bias towards holding issues trading well away from par value, which almost always means discounted issues. It’s only a bias, not a hard and fast rule, but this bias was deliberately built into the system in order to reduce the asymmetry of the projected returns curve. This means that MAPF will usually hold a portfolio more heavily weighted towards low coupon – low priced issues than the index and be correspondingly underweighted in high coupon – high priced instruments.

This in turn has the effect of introducing a bias in returns: MAPF will often underperform in poor markets (as it holds fewer of the better performing high-coupon issues than the index) and outperform in good markets (as it holds fewer of the worse performing high-coupon issues than the index). This is only a tendency, not an iron-clad rule, but the effect is there and it means that MAPF has a higher Beta than it might otherwise have, if you enjoy thinking in terms of investment models from the last century. And at all times, of course, the fund seeks to trade and exploit market inefficiencies, which mitigates but does not eliminate the effect.

On another FWF forum, there has been speculation that the fine performance of FixedResets since March, 2020, has been due to a conscious focus on spreads:

ZPR was up approximately 6% for 2020. Is this a reversal of the trend to follow interest rates downward? Perhaps investors will focus on the spread between preferred versus bond yields going forward rather than an irrational rush to the exits whenever prefs are resetting at lower rates.

[reply] It’s already happening. That’s why ZPR has finally had a positive year in a declining rate environment.

Well, this is something I would like to agree with. I’ve been pounding the ‘spreads’ drum for a long time…

Unfortunately, while one can only rarely point to a single mechanism explaining a change in relative prices and say, with any credibility whatsoever, that A caused B, I have to admit I’m more dubious than usual about this claim. I believe that the continued rally is due to continued interest rate anticipation, which is now (for some investors) considered to be on the way up rather than continuing the downward staggering of the past ten years; this in turn is derived from Central Bank ‘easy money’ policies and very loose government fiscal policies; which is considered to be on the verge of driving inflation upwards.

Who’s right? Well, we’ll know in ten years, at a time when half of the investing world will graciously explain at length how their uncanny ability to read global market forces allowed them to time the market and make enormous profits, while the other half will tell you the question is irrelevant because investing is about the future, not the past. My advice is, as always, to make asset allocation decisions based on the long-term characteristics of each asset class and how these characteristics interact with your long-term portfolio objectives.

It should be noted that I have been unable to provide an entirely satisfactory explanation for 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 +6.50% vs. PerpetualDiscounts of +0.84% in February; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep:

Click for Big

Floaters performed well, returning +10.03% for February and finally moving the trailing twelve months into positive territory at +17.65%. Look at the long-term performance:

Click for Big

Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years. 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 February 26, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

Click for Big

The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $0.48 cheap and $1.45 rich, respectively. These figures are much narrower than the 1.17 rich and 2.13 rich calculated with last month’s figures. The floors have become effective since five-year Canadas dipped below 0.81% and 1.05%, respectively – note that the floor on TRP.PR.J, which is no longer rich, is no longer assumed to be effective.

It will also be noted that the spread of a notional non-callable TRP FixedReset priced at par has narrowed from 376bp last month to 363bp this month, while GOC-5 has increased from 0.42% to 0.86%.

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, at 1.95, 1.96 and 1.94 respectively, very different from last month’s figures of cheap 1.29, cheap 1.79 and cheap 1.74. I note that it is normal for premium issues in a rising market to be cheap, since investors have an expectation for continued rising prices (and therefore an ‘automatic’ redemption), without considering the possibility of a market reversal, in which case the higher spreads will prove to be very useful.

Click for Big

It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has narrowed significantly over the month; 397bp last month to 354bp this month, while GOC-5 has increased from 0.42% to 0.86%.

Relative performance during the month was correlated (53%) with Issue Reset Spreads for the “Pfd-2 Group” and for the “Pfd-3 Group” issues (32%):

Click for Big

… with Pfd-2 Group correlation for the three-month period of 51% and 23% for Pfd-3:

Click for Big

This suggests to me that November commenced an actual theme, one based on an expectation of higher government interest rates in the future (perhaps due to renewed hopes that the introduction of coronavirus vaccines will return things to normal) and that this theme has continued through February, finally replacing the uncorrelated messes we’ve seen through much of the market’s recovery since the end of March, 2020.

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.

Yields on preferred shares of all stripes are 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.

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

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.

Turnover jumped to 29% in February.

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

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

Sectoral distribution of the MAPF portfolio on February 26 was as follows:

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, this idiosyncracy is represented by ECN.PR.C, with a portfolio weight of 1.3%. The total portfolio is therefore 82% “Floating”, which means the rates will reset periodically based upon the GOC-5, T-Bill or Canada Prime levels.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

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”.

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.

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close January 29, 2021, was $8.7395.

Six issues held at month-end returned less than 0% over the month: IFC.PR.A, IFC.PR.C, FTN.PR.A, CF.PR.C, BMO.PR.Y and SLF.PR.E, with a total weight in the portfolio (at month-end) of 11.7%. Star performers were PPL.PR.E, PPL.PR.O, INE.PR.A, TA.PR.D, AZP.PR.B, BPO.PR.R and BPO.PR.N, all returning in excess of 10% with a total month-end portfolio weight of 5.2%.

Quote quality remained fair this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices decreasing from 0.67% to 0.52%.

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 2021-1-8):

Click for Big

Note that the Seniority Spread was recorded at 355bp just after month-end, significantly narrower than the 375bp just before year-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 is still deep in ‘decoupled panic’ territory (chart end-date 2021-1-8):

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.

In this connection, it is useful to review some recent commentary regarding the preferred share market. Rob Carrick recently published a column with the title Rob Carrick: Does it make sense to use preferred shares as a bond substitute?, in which he gave a nod to the old shibboleth:

But does it truly make sense to substitute prefs for bonds? Not if you subscribe to the idea that the main point of bonds is not to generate income and returns, but rather to act as a portfolio life preserver when the stock market turns ugly.

… but then noted the crucial point:

Perpetuals are somewhat less touchy, but they’re not to be counted on in a stock market crash.

This distinction is meaningless to investors who are all about income and fine with portfolios that bounce around in price.

As I never get tired of repeating, Fixed Income portfolio management is a process that largely consists of balancing Security of Income vs. Security of Principal. These are opposing forces; the more you have of one, the less you’ll have of the other. And preferred shares are way, way over to the “security of income” pole. So in bad times … Shut up and Clip Your Coupons!

Financial Wisdom Forum’s long-running thread on preferred shares recently featured a series of posts which often deprecated preferred shares with some participants advocating market timing:

The thing about prefs is that timing is everything. You buy them when they’re being thrown out with the bathwater and you’ll be golden.
…
Yes, there’s money to be made, but only if the shares are in the order of a 30% discount.
…
If you care about total return, preferred shares probably aren’t for you, (unless of course you are interested in trading them or you have a crystal ball regarding interest rates).

If you want something that pays a decent, tax efficient dividend, in a non-registered account, and share price isn’t important, then straight perpetual preferred shares are probably fine (caveat for a few years with respect to NVCC – will no longer qualify as Tier 1 Capital post 2022). Suitable for the retired. Anything else – not so much. They all seem to favour the issuer.
…
Sure the market value is volatile but I don’t plan on selling so it doesn’t matter to me, barring default.

The part I’d like to focus on is:

Yes, there’s money to be made, but only if the shares are in the order of a 30% discount.

This is close – but not quite – to stating an essential point about Fixed Income investing: total returns are asymmetrical: you can lose a lot more than you can win. This is why credit quality is so important – a bankruptcy, or even a mere impairment, is going to take you a long way down the ‘bad side’ of the asymmetrical probability curve. But another point, often ignored, is that this implies that discounted issues are, all else being equal, better investments than premium issues: in good times, discounted issues can win a lot more than premium issues, which are tethered to their par value due to considerations of maturity or possible redemption. In bad times, they’ll lose a little more, since discounted issues have no ‘buffer’ to insulate them, while premium issues (and, to a lesser extent, issues trading modestly below par) have such a buffer that absorbs a portion of the shock – this is easier to understand in terms option values and volatility theory, as the negative value of the embedded option is reduced as the issue moves further away from par.

The implication for MAPF is that there is a bias towards holding issues trading well away from par value, which almost always means discounted issues. It’s only a bias, not a hard and fast rule, but this bias was deliberately built into the system in order to reduce the asymmetry of the projected returns curve. This means that MAPF will usually hold a portfolio more heavily weighted towards low coupon – low priced issues than the index and be correspondingly underweighted in high coupon – high priced instruments.

This in turn has the effect of introducing a bias in returns: MAPF will often underperform in poor markets (as it holds fewer of the better performing high-coupon issues than the index) and outperform in good markets (as it holds fewer of the worse performing high-coupon issues than the index). This is only a tendency, not an iron-clad rule, but the effect is there and it means that MAPF has a higher Beta than it might otherwise have, if you enjoy thinking in terms of investment models from the last century. And at all times, of course, the fund seeks to trade and exploit market inefficiencies, which mitigates but does not eliminate the effect.

On another FWF forum, there has been speculation that the fine performance of FixedResets since March, 2020, has been due to a conscious focus on spreads:

ZPR was up approximately 6% for 2020. Is this a reversal of the trend to follow interest rates downward? Perhaps investors will focus on the spread between preferred versus bond yields going forward rather than an irrational rush to the exits whenever prefs are resetting at lower rates.

[reply] It’s already happening. That’s why ZPR has finally had a positive year in a declining rate environment.

Well, this is something I would like to agree with. I’ve been pounding the ‘spreads’ drum for a long time…

Unfortunately, while one can only rarely point to a single mechanism explaining a change in relative prices and say, with any credibility whatsoever, that A caused B, I have to admit I’m more dubious than usual about this claim. I believe that the continued rally is due to continued interest rate anticipation, which is now (for some investors) considered to be on the way up rather than continuing the downward staggering of the past ten years; this in turn is derived from Central Bank ‘easy money’ policies and very loose government fiscal policies; which is considered to be on the verge of driving inflation upwards.

Who’s right? Well, we’ll know in ten years, at a time when half of the investing world will graciously explain at length how their uncanny ability to read global market forces allowed them to time the market and make enormous profits, while the other half will tell you the question is irrelevant because investing is about the future, not the past. My advice is, as always, to make asset allocation decisions based on the long-term characteristics of each asset class and how these characteristics interact with your long-term portfolio objectives.

It should be noted that I have been unable to provide an entirely satisfactory explanation for 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 +3.16% vs. PerpetualDiscounts of +0.45% in January; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep:

Click for Big

Floaters performed well, returning +6.80% for December but the past twelve months is still negative at -2.20%. Look at the long-term performance:

Click for Big

Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years. 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 November 30, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

Click for Big

The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $1.17 and $2.13 rich, respectively. These figures are much narrower than the 2.38 and 3.08 calculated with 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 narrowed from 401bp last month to 376bp this month, while GOC-5 has remained constant at 0.42%.

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 show mixed results compared to their non-floor siblings, being cheap 2.09, cheap 1.79, and cheap 1.74 respectively, respectively, very different from last month’s figures of cheap 0.28, rich 0.09 and cheap 0.59. I note that it is normal for premium issues in a rising market to be cheap, since investors have an expectation for continued rising prices (and therefore an ‘automatic’ redemption), without considering the possibility of a market reversal, in which case the higher spreads will prove to be very useful.

Click for Big

It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has narrowed significantly over the month; 416bp last month to 397bp this month, while GOC-5 has remained constant at 0.42%.

*****

Relative performance during the month was correlated (12%) with Issue Reset Spreads for the “Pfd-2 Group” but uncorrelated for the “Pfd-3 Group” issues:

Click for Big

… with Pfd-2 Group correlation for the three-month period of 48%, negligible for Pfd-3:

Click for Big

This suggests to me that November commenced an actual theme, one based on an expectation of higher government interest rates in the future (perhaps due to renewed hopes that the introduction of coronavirus vaccines will return things to normal) and that this theme has continued through January, finally replacing the uncorrelated messes we’ve seen through much of the market’s recovery since the end of March, 2020.

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.

Yields on preferred shares of all stripes are 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.

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

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.

Turnover jumped to 16% in January.

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 January 29 was as follows:

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 4.0%. The total portfolio is therefore 93.3% “Floating”, which means the rates will reset periodically based upon the GOC-5, T-Bill or Canada Prime levels.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

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”.

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.

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close December 31, 2020, was $8.3947 after a dividend distribution of 0.105302.

Three issues held at month-end returned between 0% and -2% over the month: INE.PR.A, BPO.PR.N and CU.PR.G, with a total weight in the portfolio (at month-end) of 3.8%. Star performers were TA.PR.H, PPL.PR.O, IFC.PR.C, HSE.PR.G and IFC.PR.A, all returning between +11% and +18% with a total month-end portfolio weight of 15.0%; HSE.PR.G (and the other HSE issues) has been doing very well lately, but the price remains below its pre-pandemic levels, in distinction to most other issues.

Quote quality remained fair this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices increasing slightly from 0.62% to 0.67%.

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

The preferred share market continues to be underpriced relative to other capital markets, leaving a lot of room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is extremely elevated (chart end-date 2020-12-11:

Click for Big

Note that the Seniority Spread was recorded at 370bp just before year-end, close to the 375bp at the beginning of the month. 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 is still deep in ‘decoupled panic’ territory (chart end-date 2020-12-11):

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.

In this connection, it is useful to review some recent commentary regarding the preferred share market. Rob Carrick recently published a column with the title Rob Carrick: Does it make sense to use preferred shares as a bond substitute?, in which he gave a nod to the old shibboleth:

But does it truly make sense to substitute prefs for bonds? Not if you subscribe to the idea that the main point of bonds is not to generate income and returns, but rather to act as a portfolio life preserver when the stock market turns ugly.

… but then noted the crucial point:

Perpetuals are somewhat less touchy, but they’re not to be counted on in a stock market crash.

This distinction is meaningless to investors who are all about income and fine with portfolios that bounce around in price.

As I never get tired of repeating, Fixed Income portfolio management is a process that largely consists of balancing Security of Income vs. Security of Principal. These are opposing forces; the more you have of one, the less you’ll have of the other. And preferred shares are way, way over to the “security of income” pole. So in bad times … Shut up and Clip Your Coupons!

Financial Wisdom Forum’s long-running thread on preferred shares recently featured a series of posts which often deprecated preferred shares with some participants advocating market timing:

The thing about prefs is that timing is everything. You buy them when they’re being thrown out with the bathwater and you’ll be golden.
…
Yes, there’s money to be made, but only if the shares are in the order of a 30% discount.
…
If you care about total return, preferred shares probably aren’t for you, (unless of course you are interested in trading them or you have a crystal ball regarding interest rates).

If you want something that pays a decent, tax efficient dividend, in a non-registered account, and share price isn’t important, then straight perpetual preferred shares are probably fine (caveat for a few years with respect to NVCC – will no longer qualify as Tier 1 Capital post 2022). Suitable for the retired. Anything else – not so much. They all seem to favour the issuer.
…
Sure the market value is volatile but I don’t plan on selling so it doesn’t matter to me, barring default.

The part I’d like to focus on is:

Yes, there’s money to be made, but only if the shares are in the order of a 30% discount.

This is close – but not quite – to stating an essential point about Fixed Income investing: total returns are asymmetrical: you can lose a lot more than you can win. This is why credit quality is so important – a bankruptcy, or even a mere impairment, is going to take you a long way down the ‘bad side’ of the asymmetrical probability curve. But another point, often ignored, is that this implies that discounted issues are, all else being equal, better investments than premium issues: in good times, discounted issues can win a lot more than premium issues, which are tethered to their par value due to considerations of maturity or possible redemption. In bad times, they’ll lose a little more, since discounted issues have no ‘buffer’ to insulate them, while premium issues (and, to a lesser extent, issues trading modestly below par) have such a buffer that absorbs a portion of the shock – this is easier to understand in terms option values and volatility theory, as the negative value of the embedded option is reduced as the issue moves further away from par.

The implication for MAPF is that there is a bias towards holding issues trading well away from par value, which almost always means discounted issues. It’s only a bias, not a hard and fast rule, but this bias was deliberately built into the system in order to reduce the asymmetry of the projected returns curve. This means that MAPF will usually hold a portfolio more heavily weighted towards low coupon – low priced issues than the index and be correspondingly underweighted in high coupon – high priced instruments.

This in turn has the effect of introducing a bias in returns: MAPF will often underperform in poor markets (as it holds fewer of the better performing high-coupon issues than the index) and outperform in good markets (as it holds fewer of the worse performing high-coupon issues than the index). This is only a tendency, not an iron-clad rule, but the effect is there and it means that MAPF has a higher Beta than it might otherwise have, if you enjoy thinking in terms of investment models from the last century. And at all times, of course, the fund seeks to trade and exploit market inefficiencies, which mitigates but does not eliminate the effect.

On another FWF forum, there has been speculation that the fine performance of FixedResets since March, 2020, has been due to a conscious focus on spreads:

ZPR was up approximately 6% for 2020. Is this a reversal of the trend to follow interest rates downward? Perhaps investors will focus on the spread between preferred versus bond yields going forward rather than an irrational rush to the exits whenever prefs are resetting at lower rates.

[reply] It’s already happening. That’s why ZPR has finally had a positive year in a declining rate environment.

Well, this is something I would like to agree with. I’ve been pounding the ‘spreads’ drum for a long time…

While one can only rarely point to a single mechanism explaining a change in relative prices and say, with any credibility whatsoever, that A caused B, I have to admit I’m more dubious than usual about this claim. I believe that the continued rally is due to continued interest rate anticipation, which is now (for some investors) considered to be on the way up rather than continuing the downward staggering of the past ten years; this in turn is derived from Central Bank ‘easy money’ policies and very loose government fiscal policies; which is considered to be on the verge of driving inflation upwards.

Who’s right? Well, we’ll know in ten years, at a time when half of the investing world will graciously explain at length how their uncanny ability to read global market forces allowed them to time the market and make enormous profits, while the other half will tell you the question is irrelevant because investing is about the future, not the past. My advice is, as always, to make asset allocation decisions based on the long-term characteristics of each asset class and how these characteristics interact with your long-term portfolio objectives.

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 +4.40% vs. PerpetualDiscounts of +1.26% in December; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep:

Click for Big

Floaters performed well, returning +3.04% for December but this did not prevent the figure for the past twelve months deteriorating to -12.31%. Look at the long-term performance:

Click for Big

Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years. 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 November 30, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

Click for Big

The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $2.38 and $3.08 rich, respectively. These figures are much narrower than the 3.16 and 4.14 calculated with 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 narrowed from 424bp last month to 401bp this month, while GOC-5 has decreased from 0.43% to 0.42%.

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 show mixed results compared to their non-floor siblings, being cheap 0.28, rich 0.09, and cheap 0.59 respectively, respectively, very different from last month’s figures of rich 0.82, rich 0.05 and cheap 0.85.

Click for Big

It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has narrowed dramatically over the month; 470bp last month to 416bp this month, while GOC-5 has decreased from 0.43% to 0.42%.

Relative performance during the month was correlated (22%) with Issue Reset Spreads for the “Pfd-2 Group” but uncorrelated for the “Pfd-3 Group” issues; the latter observation is not surprising given the HSE issues’ excellent performance:

Click for Big

… with Pfd-2 Group correlation for the three-month period of 38%, negligible for Pfd-3:

Click for Big

This suggests to me that November commence an actual theme, one based on an expectation of higher government interest rates in the future (perhaps due to renewed hopes that the introduction of coronavirus vaccines will return things to normal) and that this theme has continued through December, finally replacing the uncorrelated messes we’ve seen through much of the market’s recovery since the end of March.

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.

Yields on preferred shares of all stripes are 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.

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

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.

Turnover dropped precipitously to 1% in December.

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 December 31 was as follows:

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 4.0%. The total portfolio is therefore 93.3% “Floating”, which means the rates will reset periodically based upon the GOC-5, T-Bill or Canada Prime levels.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

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”.

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.

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close November 30, 2020, was $8.0176.

Four issues held at month-end returned between 0% and +3% over the month: BMO.PR.Q, ECN.PR.C, IAF.PR.I and AZP.PR.B, with a total weight in the portfolio (at month-end) of 5.9%. Stellar returns were achieved by HSE.PR.C and HSE.PR.G, both returning over 25% with a total month-end portfolio weight of 10.0%; these were also star performers in October.

Quote quality improved this month, with the difference in portfolio values when calculated with closing prices vs. calculation with bid prices decreasing from 0.96% to 0.62%.

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 2020-11-13:

Click for Big

Note that the Seniority Spread was recorded at 375bp shortly after month-end, close to the October month-end figure. 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 2020-11-13):

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.

In this connection, it is useful to review some recent commentary regarding the preferred share market. Rob Carrick recently published a column with the title Rob Carrick: Does it make sense to use preferred shares as a bond substitute?, in which he gave a nod to the old shibboleth:

But does it truly make sense to substitute prefs for bonds? Not if you subscribe to the idea that the main point of bonds is not to generate income and returns, but rather to act as a portfolio life preserver when the stock market turns ugly.

… but then noted the crucial point:

Perpetuals are somewhat less touchy, but they’re not to be counted on in a stock market crash.

This distinction is meaningless to investors who are all about income and fine with portfolios that bounce around in price.

As I never get tired of repeating, Fixed Income portfolio management is a process that largely consists of balancing Security of Income vs. Security of Principal. These are opposing forces; the more you have of one, the less you’ll have of the other. And preferred shares are way, way over to the “security of income” pole. So in bad times … Shut up and Clip Your Coupons!

Financial Wisdom Forum’s long-running thread on preferred shares recently featured a series of posts which often deprecated preferred shares with some participants advocating market timing:

The thing about prefs is that timing is everything. You buy them when they’re being thrown out with the bathwater and you’ll be golden.
…
Yes, there’s money to be made, but only if the shares are in the order of a 30% discount.
…
If you care about total return, preferred shares probably aren’t for you, (unless of course you are interested in trading them or you have a crystal ball regarding interest rates).

If you want something that pays a decent, tax efficient dividend, in a non-registered account, and share price isn’t important, then straight perpetual preferred shares are probably fine (caveat for a few years with respect to NVCC – will no longer qualify as Tier 1 Capital post 2022). Suitable for the retired. Anything else – not so much. They all seem to favour the issuer.
…
Sure the market value is volatile but I don’t plan on selling so it doesn’t matter to me, barring default.

The part I’d like to focus on is:

Yes, there’s money to be made, but only if the shares are in the order of a 30% discount.

This is close – but not quite – to stating an essential point about Fixed Income investing: total returns are asymmetrical: you can lose a lot more than you can win. This is why credit quality is so important – a bankruptcy, or even a mere impairment, is going to take you a long way down the ‘bad side’ of the asymmetrical probability curve. But another point, often ignored, is that this implies that discounted issues are, all else being equal, better investments than premium issues: in good times, discounted issues can win a lot more than premium issues, which are tethered to their par value due to considerations of maturity or possible redemption. In bad times, they’ll lose a little more, since discounted issues have no ‘buffer’ to insulate them, while premium issues (and, to a lesser extent, issues trading modestly below par) have such a buffer that absorbs a portion of the shock – this is easier to understand in terms option values and volatility theory, as the negative value of the embedded option is reduced as the issue moves further away from par.

The implication for MAPF is that there is a bias towards holding issues trading well away from par value, which almost always means discounted issues. It’s only a bias, not a hard and fast rule, but this bias was deliberately built into the system in order to reduce the asymmetry of the projected returns curve. This means that MAPF will usually hold a portfolio more heavily weighted towards low coupon – low priced issues than the index and be correspondingly underweighted in high coupon – high priced instruments.

This in turn has the effect of introducing a bias in returns: MAPF will often underperform in poor markets (as it holds fewer of the better performing high-coupon issues than the index) and outperform in good markets (as it holds fewer of the worse performing high-coupon issues than the index). This is only a tendency, not an iron-clad rule, but the effect is there and it means that MAPF has a higher Beta than it might otherwise have, if you enjoy thinking in terms of investment models from the last century. And at all times, of course, the fund seeks to trade and exploit market inefficiencies, which mitigates but does not eliminate the effect.

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 +7.09% vs. PerpetualDiscounts of +2.86% in November; the two classes finally decoupled in mid-November, 2018, after months of moving in lockstep:

Click for Big

Floaters performed extremely well, returning +20.83% for November and the figure for the past twelve months has improved to -6.77%. Look at the long-term performance:

Click for Big

Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not initially as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time. but it became worse in August, 2019! On August 30, 2019 the HIMI Floater Index (total return) value was calculated as 1906.6; the index first surpassed this value on 2003-8-13. Thus, cumulative total return (that is, including dividends) was negative over a period of slightly-over sixteen years. 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 November 30, which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

Click for Big

The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $3.16 and $4.14 rich, respectively. These figures are much narrower than the 4.59 and 5.50 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 narrowed from 439bp last month to 424bp 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 show mixed results compared to their non-floor siblings, being rich 0.82, rich 0.05, and cheap 0.05 respectively, respectively, very different from last month’s figures of rich 0.48, rich 1.24 and rich 0.85.

Click for Big

It will also be noted that the spread of a notional non-callable BAM FixedReset priced at par has narrowed only slightly (and perhaps spuriously) over the month; 475bp last month to 470bp this month, while GOC-5 has increased from 0.38% to 0.43.

Relative performance during the month was correlated (25%) with Issue Reset Spreads for the “Pfd-2 Group” but uncorrelated for the “Pfd-3 Group” issues:

Click for Big

… with no correlations for the three-month period:

Click for Big

This suggests to me that November has demonstrated an actual theme, one based on an expectation of higher government interest rates in the future (perhaps due to renewed hopes that the introduction of coronavirus vaccines will return things to normal), rather than the uncorrelated messes we’ve seen through much of the market’s recovery since the end of March.

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.

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

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.

Turnover remained steady at 13% in November.

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 November 30 was as follows:

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 4.4%. The total portfolio is therefore 91.5% “Floating”, which means the rates will reset periodically based upon the GOC-5, T-Bill or Canada Prime levels.

Credit distribution is:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

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”.

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.

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%.

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:

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):

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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):

Click for Big

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:

Click for Big

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

Click for Big

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.

Click for Big

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:

Click for Big

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

Click for Big

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.

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

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.

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:

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:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

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”.

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.