The fund had a superb month, bouncing back from the underperformance of March and April with a return of +3.84%.
The highly variable nature of the fund’s recent relative return is attributable to uncertainty and ignorance regarding OSFI’s policies concerning capital markets. The NVCC Draft Advisory has not yet been finalized, despite the fact that the deadline for (top secret) comments passed nearly three months ago. In addition, there has been nothing released regarding the potential application of this draft to insurers. Thus, the main question posed to preferred share investors has nothing to do with economics or credit quality or any of that old fashioned guff: the question is “what will OSFI do next?” OSFI may well have its own opinions on the matter but I take the view that this is gross negligence that has caused great damage to the capital markets.
I have uploaded two graphs comparing very similar issues: GWO.PR.I and CM.PR.I, updating the graphs shown last month:
These two issues are both considered to be DeemedRetractibles; I consider it more prudent to assume they will be redeemed on or before 2022-1-31 than to assume otherwise.
The fund’s Net Asset Value per Unit as of the close May 31 was $11.3297.
| Returns to May 31, 2011 | |||
| Period | MAPF | Index | CPD according to Claymore |
| One Month | +3.84% | +1.82% | +1.31% |
| Three Months | +2.02% | +2.80% | +1.76% |
| One Year | +27.08% | +17.53% | +13.32% |
| Two Years (annualized) | +23.53% | +14.37% | N/A |
| Three Years (annualized) | +24.63% | +7.46% | +4.69% |
| Four Years (annualized) | +18.74% | +5.03% | |
| Five Years (annualized) | +15.90% | +4.21% | |
| Six Years (annualized) | +14.05% | +4.02% | |
| Seven Years (annualized) | +13.49% | +4.41% | |
| Eight Years (annualized) | +14.44% | +4.38% | |
| Nine Years (annualized) | +13.53% | +4.76% | |
| Ten Years (annualized) | +13.81% | +4.47% | |
| The Index is the BMO-CM “50” | |||
| MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees. | |||
| CPD Returns are for the NAV and are after all fees and expenses. | |||
| * CPD does not directly report its two-year returns. | |||
| Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +1.51%, +1.92% and +14.90%, respectively, according to Morningstar after all fees & expenses. Three year performance is +6.07%. | |||
| Figures for Jov Leon Frazer Preferred Equity Fund Class I Units (which are after all fees and expenses) for 1-, 3- and 12-months are +0.82%, +1.17% and +9.47% respectively, according to Morningstar | |||
| Figures for Manulife Preferred Income Fund (formerly AIC Preferred Income Fund) (which are after all fees and expenses) for 1-, 3- and 12-months are +1.71%, +1.71% & +11.39%, respectively | |||
| Figures for Horizons AlphaPro Preferred Share ETF are not yet available (inception date 2010-11-23) | |||
MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.
Sometimes everything works … sometimes the trading works, but sectoral shifts overwhelm the increment … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There were a lot of strongly motivated market participants during the Panic of 2007, generating a lot of noise! Unfortunately, the conditions of the Panic may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, without worrying about the level of monthly turnover.
There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid and I have lots of confidence – backed up by my bond portfolio management experience in the markets for Canadas and Treasuries, and equity trading on the NYSE & TSX – that there is enough demand for liquidity in any market to make the effort of providing it worthwhile (although the definition of “worthwhile” in terms of basis points of outperformance changes considerably from market to market!) I will continue to exert utmost efforts to outperform but it should be borne in mind that there will almost inevitably be periods of underperformance in the future.
The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.
| Calculation of MAPF Sustainable Income Per Unit | ||||||
| Month | NAVPU | Portfolio Average YTW |
Leverage Divisor |
Securities Average YTW |
Capital Gains Multiplier |
Sustainable Income per current Unit |
| June, 2007 | 9.3114 | 5.16% | 1.03 | 5.01% | 1.2857 | 0.3628 |
| September | 9.1489 | 5.35% | 0.98 | 5.46% | 1.2857 | 0.3885 |
| December, 2007 | 9.0070 | 5.53% | 0.942 | 5.87% | 1.2857 | 0.4112 |
| March, 2008 | 8.8512 | 6.17% | 1.047 | 5.89% | 1.2857 | 0.4672 |
| June | 8.3419 | 6.034% | 0.952 | 6.338% | 1.2857 | $0.4112 |
| September | 8.1886 | 7.108% | 0.969 | 7.335% | 1.2857 | $0.4672 |
| December, 2008 | 8.0464 | 9.24% | 1.008 | 9.166% | 1.2857 | $0.5737 |
| March 2009 | $8.8317 | 8.60% | 0.995 | 8.802% | 1.2857 | $0.6046 |
| June | 10.9846 | 7.05% | 0.999 | 7.057% | 1.2857 | $0.6029 |
| September | 12.3462 | 6.03% | 0.998 | 6.042% | 1.2857 | $0.5802 |
| December 2009 | 10.5662 | 5.74% | 0.981 | 5.851% | 1.0819 | $0.5714 |
| March 2010 | 10.2497 | 6.03% | 0.992 | 6.079% | 1.0819 | $0.5759 |
| June | 10.5770 | 5.96% | 0.996 | 5.984% | 1.0819 | $0.5850 |
| September | 11.3901 | 5.43% | 0.980 | 5.540% | 1.0819 | $0.5832 |
| December 2010 | 10.7659 | 5.37% | 0.993 | 5.408% | 1.0000 | $0.5822 |
| March, 2011 | 11.0560 | 6.00% | 0.994 | 5.964% | 1.0000 | $0.6594 |
| May, 2011 | 11.3297 | 5.75% | 1.009 | 5.802% | 1.0000 | $0.6573 |
| NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains. Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00% The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99 Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings. The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested. Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units. |
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| DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (definition refined in May). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February and March, 2011, editions of PrefLetter for the rationale behind this analysis. | ||||||
Significant positions were held in DeemedRetractible and FixedReset issues on May 31; all of the former and most of the latter currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31. This presents another complication in the calculation of sustainable yield. The fund also holds a position in a SplitShare (BNA.PR.C) and an OperatingRetractible Scrap (YLO.PR.B) which also have their yields calculated with the expectation of a maturity.
However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 5.68% shown in the MAPF Portfolio Composition: May 2011 analysis (which is greater than the 5.52% index yield on May 31). Given such reinvestment, the sustainable yield would be $11.3297 * 0.0568 = $0.6435, an increase from the $10.9105 * 0.0554 = $0.6044 reported in April.
Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in
- the very good performance against the index
- the long term increases in sustainable income per unit
As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.
Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.
[…] The Unit Value of MAPF and the performance in May has been previously discussed. […]
[…] would be $11.1194 * 0.0565 = $0.6282, a decrease from the $11.3297 * 0.0568 = $0.6435 reported in May; about half the decrease over the month is due simply to the distribution of the […]