MAPF Performance: October, 2011

The fund had a good month in October, making up some of the ground lost in September.

The fund’s Net Asset Value per Unit as of the close October 31 was $10.4924.

Returns to October 31, 2011
Period MAPF Index CPD
according to
One Month +2.16% +0.60% +0.82%
Three Months -3.80% -0.39% -0.65%
One Year +2.37% +6.44% +3.72%
Two Years (annualized) +11.41% +10.28% N/A
Three Years (annualized) +27.68% +12.72% +9.95%
Four Years (annualized) +18.37% +5.90%  
Five Years (annualized) +13.74% +3.64%  
Six Years (annualized) +12.47% +3.88%  
Seven Years (annualized) +11.58% +3.90%  
Eight Years (annualized) +12.06% +4.11%  
Nine Years (annualized) +13.57% +4.46%  
Ten Years (annualized) +12.01% +4.37%  
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 +0.85%, -0.52% and +4.67%, respectively, according to Morningstar after all fees & expenses. Three year performance is +10.86%.
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 +0.54%, -0.26% and +1.79% 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 +0.40%, -0.30% & +3.36%, 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.

The fund’s returns in October were aided by a small bounce in the value of the YLO preferreds:

Click for big

However, there was a drag on performance due to a holding in CZP.PR.A. The bulk of this position was purchased in February and March of this year, when this PerpetualDiscount issue was rated three notches higher than BBD.PR.C, but yielded about the same:

The spread widened in June, 2011, following S&P’s announcemnet that CZP was on review-negative, but gradually returned to more usual levels … until the details of the take-over by Atlantic Power (ATP) were announced! DBRS warned of a three-notch downgrade (which would make the credit ratings of BBD and CZP equal) and … there was a lot of selling in late October.

The problem with the ATP take-over is that it is being structured, effectively, as a complete acquisition, rather than keeping Capital Power as a wholly-owned subsidiary. While the structure retains the wholly-owned subsidiary legal structure, the subsidiary is guaranteeing the senior debt of the holding company (the same way in which the attempted Teachers / BCE deal was structured), so CZP has lost its credit advantage of being “closer to the money” than the holding company.

The position in CZP.PR.A as of October 31 amounted to about 2.6% of fund value. It is my current intention to maintain the position until such time as the yield is again comparable with BBD.PR.C – as it now “should” be, given that a three-notch downgrade will make the credit ratings identical.

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
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
June 11.1194 5.87% 1.018 5.976% 1.0000 $0.6645
September 10.2709 6.10%
1.001 6.106% 1.0000 $0.6271
October, 2011 10.4924 6.01%
1.001 6.016% 1.0000 $0.6312
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (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, March and June, 2011, editions of PrefLetter for the rationale behind this analysis.
Yields for September, 2011, to October, 2011, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized.

Significant positions were held in DeemedRetractible and FixedReset issues on August 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 at par, a somewhat dubious assumption in the latter case.

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 5.98% shown in the MAPF Portfolio Composition: October 2011 analysis (which is greater than the 5.37% index yield on October). Given such reinvestment, the sustainable yield would be $10.4924 * 0.0598 = $0.6274, an increase from the $10.2709 * 0.0584 = $0.5998 reported in September.

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.

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