S&P has announced:
the following index changes as a result of the semi-annual S&P/TSX Preferred Share Index Review. These changes will be effective at the open on Monday, July 21, 2008
| TXPR Index Adds July 2008 |
||
| Ticker | HIMI Preferred Sub-Index | DBRS Rating |
| ACO.PR.A | OpRet | Pfd-2(low) |
| BMO.PR.M | None Fixed-Reset |
Pfd-1 |
| BNS.PR.N | PerpetualDiscount | Pfd-1 |
| BNS.PR.P | None Fixed-Reset |
Pfd-1 |
| BNS.PR.Q | None Fixed-Reset |
Pfd-1 |
| BCE.PR.I | FixFloat | Pfd-2(low) Review Negative |
| BAM.PR.N | PerpetualDiscount | Pfd-2(low) |
| BPO.PR.I | Scraps (OpRet) |
Pfd-3(high) |
| CL.PR.B | PerpetualPremium | Pfd-1(low) |
| ENB.PR.A | PerpetualDiscount | Pfd-2(low) |
| FTS.PR.E | Scraps (OpRet) |
Pfd-3(high) |
| FTS.PR.G | None (Fixed-Reset) |
Pfd-3(high) |
| GWO.PR.I | PerpetualDiscount | Pfd-1(low) |
| NA.PR.M | PerpetualDiscount | Pfd-1(low) |
| NA.PR.N | None (Fixed-Reset) |
Pfd-1(low) |
| TD.PR.S | None (Fixed-Reset) |
Pfd-1 |
| FAL.PR.H | ???? | N/A |
I don’t understand why they are adding FAL.PR.H. Its redemption was announced May 22 and the date was set on May 29: Redemption Date June 30. They were redeemed on schedule. They are no longer listed on the TSX.
But that’s what happens, I guess, when (instead of hiring HIMI) you entrust index preparation to a small, inexperienced outfit like S&P!
But Holy Smokes! That’s a lot of Fixed-Resets! There are now seven of these thingies outstanding and six of them are now incorporated in TXPR – or will be once the change takes effect, anyway. Call up your friendly neighborhood CPD holder – preferably, one who is a really hard-line anti-active-management indexing zealot – and ask him why he’s so enamoured of the sub-class.
Is this jiggery-pokery, or do I have a disgusting suspicious mind? The latest Claymore literature references the “Desjardins Preferred Share Universe Index”; Desjardins is heavily promoting its involvement in fixed resets and (this wins all arguments in the bond world) Innovative Tier 1 Capital was put in the Scotia bond index (now DEX) for no reason that anybody can figure out except that it made it easier to sell.
All conspiracy theories are welcome.
In the meantime, this rebalancing compromises the integrity of the index as representative of actual preferred shares. Sorry folks, but that’s the way it is. And I’d love to know what the reference to FAL.PR.H is all about!
| TXPR Index Deletions July 2008 |
||
| Ticker | HIMI Preferred Sub-Index | DBRS Rating |
| BMO.PR.H | PerpetualDiscount | Pfd-1 |
| BNS.PR.J | PerpetualDiscount | Pfd-1 |
| BNS.PR.K | PerpetualDiscount | Pfd-1 |
| BNS.PR.L | PerpetualDiscount | Pfd-1 |
| BCE.PR.F | None (FixFloat) |
Pfd-2(low) Review Negative |
| BAM.PR.B | Floater | Pfd-2(low) |
| BPO.PR.J | Scraps (OpRet) |
Pfd-3(high) |
| FTS.PR.C | Scraps (OpRet) |
Pfd-3(high) |
| FTS.PR.F | Scraps (PerpetualDiscount) |
Pfd-3(high) |
| GWO.PR.X | OpRet | Pfd-1(low) |
| HSB.PR.C | PerpetualDiscount | Pfd-1 |
| IAG.PR.A | PerpetualDiscount | Pfd-2(high) |
| NA.PR.L | PerpetualDiscount | Pfd-1(low) |
| TD.PR.P | PerpetualDiscount | Pfd-1 |
| TCA.PR.X | PerpetualDiscount | Pfd-2(low) |
| YPG.PR.B | Scraps (OpRet) |
Pfd-3(high) |
In summary and, perforce, ignoring any weightings that S&P might be assigning:
| TXPR Changes by Sector Ignoring FAL.PR.H Add Assigning “Scraps” & “None” to “Would be” |
|||
| Sector | Adds | Deletions | Net |
| OpRet | 3 | 4 | -1 |
| FixedReset | 6 | 0 | +6 |
| PerpetualDiscount | 5 | 10 | -5 |
| FixFloat | 1 | 1 | 0 |
| PerpetualPremium | 1 | 0 | +1 |
| Floater | 0 | 1 | -1 |
… and …
| TXPR Changes by Credit (DBRS) Ignoring FAL.PR.H Add |
|||
| Credit | Adds | Deletions | Net |
| Pfd-1 | 5 | 6 | -1 |
| Pfd-1(low) | 4 | 2 | +2 |
| Pfd-2(high) | 0 | 1 | -1 |
| Pfd-2(low) | 4 | 3 | +1 |
| Pfd-3(high) | 3 | 4 | -1 |
The previous rebalancing of TXPR removed SplitShares; this was claimed to be due to liquidity concerns … which, on examination, looked to be more like institutional holding / block trading concerns, strictly speaking.
James said: “But that’s what happens, I guess, when (instead of hiring HIMI) you entrust index preparation to a small, inexperienced outfit like S&P!”
Unfortunately, ISTM that an “active/passive” debate in a small universe is prone to lack of a clear distinction between the two, since boundaries will be relatively more fuzzy than in larger indexes – and if the boundaries aren’t fuzzy, like in the Russell 2000, index rebalancing can be gamed to the detriment of the passive investor.
This makes index construction at the borders both arbitrary and uncertain, and makes the active/passive debate somewhat less black and white than it might otherwise be.
I will certainly agree that judgement needs to be exercised in a small universe – particularly one which has liquidity trouble – and that this judgement can be thought to introduce an active element into the index itself.
I don’t have any real quarrel with the elimination of split-shares from the index. While it makes the index somewhat less representative of the preferred shares out there, their inclusion made it harder to arbitrage the index against the market. Part of the whole point of CPD – and of many index-linked products – is to provide a whole that is more liquid than the sum of its parts. They had to trade off representation against investibility, and made a decision, for better or worse.
In this particular case, however, I don’t see that the argument applies. They have added six out of seven outstanding issues of a particular type to the index! I simply do not see how such a decision can be justified … but I’ve alerted S&P to my criticism (and to the FAL.PR.H redemption issue!) and will wait and see what they have to say.
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