Turnover remained slow and steady in May, at about 5%.
There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:
- Unaffected Straight Perpetuals
- DeemedRetractibles explicitly subject to the rules (banks)
- DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)
This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading. Another trend that hasn’t helped was the migration of PerpetualDiscounts into PerpetualPremiums (due to price increases) in early 2013 – many of the PerpetualPremiums had negative Yields-to-Worst and those that don’t aren’t particularly thrilling; speaking very generally, PerpetualPremiums are to be avoided, not traded! This effect has caused the first of the three segments noted above to be untradeable for most practical purposes. Last summer’s downdraft reversed the trend and resulted in a large pool of PerpetualDiscounts, but due to their long term they are still, as a class, inferior to DeemedRetractibles.
To make this more clear, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to other Straights, I also have to check its peer group. This cuts down on the potential for trading.
There is no real hope that this situation will be corrected in the near-term. OSFI has indicated that the long-promised “Draft Definition of Capital” for insurers will not be issued “for public consultation in late 2012 or early 2013”, as they fear that it might encourage speculation in the marketplace. It is not clear why OSFI is so afraid of informed speculation, since the constant speculation in the marketplace is currently less informed than it would be with a little bit of regulatory clarity.
As a result of this delay, I have extended the Deemed Maturity date for insurers and insurance holding companies by three years (to 2025-1-31), in the expectation that when OSFI finally does provide clarity, they will allow the same degree of lead-in time for these companies as they did for banks. This had a major effect on the durations of preferred shares subject to the change but, fortunately, not much on their calculated yields as most of these issues were either trading near par when the change was made or were trading at sufficient premium that a par call was expected on economic grounds. However, with the declines in the market over the past nine months, the expected capital gain on redemption of the insurance-issued DeemedRetractibles has become an important component of the calculated yield.
Due to further footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another two years in the near future.
Sectoral distribution of the MAPF portfolio on May 30 was as follows:
| MAPF Sectoral Analysis 2014-05-30 | |||
| HIMI Indices Sector | Weighting | YTW | ModDur |
| Ratchet | 0% | N/A | N/A |
| FixFloat | 0% | N/A | N/A |
| Floater | 0% | N/A | N/A |
| OpRet | 0% | N/A | N/A |
| SplitShare | 15.8% (+0.8) | 3.94% | 5.75 |
| Interest Rearing | 0% | N/A | N/A |
| PerpetualPremium | 0% | N/A | N/A |
| PerpetualDiscount | 8.3% (-2.3) | 5.05% | 15.41 |
| Fixed-Reset | 9.5% (+2.7) | 3.94% | 7.48 |
| Deemed-Retractible | 55.6% (-1.2) | 5.81% | 8.29 |
| Scraps (Various) | 10.5% (-0.3) | 6.03% | 11.11 |
| Cash | 0.2% (+0.2) | 0.00% | 0.00 |
| Total | 100% | 5.28% | 8.68 |
| Totals and changes will not add precisely due to rounding. Bracketted figures represent change from April month-end. Cash is included in totals with duration and yield both equal to zero. | |||
| 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. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), 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: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section)
Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue. |
|||
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.
Towards the end of the month, there were some trades into FixedResets (BNS.PR.Z @ 24.305 and GWO.PR.N at 22.097) from PerpetualDiscounts (CU.PR.G @ 22.456) and DeemedRetractibles (GWO.PR.Q @ 24.459 and GWO.PR.H @ 23.36). The first of these trades (from CU.PR.G to BNS.PR.Z) is currently underwater; the second (into GWO.PR.N) is roughly flat.
Credit distribution is:
| MAPF Credit Analysis 2014-5-30 | |
| DBRS Rating | Weighting |
| Pfd-1 | 0 (0) |
| Pfd-1(low) | 28.8% (+0.5) |
| Pfd-2(high) | 51.4% (-0.5) |
| Pfd-2 | 0% |
| Pfd-2(low) | 9.0% (0) |
| Pfd-3(high) | 1.0% (0) |
| Pfd-3 | 4.4% (-1.0) |
| Pfd-3(low) | 2.8% (+0.6) |
| Pfd-4(high) | 0% |
| Pfd-4 | 0% |
| Pfd-4(low) | 0.8% (0) |
| Pfd-5(high) | 1.4% (0) |
| Cash | 0.2% (+0.2) |
| Totals will not add precisely due to rounding. Bracketted figures represent change from April month-end. | |
| A position held in NPI.PR.A is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3(high). | |
Liquidity Distribution is:
| MAPF Liquidity Analysis 2014-5-30 | |
| Average Daily Trading | Weighting |
| <$50,000 | 1.5% (+1.5) |
| $50,000 – $100,000 | 26.3% (-0.6) |
| $100,000 – $200,000 | 22.4% (-2.6) |
| $200,000 – $300,000 | 42.3% (-0.6) |
| >$300,000 | 7.3% (+2.1) |
| Cash | 0.2% (+0.2) |
| Totals will not add precisely due to rounding. Bracketted figures represent change from April month-end. | |
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 either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission) or those who subscribe for $150,000+. Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.
A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of August 31, 2012, and published in the October (mainly methodology), November (most funds), and December (ZPR) 2012, PrefLetter. While direct comparisons are difficult due to the introduction of the DeemedRetractible class of preferred share (see above) it is fair to say:
- MAPF credit quality is better
- MAPF liquidity is a bit lower
- MAPF Yield is higher
- Weightings
- MAPF is much more exposed to DeemedRetractibles
- MAPF is much less exposed to Operating Retractibles
- MAPF is much more exposed to SplitShares
- MAPF is less exposed to FixFloat / Floater / Ratchet
- MAPF weighting in FixedResets is much lower
A question…. Do you intend to update http://www.prefinfo.com from time to time? I recognize this can be a lot of work, especially given all the recent activity in redemptions and new issues, but I find this an excellent reference source for the various issues.
I originally used http://www.prefinfo.com as a source, but switched to subscribing to prefLetter about four years ago. It’s a far better (and always up to date) source of info on all the various issue types. As always, you get what you pay for. 😉
AltaRed, you are correct on both issues … PrefInfo needs an update and it does take a lot of time to update!
But I’ll try and get it done in the next week or so.
like_to_retire is my new best friend!
DO YOU OWN ANY RY-Y JAMES?
SEEMS LIKE A GOOD OPPORTUNITY FOR LOW RISK RETURN OF NEAR 2% AND LOTS OF UPSIDE IF THEY DONT CALL THIS ONE IN – +413 SO PROBABLY WILL CALL BUT THERE SEEMS TO BE SOME SELLING DOWN HERE.
IF THEY DONT REDEEM THIS ONE MIGHT BE WORTH 26.50 TO 27.50 BASED ON RY-I AND RY-L VALUE (AS THEY WERENT REDEEMED EITHER WTIH LOWER SPREADS OVER THE 5YR CANADIAN). IF NOT GOOD SOLID LOW RISK RETURN
REIKREIK
I subscribe to Prefletter as well. I just find PrefInfo very convenient, quick and easy to use.
DO YOU OWN ANY RY-Y JAMES?
I generally don’t comment on current holdings.
SEEMS LIKE A GOOD OPPORTUNITY FOR LOW RISK RETURN OF NEAR 2% AND LOTS OF UPSIDE IF THEY DONT CALL THIS ONE IN – +413 SO PROBABLY WILL CALL BUT THERE SEEMS TO BE SOME SELLING DOWN HERE.
I would say ‘almost certainly will call’ when that becomes possible on November 24.
You must remember that there is also lots of downside, since there’s a lot of negative convexity in the issue. Sure, things look good now, but if FixedReset spreads move out to GOC5 + 1000, you could be looking pretty sick.
Which is not to say I consider this to be a particularly bad issue, but see Are Floating Prefs Money Market Vehicles? and Some Preferreds to Float Your Boat.
IF NOT GOOD SOLID LOW RISK RETURN
Which is fine if your portfolio goal is a good solid low risk return … but is it? The flip side of a change in market conditions is that you may incur large opportunity costs.
I subscribe to Prefletter as well.
Good man!
You must remember that there is also lots of downside, since there’s a lot of negative convexity in the issue. Sure, things look good now, but if FixedReset spreads move out to GOC5 + 1000, you could be looking pretty sick.
but then aren’t you looking pretty sick in all your similar holdings if this happens????
if you have anything similar wouldn’t they get smoked too????
reikreik
but then aren’t you looking pretty sick in all your similar holdings if this happens????
Yes; but the similar issues would have performed much better if things had gone the other way. That’s negative convexity; it leads to the asymmetry of returns under positive and negative scenarios.
RY.PR.Y has – at present! – a great deal of “buffer” before adverse changes in market conditions affect it (see my article Perpetual Hockey Sticks). But you’re paying through the nose for that via a lower expected return.
I’m not saying it’s a bad investment; those looking to place money for less than a year with an expected return in excess of Money Market and willing to accept a relatively small amount of risk and relatively low liquidity may well find it interesting. But it’s not a silver bullet. Ain’t nuthin a silver bullet.
I understand that part but how do you account for the upside potential if things stay roughly the same and they don’t redeem it????
I guess there has to be some probability but would the fact that it could go up 3 to 5% if things stay the same and they don’t get redeemd – would that affect their convexity in any way????
reikreik
how do you account for the upside potential if things stay roughly the same and they don’t redeem it????
The expected return will be sum over all scenarios of the products of scenario return and scenario probability. I believe the probability of the scenario you describe to be vanishingly small.
would that affect their convexity in any way????
Not the way I calculate it. Convexity is a number derived from the expected cash flows of the instrument given changing prices (the change in duration divided by the change in price). “Negative Convexity”, as I generally use the term, is more of a qualitative descriptor, indicating that the potential for option exercise (or in this case, the potential for a likely option not to be exercised) may cause the price to behave differently from – and to the detriment of the holder – what would be expected if there was no change in option exercise assumptions.
Which is a horribly convoluted way of expressing the idea.