PrefBlog

There was a substantial amount of trading in August, as the resurgence in prices of PerpetualDiscounts in a confused market brought many opportunities to the Fund. Turnover was close to 100% for the month, but a high proportion of these trades were intra-issuer (trades between the CM issues were particularly frequent) and most others were intra-sector (PerpetualDiscounts rose at different rates).

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

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.

The increase in SplitShares is due to purchases of BNA.PR.C net of a small sale of WFS.PR.A. Assiduous readers will recall that I consider exposure to BNA to be equivalent, for credit risk control purposes, to exposure to BAM. These readers will not be surprised, therefore, to learn that the purchase of BNA.PR.C was not only funded by a sale of BAM.PR.N, but that this trade reversed swaps undertaken last February.

As may be seen, the February-August swap was immensely profitable: there would have been a loss of $3.02 on the BNA.PR.C had it been held, about 14.6% of the February trading price. Instead, the BAM.PR.N lost $1.63, about 8.5% of the February trading price. The outperformance of BAM.PR.N by 6.1% is massive and leaves an old bond guy like me just shaking his head.

There will be those who will shout that it would have been better to have held cash during this period and lost nothing; but that would be market timing. I cannot predict the overall direction of the market, nor have I ever met anybody who can. The way to make money is to outperform the market whether it goes up or down; in time the rewards will be tangible.

As of month-end, the trade back into BNA.PR.C has not borne fruit – but given the substantial yield pick-up (over 2 points!) I consider it to be only a matter of time before the BNA.PR.C experiences a substantial price increase.

Credit distribution is:

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed.

Liquidity Distribution is:

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. 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) and 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 CPD as of May month end; it should be noted that the underlying TXPR index has been rebalanced and I have not yet fully analyzed the changes. While the changes affect the allocation to the different sectors, I do not believe the credit or liquidity metrics will have changed much.

• MAPF credit quality is superior
• MAPF liquidity is somewhat lower
• MAPF Yield is higher
• But … MAPF is more exposed to PerpetualDiscounts
• MAPF is less exposed to Fixed-Resets

This entry was posted on Wednesday, September 3rd, 2008 at 2:44 pm and is filed under MAPF. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.