MAPF Portfolio Composition, October 2008

Trading was heavy in October as a disorderly decline in a confused market brought many opportunities to the Fund. Turnover was approximately 200% 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.

MAPF Sectoral Analysis 2008-10-31
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 21.1% (+2.6) 14.95% 4.45
Interest Rearing 0% N/A N/A
PerpetualPremium 0.0% (-0.3) N/A N/A
PerpetualDiscount 74.9% (-3.1) 7.19% 12.34
Scraps 0% N/A N/A
Cash +3.9% (+0.8) 0.00% 0.00
Total 100% 8.55% 10.20
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from September month-end. Cash is included in totals with duration and yield both equal to zero.

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 proportion of SplitShares held was due to a small trade executed to maximize holdings of WFS.PR.A when the price declined in early October. A post-mortem of this trade is:

Post-Mortem: BMO.PR.H to WFS.PR.A
21.10 9.00
Net of
20.97 8.22
19.03 7.71

So the return of BMO.PR.H since the trade has been -7.67% (including the dividend) while the return of WFS.PR.A has been -6.20%. Thus far, the trade has been successful.

The decline in price of WFS.PR.A is probably due to concerns over credit quality. Asset coverage over the period, according to Mulvihill has been:

WFS.PR.A Credit Quality
Date Asset
September 30 1.546:1
October 9 1.324:1
October 16 1.382:1
October 23 1.360:1

As of June 30, according to Mulvihill, the underlying portfolio for WFS was:

  • Canada, 35.9%
  • United States, 23.3%
  • International, 23.0%
  • Cash & Other, 17.8%

Of the 93.2% of total assets held in equities, 17.6% was hedged with put options.

WFS.PR.A has a scheduled maturity of 2011-6-30, so the remaining term is just 2 years & 8 months. The price should be supported by a valuable monthly retraction privilege – but this is not happening for reasons I don’t understand. As a count against the position, it should be noted that DBRS has the issue under Credit Review Negative and it may be downgraded from its current Pfd-2(low) rating.

Credit distribution is:

MAPF Credit Analysis 2008-10-31
DBRS Rating Weighting
Pfd-1 75.2% (+20.5)
Pfd-1(low) 0.3% (-20.4)
Pfd-2(high) 0% (-3.5)
Pfd-2 0.4% (-0.1)
Pfd-2(low) 20.1% (+3.7)
Cash 3.9% (+0.8)
Totals will not add precisely due to rounding. Bracketted figures represent change from September month-end.

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.

The improvement in credit quality was driven largely by movement out of PWF and GWO issues (which comprised 18.7% of the portfolio on 9/30) into BMO (from 7.3% of the portfolio to 25.5%). BMO issues were hit by weakness in the latter part of the month and these quality improvements have not yet borne fruit: the quality spread continued to narrow to the point where the lower quality issues are trading at even-yield (or through!) the higher quality issues. On the positive side, there has been significant opportunity for trading amongst the BMO issues, so the effort has not been a total loss.

Liquidity Distribution is:

MAPF Liquidity Analysis 2008-10-31
Average Daily Trading Weighting
<$50,000 0.6% (0)
$50,000 – $100,000 28.5% (+1.5)
$100,000 – $200,000 30.4% (-24.4)
$200,000 – $300,000 18.5% (+4.1)
>$300,000 18.0% (+18.0)
Cash 3.9% (+0.8)
Totals will not add precisely due to rounding. Bracketted figures represent change from September 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. 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 The Claymore Preferred Share ETF (symbol CPD) as of August 29. When comparing CPD and MAPF:

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

Leave a Reply

You must be logged in to post a comment.