MAPF Performance: January 2019

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close January 31, 2019, was $8.5108.

Returns to January 31, 2019
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month -2.03% -0.93% -0.50% N/A
Three Months -12.85% -9.07% -7.93% N/A
One Year -15.86% -11.72% -9.81% -10.37%
Two Years (annualized) +0.72% +0.39% +0.02% N/A
Three Years (annualized) +11.35% +7.96% +7.51% +7.00%
Four Years (annualized) +0.72% +0.61% -0.19% N/A
Five Years (annualized) +1.52% +0.48% +0.06% -0.36%
Six Years (annualized) +0.66% +0.20% -0.36% N/A
Seven Years (annualized) +1.54% +0.75% +0.30% N/A
Eight Years (annualized) +1.92% +1.62% +1.08% N/A
Nine Years (annualized) +3.57% +2.64% +1.93% N/A
Ten Years (annualized) +7.71% +4.70% +3.82% +3.28%
Eleven Years (annualized) +7.45% +2.86% +1.84%  
Twelve Years (annualized) +6.86% +2.16%    
Thirteen Years (annualized) +6.76% +2.31%    
Fourteen Years (annualized) +6.69% +2.40%    
Fifteen Years (annualized) +7.01% +2.54%    
Sixteen Years (annualized) +8.18% +2.91%    
Seventeen Years (annualized) +7.85% +2.91%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees.
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -0.26%, -5.66% and -8.58%, respectively, according to Morningstar after all fees & expenses. Three year performance is +7.02%; five year is +0.96%; ten year is +4.50%
Manulife Preferred Income Class Adv has been terminated by Manulife.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are -0.44%, -9.62% & -12.27%, respectively. Three year performance is +7.22%, five-year is +0.80%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -0.31%, -9.47% and -12.57% for one-, three- and twelve months, respectively. Three year performance is +6.58%; five-year is -0.04%.

Acccording to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is -11.54% for the past twelve months. Two year performance is -0.68%, three year is +8.55%, five year is -1.83%.
Figures for Natixis Canadian Preferred Share Class Series F (formerly NexGen Canadian Preferred Share Tax Managed Fund) are -2.05%, -9.34% and -12.33% for one-, three- and twelve-months, respectively. Three year performance is +5.26%; five-year is +1.54%
Figures for BMO Preferred Share Fund (advisor series) according to Morningstar are -0.89%, -9.99% and -13.65% for the past one-, three- and twelve-months, respectively. Three year performance is +4.06%; five-year is -1.86%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F are -% for the past twelve months. The three-year figure is +%; five years is +%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR)
Figures for Lysander-Slater Preferred Share Dividend Fund according to Morningstar are -0.38%, -9.39% and -12.54% for the past one, three and twelve months, respectively. Three year performance is +5.00%.
Figures for the Desjardins Canadian Preferred Share Fund A Class, as reported by Morningstar are -0.62%, -8.82% and -11.94% for the past one, three and twelve months, respectively.

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 preferred share market has suffered a sharp reverse in the past four months, leaving a lot of room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is extremely elevated (chart end-date 2019-1-11)

Click for Big

Note that the Seniority Spread was 345bp on January 30. As a good practical example of the spreads between markets, consider that on November 19, CIU issued $385-million of 30-year bonds yielding 3.95%, at a time when issuing Straight Perpetuals would have cost them about 5.75% – a very wide spread even before considering the tax effect.

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2018-12-14):

Click for Big

In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

It seems clear that many market players are, wittingly or not, using FixedResets to speculate on future moves in the Canada 5-Year yield. This is excellent news for those who take market action based on fundamentals and the long term characteristics of the market because nobody can consistently time the markets. The speculators will, over the long run, lose money, handing it over to more sober investors.

FixedReset (Discount) performance on the month was -1.12% vs. PerpetualDiscounts of +1.01% in January; the two classes finally decoupled in mid-November after months of moving in lockstep.:

Click for Big

Floaters took another hit over the month, as they returned -7.21% for January and -21.13% for the past twelve months. But look at the long-term performance:

Click for Big

Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time and still can’t get over it. Fifteen years!

But, as mentioned earlier with respect to FixedResets, it seems clear that Floaters are used, wittingly or otherwise, as a vehicle for speculation on the policy rate and Canada Prime.

As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. There could be a reversal, particularly if Trump’s international trade policies cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment. However, the sharp declines of the past two months clarify the market’s fears, which were unclear on October 29: the market is behaving more as if it fears falling interest rates rather than rising ones – although this does not explain the very high value of the Seniority Spread, discussed above.

Yields on preferred shares of all stripes are extremely high compared to those available from other investments of similar quality. A I told John Heinzl in an eMail interview in late November, the best advice I can offer investors remains Shut up and clip your coupons!

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen!

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
June 9.5313 6.41% 0.998 6.423% 1.0000 $0.6122
September 9.7129 6.56% 0.998 6.573% 1.0000 $0.6384
December, 2017 10.0566 6.06% 1.004 6.036% 1.0000 $0.6070
March, 2018 10.2701 6.22% 1.007 6.177% 1.0000 $0.6344
June 10.2518 6.22% 0.995 6.251% 1.0000 $0.6408
September 10.2965 6.62% 1.018 6.503% 1.0000 $0.6696
December, 2018 8.6875 7.16% 0.997 7.182% 1.0000 $0.6240
January, 2019 8.5108 7.51% 1.000 7.510% 1.0000 $0.6392
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, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or the Deemed Maturity date for insurers and insurance holding companies (see below)), in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

The Deemed Maturity date for insurers was set at 2022-1-31 at the commencement of the process in February, 2011. It was extended to 2025-1-31 in April, 2013 and to 2030-1-31 in December, 2018
Yields for September, 2011, to January, 2012, 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. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
June 1.35% 0.69%
September 1.79% 0.97%
December, 2017 1.83% 1.00%
March, 2018 2.06% 1.08%
June 1.95% 1.22%
September 2.33% 1.55%
December, 2018 1.88% 1.65%
January, 2019 1.89% 1.63%

Significant positions were held in NVCC non-compliant regulated FixedReset issues on January 31, 2019; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2030-1-31 (insurers and insurance holding companies) or on a different date (SplitShares, when present in the portfolio) This presents another complication in the calculation of sustainable yield, which also assumes that redemption proceeds will be reinvested at the same rate. It will also be noted that my analysis of likely insurance industry regulation as updated is not given much weight by the market.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

3 Responses to “MAPF Performance: January 2019”

  1. mr_j936 says:

    I do not personally think or trust that the Canadian interest rate will rise. The US has struggled to get it up to 2.50% and even that caused a panic, Canadian households are very deep in debt and the government is deep in debt. Many think that we are following what happened to Japan 30 years ago when interest rates since then have remained low…
    I am admittedly very new to investing and preferred shares but I am leaning to buying minimum rate reset preferred or preferred shares issued in 2016 when the spread was a good 4% (although I am taking a relatively high call risk by doing that since most are priced well above par by 5 or 10%, which really would make me break even if they get called) I also struggle to understand floater shares, still working on figuring them out…

    But honestly it all comes down to this: I would like to know what payout I can expect going forward, and making a decision that completely ties you to the performance of the Canadian interest rates does not suit me personally, my plan for my life is to have a 50k dividend income a year(which would require me putting aside 1 million, but hopefully in 20 years it will happen), whether or not the actual preferred price rises or falls is of little interest to me, as long as I can keep clipping the coupons, and the fixed spread gives me that piece of mind…

  2. mr_j936 says:

    Never mind. I subscribed to the prefletter, your recommendations work much better 😀

  3. jiHymas says:

    but I am leaning to buying minimum rate reset preferred

    You have to be careful here, because not only is there some dispute regarding just how much the minimum reset rate guarantee is worth, but it is also extremely expensive in today’s environment.

    Compare, for example, BIP.PR.A (+356, bid price = 20.50) and BIP.PR.D (+378M500, price = 22.40).

    The following ignores the effect of the current fixed rate period. Determining what adjustment is necessary is left as an exercise for the student.

    First, let’s ignore the guarantee and see what level of five-year Canada yield (Y) is required to make the Expected Future Current Yield the same.

    (Y + 0.0356) * 25 / 20.50 = (Y + 0.0378) * 25 / 22.40
    … a little bit of algebra …
    Y = -1.18%.

    So, in the absence of a guarantee, the 5-year Canada yield would have to drop to the negative and obscene value of -1.18% before the securities become identical in Expected Future Current Yield. That difference of nearly two bucks in price has quite an effect!

    So let’s say the minimum kicks in. Then:

    (Y + 0.0356) * 25 / 20.50 = 0.05 * 25 / 22.40
    … algebra …
    Y = 1.02%

    So, taking into account the minimum rate guarantee, you are indifferent between the two issues when the Canada 5-Year Yield is 1.02%.

    At higher rates, you prefer BIP.PR.A. At lower rates, you prefer BIP.PR.D.

    Now, you can make whatever assumptions about future 5-year yields you want. It’s a free country. But me, I say the chance of 5-year Canadas yielding more than 1.02% over the long term is a lot higher than the chance of lower, and therefore I say that between the two, BIP.PR.A is preferable.

    I am leaning to buying minimum rate reset preferred or preferred shares issued in 2016 when the spread was a good 4% (although I am taking a relatively high call risk by doing that since most are priced well above par by 5 or 10%, which really would make me break even if they get called) … making a decision that completely ties you to the performance of the Canadian interest rates does not suit me personally

    You have to be careful here, too.

    If you are called out of your position, you will have to reinvest at whatever the market yield at that time happens to be. Calls are nasty that way.

    I subscribed to the prefletter, your recommendations work much better

    That’s the spirit! Everybody should do that, I say!

    Thanks for the kind words.

Leave a Reply

You must be logged in to post a comment.