The fund performed well in another month of recovery for the preferred share market. As noted in the report of Index Performance, June 2009, both the FixedReset and PerpetualDiscount now have positive total return over the past years – rather a back-handed compliment, but it’s a lot better than has been the case lately!
Fund performance was hurt by the underweighting in FixedReset issues noted in MAPF Portfolio Composition: June 2009, as well as an underweighting in lower quality issues (which also outperformed), but these allocation hurdles were handsomely overcome by security selection and trading within the actual portfolio.
Note that the passive funds (DPS.UN and CPD) both have relatively high weightings in Pfd-3-tier issues; as shown in the uploaded chart, these “Credit Class 3” issues have tightened massively recently. Note that in the chart, the Credit Class 3 spread is shown as a spread against Credit Class 2; while the Credit Class 2 spread is shown as a spread against Credit Class 1.
The fund’s Net Asset Value per Unit as of the close June 30 was $10.9846 after a dividend distribution of $0.168846 per unit.
| Returns to June 30, 2009 | |||
| Period | MAPF | Index | CPD according to Claymore |
| One Month | +4.93% | +1.60% | +1.38% |
| Three Months | +26.29% | +13.49% | +12.77% |
| One Year | +42.19% | -0.18% | -0.47% |
| Two Years (annualized) | +16.60% | -2.28% | |
| Three Years (annualized) | +12.69% | -1.63% | |
| Four Years (annualized) | +10.60% | -0.55% | |
| Five Years (annualized) | +10.44% | +0.82% | |
| Six Years (annualized) | +12.04% | +1.39% | |
| Seven Years (annualized) | +11.32% | +2.31% | |
| Eight Years (annualized) | +11.82% | +2.41% | |
| The Index is the BMO-CM “50” | |||
| MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. | |||
| CPD Returns are for the NAV and are after all fees and expenses. | |||
| Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are 2.0%, 12.7% and -1.0%%, respectively, according to Morningstar after all fees & expenses | |||
| Figures for Jov Leon Frazer Preferred Equity Fund (which are after all fees and expenses) for 1-, 3- and 12-months are N/A, N/A & N/A, respectively, according to Morningstar and the Globe and Mail | |||
| Figures for AIC Preferred Income Fund (which are after all fees and expenses) for 1-, 3- and 12-months are +0.7%, N/A & N/A, 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.
I am very pleased with the returns, but implore Assiduous Readers not to project this level of outperformance for the indefinite future. The past year in the preferred share market has been filled with episodes of panic and euphoria, together with many new entrants who do not appear to know what they are doing; perfect conditions for a disciplined quantitative approach. While I will continue to exert utmost efforts to outperform, it should be borne in mind that beating the index by 500bp represents a good year, and there will almost inevitably be periods of underperformance in the future.
The outperformance of the fund is almost – not quite! – embarrassing. You will find no shortage of people who will be willing to state flatly that it is not possible to achieve such returns without incredible risks; there will be others who deprecate the size of the fund and say that trading in size would eliminate every scrap of outperformance. These are the same things I kept hearing when I was trading Canada bonds for pension funds. All I can do is point to my portfolio composition, financial statements & trading records and state that I see lots of silly prices on the Exchange that I can’t take full advantage of because I’ve reached my position limits. There’s plenty of room for new money left in the fund. Just don’t expect index+4237bp every year, OK?
The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.
| Calculation of MAPF Sustainable Income Per Unit | |||||
| Month | NAVPU | Portfolio Average YTW |
Leverage Divisor |
Securities Average YTW |
Sustainable Income |
| June, 2007 | 9.3114 | 5.16% | 1.03 | 5.01% | 0.4665 |
| September | 9.1489 | 5.35% | 0.98 | 5.46% | 0.4995 |
| December, 2007 | 9.0070 | 5.53% | 0.942 | 5.87% | 0.5288 |
| March, 2008 | 8.8512 | 6.17% | 1.047 | 5.89% | 0.5216 |
| June | 8.3419 | 6.034% | 0.952 | 6.338% | $0.5287 |
| September | 8.1886 | 7.108% | 0.969 | 7.335% | $0.6006 |
| December, 2008 | 8.0464 | 9.24% | 1.008 | 9.166% | $0.7375 |
| March 2009 | $8.8317 | 8.60% | 0.995 | 8.802% | $0.7633 |
| June 2009 | 10.9846 | 7.05% | 0.999 | 7.057% | $0.7752 |
| NAVPU is shown after quarterly distributions. “Portfolio YTW” includes cash (or margin borrowing), with an assumed interest rate of 0.00% “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. “Sustainable Income” is the resultant estimate of the fund’s dividend income per unit, before fees and expenses. |
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As discussed in the post MAPF Portfolio Composition: May 2009, the fund has positions in splitShares (almost all BNA.PR.C) and an operating retractible, both of which have high yields that are not sustainable: at some point they will be called or mature and the funds will have to be reinvested. Therefore, both of these positions skew the calculation upwards.. Since the yield on thes positions is higher than that of the perpetuals despite the fact that the term is limited, the sustainability of the calculated “sustainable yield” is suspect, as discussed in August, 2008.
Significant positions were also held in Fixed-Reset issues on June 30; all of which currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity. It is the increase in exposure to the lower-yielding Fixed-Reset class that accounts for the apparent stall in the increase of sustainable income per unit in the past six months. In December 2008, FixedReset exposure was zero; it is now 11.5%. Exposure to the extraordinarily high-yielding SplitShare class has also been reduced due to credit concerns.
However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 6.58% shown in the June 30 Portfolio Composition analysis (which is in excess of the 6.36% index yield on June 30). Given such reinvestment, the sustainable yield would be 10.9846 * 0.0658 = $0.7228, an increase from the $0.7154 derived by a similar calculation last month, despite the negative effects on the calculation of having distributed the accumulated dividends.
Different assumptions lead to different calculations, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in
- the very good performance against the index
- the long term increases in sustainable income per unit
As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.
Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.
[…] However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 6.14% shown in the July 31 Portfolio Composition analysis (which is in excess of the 6.06% index yield on July 31). Given such reinvestment, the sustainable yield would be 11.8181 * 0.0614 = $0.7256, an increase from the $0.7228 derived by a similar calculation last month. […]