MAPF Performance: December 2009

The fund performed well in December, but probably underperformed CPD which has a much higher weighting the Floating Rate issues which performed very well this month. MAPF’s performance increment over the PerpetualDiscount and FixedReset sectors (in which it is it is 85%+ weighted) was satisfactory.

The fund’s Net Asset Value per Unit as of the close December 31 was $10.5662 after giving effect to a Capital Gains Distribution of $1.989262 and a Dividend Distribution of $0.154071.

Returns to December 31, 2009
Period MAPF Index CPD
according to
One Month +1.55% +1.97% +%
Three Months +2.94% +2.46% +%
One Year +66.29% +29.41% +%
Two Years (annualized) +26.45% +4.00% +% *
Three Years (annualized) +16.30% +0.49%  
Four Years (annualized) +13.87% +1.42%  
Five Years (annualized) +12.23% +1.90%  
Six Years (annualized) +12.43% +2.58%  
Seven Years (annualized) +15.23% +3.24%  
Eight Years (annualized) +13.37% +3.39%  
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.
* CPD does not directly report its two-year returns. The figure shown is the product of the current one-year return and the similar figure reported for December 2008
Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +1.5%, +2.3% and +26.6%, 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 +1.5%, +2.1% & 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 over the past year, but implore Assiduous Readers not to project this level of outperformance for the indefinite future. The year in the preferred share market was 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.

Sometimes everything works … sometimes the trading works, but sectoral shifts overwhelm the increment … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There have been a lot of strongly motivated market participants in the past year, generating a lot of noise! The conditions of the past year may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, whether that implies monthly turnover of 10% or 100%.

There’s plenty of room for new money left in the fund. Just don’t expect the current level of outperformance every year, OK? 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.

On the one hand, I’m a bit relieved that the fourth quarter of 2009 was so normal – in terms of trading volume, index performance and performance increment. The problem with beating the index by thousands of beeps is that many people will simply assume the fund is taking enormous risks in low-quality issues – which is not the case – and not look any further to determine the truth. On the other hand … well, that’s a nice kind of problem to have!

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
June, 2007 9.3114 5.16% 1.03 5.01% 1.1883 0.3926
September 9.1489 5.35% 0.98 5.46% 1.1883 0.4203
December, 2007 9.0070 5.53% 0.942 5.87% 1.1883 0.4448
March, 2008 8.8512 6.17% 1.047 5.89% 1.1883 0.4389
June 8.3419 6.034% 0.952 6.338% 1.1883 $0.4449
September 8.1886 7.108% 0.969 7.335% 1.1883 $0.5054
December, 2008 8.0464 9.24% 1.008 9.166% 1.1883 $0.6206
March 2009 $8.8317 8.60% 0.995 8.802% 1.1883 $0.6423
June 10.9846 7.05% 0.999 7.057% 1.1883 $0.6524
September 12.3462 6.03% 0.998 6.042% 1.1883 $0.6278
December 2009 10.5662 5.74% 0.981 5.851% 1.0000 $0.6182
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.

As discussed in the post MAPF Portfolio Composition: November 2009, the fund has a position in the high-yielding split-share BNA.PR.C, about half of which was sold in November in a swap for the slightly lower-yielding PerpetualDiscount BAM.PR.N. Additionally, the fund has a position in the high-yielding Operating Retractible YPG.PR.B. Both BNA.PR.C and YPG.PR.B are scheduled to mature (or to be retracted) in the future, hence the sustainability of sustainable yield calculated while incorporating their contribution is somewhat suspect, as discussed in August, 2008.

Significant positions were also held in Fixed-Reset issues on December 31; 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. This presents another complication in the calculation of sustainable yield.

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 5.97% shown in the MAPF Portfolio Composition: December 2009 analysis(which is in excess of the 5.85% index yield on December 31). Given such reinvestment, the sustainable yield would be $10.5662 * 0.0597 = $0.6308 whereas a similar calculation for November results in 12.5153 * 0.0601 / 1.1883 = 0.6330. Note that the November figure has had to be adjusted to reflect the Capital Gains Multiplier. The slight decrease is partly due to the dividend distribution (in November the fund was earning income on the dividends earned but not yet distributed) and partly due to minor effects such as the improvement in credit quality over the month.

The equivalent calculation for December 2008 is $8.0464 [NAVPU] * 0.0749 [Yield on PerpetualDiscounts] / 1.1883 [Capital Gains Multiplier] = 0.5072, which shows that progress is indeed being made! The portfolio yield in the table is severely skewed by the presence of very high-yielding, short-term split shares in the December 2008 Portfolio.

Different assumptions lead to different results from the calculation, 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.

Update 2010-1-3: Thanks to Assiduous Reader AS for pointing out a typo in the first paragraph. It has been corrected.

One Response to “MAPF Performance: December 2009”

  1. […] 29). Given such reinvestment, the sustainable yield would be $10.7610 * 0.0589 = $0.6338 whereas a similar calculation for December results in $10.5662 * 0.0597 = […]

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