PrefBlog

Performance of the HIMI Indices for May was:

The Claymore Preferred ETF may be viewed, with caution, as a proxy for the S&P/TSX Preferred Share Index. Caution is required due to tracking error – the ETF will deliver performance according to what it actually holds and how well it is able to do things like reinvest its dividends, which is not the same thing as an index return. I suspect that tracking error this month will be larger than it will be in the future, since it has issued a great many units. Additionally, the fund’s NAV will be reported after MER of 0.45% p.a.

Be that as it may, the NAV on 5/31 was $19.44; the NAV on 4/30 was $19.91. Therefore, NAV Performance for May 2007 for CPD was -2.36%, net of MER (which will be just under 0.04% monthly).

Diversified Preferred Share Trust, DPS.UN is the main competitor of CPD. It doesn’t publish month-end NAVs, but the May 30 NAV was $22.55, while the May 2 NAV was $23.11, so its performance for this four-week period was -2.42%, net of its MER of about 0.04% for the period. The corresponding figures for CPD are $19.48, $19.90, -2.11%. Ouch! I presume that DPS.UN underperformed due to its greater weight in BCE issues, but that’s merely speculation.

It should also be noted that the HIMI Indices are prepared using the closing bids, which can be a very different thing from the closing price. When averaged over a lot of issues the difference should be minimal, but you can’t tell until you rip apart the data.

Caution should also be used in interpreting the differences between the various HIMI Indices. I will suggest that the lousy performance in Ratchet and FixFloat have a lot more to do with nervousness about BCE’s credit than the intrinsic performance of those investment classes – both of those subindices held entirely BCE for the period.

One very interesting thing that happened this month is that a lot of the yieldCurvePremiumLiquidity disappeared, as shown in this graph. I interpret the change in the premium as reflecting a desire by some holders, at least, to get out of the sector in size and quickly; such holders might simply sell their most liquid holdings to adjust portfolio exposures; this will affect the prices of these issues; hence, liquidity will become a lot less expensive. The PerpetualDiscount index is the most liquid of all the sub-indices – it’s dominated by recent issues, apart from anything else – and thus a portion of the decline in this index might be attributed to this factor rather than the intrinsic characteristics of the investment.

Such a hypothesis gains some support from examination of the changes in the yield curve, which I found a little surprising. The long-end hasn’t moved by nearly as much as one might have expected. Note that this graph is of the TAXABLE curve and refers to SPOT YIELDS … therefore, the x-axis shows the yield one might expect on a “stripped dividend”, after tax.

Attribution analysis is tricky and very implementation dependent. I might return to this topic on the weekend.

There was a lot of activity this month: a huge migration from PerpetualPremium to PerpetualDiscount; a transfer of all the Weston issues to Scraps due to credit concerns; and a transfer of several issues from Scraps due to increased volume.

The changes are:

A fair amount of movement this month – mainly from PerpetualPremium to PerpetualDiscount.

All over the map this month!

Both the FixFloat and the RatchetRate indices are comprised entirely of BCE issues; BCE has no issues included in any of the other indices. 

The S&P/TSX preferred share index was (before the collapse) 7-8% BCE (which is proxied by FixFloat); the BMO-NB 50 is a little higher, about 10%. Diversified Preferred Fund (DPS.UN) lists its 25 largest positions as of Year-end, which include 6 BCE/Bell issues totalling 9.95% of the portfolio at that time, while the Claymore ETF currently lists 2 of these issues in its holdings, currently comprising 6.86% of the portfolio. MAPF hasn’t held any of these issues for a long time … I can’t even remember holding them, but I’m sure I have at some point or other.

By cracky, you young whippersnappers don’t know nuthin’. I can remember when Bell Canada / BCE was a decent credit!

My eagle-eyed readership will have noticed that the FixedFloater index is not doing very well recently.

This is largely due to the fact that it is entirely comprised of BCE issues: BCE has been in the news lately due to speculation that Ontario Teachers might take a run at it … or at least try to pump up the shareholder value … and I don’t mean the PREFERRED shares!

DBRS had this to say today:

DBRS notes that the Company’s largest shareholder, Ontario Teachers’ Pension Plan Board (OTBP or Teachers), has recently changed its long-standing position from being a more passive shareholder to an active shareholder. This change could place further pressure on the Company and thereby heighten its event risk.

DBRS’s current expectations for BCE include the Company maintaining a stable and conservative balance sheet and the balanced deployment of the Telesat proceeds. Should the Company’s response to recent pressure be outside of DBRS’s expectations, DBRS may reconsider the appropriateness of the Company’s A (low)/“A” ratings.

However, DBRS currently expects that any changes in the Company’s financial policy as outlined above would likely result in one-notch rating change at BCE to BBB (high)/A (low).

Nice, eh? I tell people and tell people : Floating prefs are not money market instruments, no matter how much they quack like those ducks, but nobody ever listens.

A more aggressively pro-shareholder stance by BCE will not lead to another offer for the preferreds – if anything, such an event will be less likely. I bet the old Bell Canada pref holders are now feeling a little blue : they voted to switch to an inferior credit for a trivial consideration and this could be nasty.

How will all this work out? I have no idea. I’d be buying options like crazy if I did. But I did want to ensure that readers understand that the recent decline in the FixedFloater index (down to 1,039.4 today from a peak of 1055.7 on March 15) is not necessarily due to any market disenchantment with FixedFloaters – it is more likely BCE related.