PrefBlog

I had an idle look at the most recent BMO Laddered Preferred Share (ZPR) Summary Guide (for July, 2024, “Data as of June 30, 2024.”) and was immediately struck by the laddering:

Well, that’s a helluva change from Table ZPR-6A: Resets Effective by Calendar Year Analysis of 2023-11-16, published as part of my ZPR analysis! I’m glad to see it … if I had seen numbers like this when I did my periodic monitoring of the fund, I would never have gotten so interested!

I have done nothing to investigate further, so I have no idea whether exposures to individual issues, issuers and issuer groups has improved since my review. Nobody’s paying me! But if somebody wants to do the work, contact me and we can discuss publishing it on the blog.

Update, 2024-8-30: Over a month ago, Assiduous Reader IrateAR contacted me and sent me his analysis … I’ve been trying to find time to post it ever since!

He updates Table ZPR-1D from the Investigation of ZPR – BMO Laddered Preferred Share Index ETF page as (abridged and edited version of his table):

So things are getting better, but what I want to know is: who got fired? I don’t mean the front-line guy – the investment world is full of people who try to be investment management genius heroes without having either the brains or the mandate to do so … I mean management.

The fund was way out of whack for at least six months and that is (or should be) completely unacceptable – not to mention the fact that my pointed inquiries never got escalated in any meaningful way. Why weren’t there exception reports, listing the differences from specifications between the index and the fund? If there were exception reports, why weren’t they acted upon? If there weren’t any exception reports, why not? These are easy enough to produce automatically, every night for a front line supervisor, perhaps shorter and less frequently for mor senior staff. Any member of the chain of command who wasn’t pounding the table on every possible occasion and making a confounded nuisance of themselves by complaining incessantly about the lack of checking should get fired; the guy who specified the programming required for the process should get fired; the guy who refused to budget or schedule the necessary progamming should get fired; and good riddance to all of them.

But, as I found out personally many years ago, the Other People’s Money Department is the ass-end of banks; and Index Funds are the ass-end of the Other People’s Money Department. Staff, management, available resources – everything is second rate. The objective is not to make a good product – the objective is to make a cheap product and sell the hell out of it. Making the product is just another cost centre to be minimized. My information from direct observations may be old, but everything I have seen for myself or simply read about in the papers (hello, Boeing!) convinces me that the problem has only gotten worse with time. Pride in workmanship may not be dead, but it’s pretty damn sick.

James Hymas, president of preferred share specialist firm Hymas Investment Management Inc. (“HIMI”), stated today that his investigation of discrepancies between Bank of Montreal’s (“BMO”) regulatory and advertising material for BMO Laddered Preferred Share Index ETF (TSX: ZPR) and the actual portfolio held by the fund has led to the conclusion that BMO has not been straightforward with its investors regarding the portfolio composition of the fund.

“Like many funds, ZPR relies on a gimmick to attract customers: in this case, the fund’s advertising emphasizes the idea that the fund is ‘laddered’”, Hymas explained. “The word ‘laddered’ is even included in the name of the fund! Certainly, the index on which ZPR purports to be based is laddered – the proportion of the portfolio that will reset in each of the next five years is very close to 20% for all reset years – even when measured between the monthly index rebalancing dates. However, BMO’s own report for ZPR dated October 31, 2023, shows a range of 11.38% to 27.69%.”

Hymas also stated “Problematical laddering is not the only issue. Aggregate weights by issuer for the portfolio are wildly different from the index on the dates I sampled, as are weights by individual issue – to the extent that over 12% of the fund’s portfolio is held in issues not included in the index. This does not support the prospectus claim that ‘The investment strategy of BMO Laddered Preferred Share Index ETF is currently to invest in and hold the constituent securities of the Solactive Laddered Canadian Preferred Share Index in the same proportion as they are reflected in the Index.’”

BMO claims that the quoted sentence “cannot be read in isolation and is qualified by other statements in the prospectus”, but this is not well-supported by the evidence – a discussion is embodied in the supporting commentary linked below. Hymas remarked that he will leave it to investors to determine for themselves whether they accept BMO’s claim, noting that the ‘same proportion’ assertion is repeated on the fund’s web page without any qualifying statement; the fund’s “Factsheet” – which may be obtained from the fund’s web page – repeats the web page’s unequivocal yet false statement of strategy.

“As it stands, BMO Laddered Preferred Share Index ETF is neither laddered nor an Index fund – BMO must make immediate full and frank disclosure of their shortcomings in the management of the fund and make restitution to clients for the risks that they have borne that they had been seeking to avoid”, Hymas concluded.

Further information has been published by HIMI on a dedicated web page at https://himivest.com/ZPR/ .

Invesco has announced [on 2023-1-23] (although not on their website, as far as I can see):

Invesco Canada Ltd. (“Invesco”) announced today proposed changes to its Canadian exchange-traded funds (ETFs) and mutual fund line-up. The objective of this initiative is to simplify the firm’s product offerings to enable it to sharpen the focus on areas of highest client demand. Another benefit will be increased capacity to provide better service and support while investing in those high demand products. The products listed below will be set to be terminated in 2023:

The firm plans to terminate the following TSX-Listed ETFs, effective close of business on or about April 21, 2023:

Terminating fund	Ticker Symbol
Invesco Canadian Preferred Share Index ETF	PPS
Invesco FTSE RAFI Canadian Small-Mid Index ETF	PZC
Invesco FTSE RAFI Global+ Index ETF	PXG, PXG.U
Invesco Global Shareholder Yield ETF	PSY, PSY.U
Invesco LadderRite U.S. 0-5 Year Corporate Bond Index ETF	USB, USB.U
Invesco S&P/TSX REIT Income Index ETF	REIT
Invesco S&P Emerging Markets Low Volatility Index ETF	ELV
Invesco S&P International Developed Low Volatility Index ETF	ILV, ILV.F
Invesco Senior Loan Index ETF	BKL.C, BKL.U, BKL.F

The TSX-Listed ETFs will continue to be listed on the Toronto Stock Exchange (“TSX”) until the close of business on or about April 17, 2023, when they are expected to cease trading and be delisted. No further subscription orders for units of the TSX-Listed ETFs will be accepted after the close of business on April 5, 2023. Unitholders of the TSX-Listed ETFs may continue to submit requests to exchange units until close of business on or about April 14, 2023 and to redeem units until April 21, 2023.

There goes another! It just goes to show what a 10+ year long bear market can do to retail sentiment.

This is pretty old at this point and therefore a tad embarrassing to post, but …

Fiera Capital Corporation has announced (on 2019-7-3):

that it completed today the acquisition of all the issued and outstanding shares of Natixis Investment Managers Canada Corp. (“Natixis Corp”), the holding company of Natixis Investment Managers Canada LP (“Natixis LP”), acting as investment fund manager of publicly and privately distributed investment funds (the “Natixis Funds”).

Natixis LP is based in Toronto and the value of the assets of the Natixis Funds amount to approximately C$1.8 billion as at March 31, 2019. Natixis LP will continue to operate as a distinct legal entity from Fiera Capital and there are no immediate plans to change Natixis LP’s senior management team, the investment objectives of the Natixis Funds, increase the management fees or operating expenses paid by the Natixis Funds or change the role of Natixis LP as investment fund manager of the Natixis Funds. Natixis Corp, Natixis LP and the Natixis Funds will be rebranded as “Fiera Investments” in conjunction with closing.

The acquisition relates to the long-term strategic partnership between Fiera Capital and Natixis Investment Managers S.A. announced on May 9, 2019, establishing Fiera Capital as Natixis Investment Managers S.A.’s preferred Canadian distribution platform.

There is a document on SEDAR that I am not permitted to link to because the Canadian Securities Administrators believe that public documents shouldn’t be all that public, but it may be found by searching for “Fiera Canadian Preferred Share Class (formerly Natixis Canadian Preferred Share Class) Aug 30 2019 11:52:53 ET Notice PDF 389 K”, to the effect that, among other fund name changes, “Natixis Canadian Preferred Share Class” became “Fiera Canadian Preferred Share Class”.

First Asset Investment Management Inc. has announced:

that the merger of Preferred Share Investment Trust (TSX: PSF.UN) (the “Fund”) with First Asset Preferred Share ETF (the “First Asset ETF”) (TSX: FPR) was implemented after the close of business on November 1, 2016.

In connection with the Merger, each issued and outstanding unit of the Fund received 0.29955 Unit of the First Asset ETF.

According to FPR’s investment objectives:

First Asset Preferred Share ETF’s investment objective is to provide unitholders with regular distributions; and the opportunity for capital appreciation from the performance of a portfolio comprised primarily of preferred shares of North American issuers. This actively managed portfolio will be comprised primarily of investment grade preferred shares and to a lesser extent investment grade corporate debt and convertible bonds. At least 75% of the Preferred Shares and Corporate Debt in the portfolio of FPR shall be rated investment grade at the end of every reporting period (June 30th and December 31st).

This has the very sad, unfortunate and most lamentable effect of suppressing the performance history of PSF.UN. As reported in the MAPF Performance: September 2016 report, as of September 30, 2016, the historical performance looked like this:

Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are +0.11%, +2.45% and -1.67% for the past one, three and twelve months, respectively. The two-, three-, four- and five-year figures are -14.52%, -9.01%, -7.09% and -5.10%, respectively.

When one checks the TXPL Index on the TMX website nowadays, the ‘overview’ section contains the following notice in large red letters:

This index has been discontinued effective April 29, 2016. Data displayed for this index is accurate as of the last trading day prior to discontinuation.

The same notice is displayed for the ‘year’ indices that provided data according to the term to reset of the various issues:

• TXLC (Current Year)
• TXL1 (year 2)
• TXL2 (year 2)
• TXL3 (year 3)
• TXL4 (year 4)

TXPL was developed in order to provide an index for BMO’s FixedReset ETF, ZPR, but this ETF hired a new index provider in October 2015. It would appear that those behind TXPL have been unsuccessful in finding a client to pay for the preparation of this index; or perhaps that there was a six-month notice period for cancellation of the contract.

I have not been able to find a formal announcement that goes beyond the bare bones on the TMX pages.

Jeff Herold, who manages NexGen Canadian Preferred Share Tax Managed Fund, comments:

As we move into May, we note the unmourned passing of the S&P/TSX Preferred Share Laddered Index. Created as a benchmark for the BMO S&P/TSX Laddered Preferred Share Index ETF, the index had no purpose once the ETF switched in October 2015 to a different index provided by Solactive. The switch allowed BMO to reduce expenses, have more frequent rebalancing, and simplify the ETF name to the BMO Laddered Preferred Share Index ETF. The changes just reinforce our conviction that bespoke indices created for unique ETF’s must be carefully evaluated for any informational value. Indices are generally not good prescriptions for how to invest, but can be used for clever marketing purposes.

S&P Dow Jones Indices Canadian Index Operations has announced (on December 31, so this is rather late):

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Preferred Share Laddered Index Reviews. These changes will be effective at the open on Monday, January 18, 2016.

Bank of Montreal has announced:

BMO Asset Management Inc. (BMO AM) today announced a change (ZPR Index Change) to the underlying index of BMO S&P/TSX Laddered Preferred Share Index ETF (Ticker: ZPR).

Currently, ZPR tracks the performance of the S&P/TSX Preferred Share Laddered Index. Effective on or about October 19, 2015, ZPR will start tracking the performance of the Solactive Canadian Preferred Share Index (Successor Index). An amendment to the offering documents of ZPR has been filed with the securities regulatory authorities, for which a receipt has been issued.

As a result of the ZPR Index Change, the current name of ZPR will change to BMO Laddered Preferred Share Index ETF.

In addition, the index provider will change to Solactive AG.The Solactive Canadian Preferred Share Index will provide investors with substantially the same exposure to the asset class to which ZPR is currently exposed. Since its creation in 2007, Solactive AG has become one of the key players in the indexing space. Solactive AG currently calculates indices for 175 clients in Europe, America and Asia with approximately USD$ 25 billion invested in products linked to its indices.

The ZPR Index Change is intended to provide investors of ZPR with substantially the same index exposure as the current index. The Successor Index aligns with the current investment objectives and strategy of ZPR. One notable but slight difference between the current index and Successor Index is the S&P/TSX Preferred Share Laddered Index is rebalanced on a quarterly basis while the Solactive Canadian Preferred Share Index is rebalanced on a monthly basis.

Solactive has been mentioned on PrefBlog once before, in connection with the now defunct CNPF:

The Solactive Canada Preferred Stock Index is admirably transparent. The indexing agent is Structured Solutions AG, which is based in Frankfurt. My, aren’t we getting international! They appear to do a lot of business with Global X, a New York based firm that has a hatful of thinly sliced ETFs.

The Solactive Laddered Canadian Preferred Share Index is similarly transparent making public a complete list of constituents together with the number of shares held in the index to six decimal places. Regrettably, they use Bloomberg symbols in their listing, presumably because brain-dead bank employees have no idea that information about anything is available anywhere else, but it’s no big deal. Hit yourself on the head with a hammer a few times, mumble something positive about ‘respect inna workplace’ and you’ll be able to translate the symbols to your preferred convention pretty easily. Mind you, there are no less than eight constituents with the symbol “ENBCN 4 12/31/49”, so you’ll have to do some guessing!

The Solactive Guideline describes index construction:

On each Adjustment Day each Index Component of the Solactive Laddered Canadian Preferred Share Index is weighted according to the Market Capitalization of the respective preferred share within the term buckets. The weights are capped twofold on a Selection day, whereas a cap on an issuer basis is applied of 12.5% per issuer on a selection day as well as a Cap of 20% per Maturity Bucket.

So the caps are a little higher than the 10% previously used.

“Solactive Laddered Canadian Preferred Share Index Universe” in respect of a Selection Day are instruments that fulfill the following criteria:
a) Defined as Preferred Share
b) Listed on the Toronto Stock Exchange
c) Incorporated in Canada
d) Trading in CAD
e) Only rate reset securities are eligible, which have rate reset dates frequency of five years or less
f) Floating Rate instruments are explicitly excluded
g) For instruments that are currently part of the Solactive Laddered Canadian Preferred Share Index a minimum Total Market capitalization of 50 m CAD. For instruments that are not part of the current composition of the Solactive Laddered Canadian Preferred Share Index a minimum Total Market capitalization of 100 m CAD is required
h) For instruments that are currently part of the Solactive Laddered Canadian Preferred Share Index a minimum Average daily value traded over the last 3 month of 50,000 CAD is required. For instruments that are not part of the current composition of the Solactive Laddered Canadian Preferred Share Index a minimum Average daily value traded over the last 3 month 100,000 CAD is required
i) Minimum ration of DBRS or S&P is P3 (low) or a minimum ration of Moodys above Baa3. If more than one of the rating agencies has issued a rating on the stock, the highest rating is used
j) Time to maturity of up to 6 years.

Looks like a bit of a rush job on the guideline. Ration?

Anyway, two of these elements confused me: first, I’m not sure what they mean by “Floating Rate instruments”. Does this include the BCE FixedFloaters and RatchetRates? (The answer is ‘no’; the constituent list includes “BCECN 3.11 12/31/49”, which is BCE.PR.F, a FixedFloater). Does it include FloatingResets? The term is not defined. Second, I am baffled by the stipulation that the Time to maturity is up to 6 years. The best guess I can come up with is that they mean Time to Next Exchange Date, which, since reset frequency is stipulated as being five years or less, means they just want to eliminate new issues with a long first-call-lockout-period.

There’s a bit of ambiguity in section “3.4 Dividends and other distributions” as well. The formula they provide makes sense if dividends are reinvested on the ex-date, but this is not made explicitly clear. This is not as pedantic a point as one might think: a lot of people simply can’t reinvest on the ex-date because they won’t get the money until a month later. Therefore, if they want to match the index exactly, they’ll have to borrow it and incur interest costs that will not be reflected in the index; this represents a bias against active managers. Not the biggest deal in the world, to be sure, but it’s there.

And finally we arrive at the interesting question of why BMO has changed index providers. It seems likely that Solactive is cheaper than S&P and it also seems likely that “BMO” is a much better name to use when selling a Canadian ETF than “S&P”. If I was running an index fund, I’d basically have to go with S&P to get the credibility, but BMO doesn’t have that problem. So, I’ll bet a nickel that part of the answer is short and sweet: it’s about the money.

A much more interesting possibility, however, is reporting vs. their benchmark. The fund is currently reporting its performance for past periods against the S&P index and detailed quantitative analysis by PrefBlog’s crack team of analysts has determined that performance, in absolute terms, since the inception date of Nov 14, 2012, has not been at levels that will help persuade granny to invest some of the old hard-earned. We also note from the guideline that:

The Index is based on 1000 at the close of trading on the start date, September 15th 2015

Historical figures have not been calculated and I’m not sure BMO would be allowed to use hypothetical, back-dated index calculations even if they were available. So while I have every confidence that BMO will comply with every jot, tittle and comma of the regulations regarding fund performance reporting, I also suspect that having a benchmark that only starts on September 15, 2015, will not only allow them to de-emphasize the results of the preceding three years, but that there is a pretty good chance that results measured from index inception are going to be pretty good.

S&P Dow Jones Indices Canadian Index Operations has announced:

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Preferred Share Laddered Index Reviews. These changes will be effective at the open on Monday, October 20, 2014.