PrefBlog

Standard & Poor’s has announced a massive revision to the S&P/TSX Preferred Share Index, reflecting their new methodology:

These changes will be effective at the open on Monday, July 19, 2010

The net effect of these changes (counting solely by issue count, not by the undisclosed index weight; and counting HIMIPref™ "Scraps" issues according to their bracketted ‘would be’ subindex) are:

I regret that I do not have time at the moment to fill in all of the empty boxes or to make any comments – but I will!

Well – maybe a quick comment … looks like credit quality will improve significantly … but it depends on the weighting factors they use.

Standard & Poor’s has announced:

the following modifications to the methodology of the S&P/TSX Preferred Share Index, which will become effective after the close of trading on Friday, July 16, 2010, with the second semi-annual review of the index in 2010:

• There will be no limit to the number of preferred share issues from any given issuer. Previously, the number of issues per issuer was limited to a maximum of three.
• There will be a maximum relative weight of 10% set per issuer. All eligible lines for an issuer will be included in the index and capped on a pro-rata basis to a maximum of 10% of the total index market capitalization.
• Preferred shares that have a mandatory conversion or a scheduled maturity or redemption within 12 months of the review period will not be added to the index. Existing index constituents which have a redemption or conversion will be removed on the redemption or conversion date.
• A buffer rule for existing index constituents will be applied for the dollar value traded liquidity requirement. Existing constituents must have a minimum average dollar value traded in the 3 months prior to the review date of C$100,000.
• The liquidity requirement to get included in the index will increase from C$100,000 to C$200,000.
• Effective January 2011 the rebalance scheduled will change from semi-annually to quarterly. Rebalancing will occur after the close on the third Friday of January, April, July and October.

In order to lessen the impact of these changes, the new methodology will be phased in beginning with the July 2010 rebalance. The index will rebalance 25% each month from July to October, effective after the close on the third Friday, where S&P will apply a weight factor to each issue in order to gradually bring each in to the index.

It will take me a little time to digest the effect of all these changes. Clearly, they are attempting to make life easier for CPD so that mechanical application of trading rules to a change in relatively small issue doesn’t burn them as badly as POW.PR.C, inter alia, burned them last time.

I find the liquidity requirement to be fascinating. Assiduous Readers will remember that HIMIPref™ has a relatively complex methodology for determining averageTradingValue. This is because preferred share volumes are lumpy: a few block trades can distort a simple mean average considerably. We may well see some issues added that don’t really meet a sensible trading criteria.

Today’s spreadsheet (dated 2010-1-21) from CPD discloses a holding of 0.72% in POW.PR.C compared to the January 19 figure of 0.25% … so we may conclude that CPD is the culprit behind the stupid dumb trading in the TXPR Rebalancing Issues … Assiduous Reader to_be_frank wins a kewpie doll for first spotting the pattern.

Nesbitt – it looks like they are CPD’s agents in this horrific display of gross incompetence – bought 30,000 shares of POW.PR.C today at 25.443 while selling 25,000 at 25.45 (the sale was a single cross, so there’s one institutional investor with a smile on his face, anyway. Give the man a bonus! The other implication is that Nesbitt only bought 5,000 from retail). POW.PR.C closed the day at 25.08-20, 2×10 … so who knows? Maybe things are getting back to normal. POW.PR.C is still trading about 25bp through POW.PR.B at the closing bids, however – despite having significantly more call risk – so they’re still extremely ridiculously expensive.

Fearless Prediction: CPD will show its normally low Trading Expense Ratio on its next financials (the TER shows only commission cost, and makes no attempt to capture the generally much much higher market impact and spread costs). Regulators are very particular about funds reporting their TER, because it’s so VERY VERY important.

Update, 2010-1-22: I have uploaded three charts from HIMIPref™ for your edification and amusement. They compare POW.PR.B (which should normally trade to yield less, due to the lower value of the embedded option) with POW.PR.C:

• YTW
• YTW Difference
• Closing Bid Difference

Yesterday I posted regarding the remarkable performance of POW.PR.C in the past two days and new commenter to_be_frank suggested that it might be due to the TXPR rebalancing.

So, I thought I’d have a look at the index changes in systematic manner:

So, for the year to date, all but one of the adds have outperformed their benchmark (note that lower quality issues are not included in their benchmark) and all of the deletions have underperformed.

This is a very interesting result: it is a reversal of the previously established pattern in which adds would outperform pre-rebalancing and underperform post-rebalancing (although I used a different methodology in the publication; I can’t use the prior method as a template until the current post-rebalancing period ends at the end of February).

While I must bow to the data, of course, I must say I am surprised and will not yet accept the hypothesis (that POW.PR.C et al. owe their relative performance to TXPR) as proven. The trading in POW.PR.C continues to be haywire today, with bazillions of small trades lifting the offer. This method is virtually guaranteed to be an expensive way to rebalance: normally an institutional buyer or seller would take a more gradual approach, adjusting an iceberg order by a nickel or so per day until the whole thing gets filled.

But there are more things in heaven and earth than are dreamt of in my philosophy! I’ve said it before – I’ll say it again: I find it quite challenging enough to determine what’s rich and what’s cheap … figuring out why is quite beyond me.

I just hope it actually is CPD doing the buying, though … these distortions will cost it money and make it easier to beat!

However, it must be borne in mind that while CPD is rapidly achieving gorilla status ($378-million AUM) this does not necessarily mean huge market impact. CPD’s holdings of POW.PR.C were 0.25% of assets on January 19, or a little less than $1-million, about 40,000 shares. It will be most interesting to check this tomorrow and compare with the day’s trading!

Standard & Poor’s has announced (although not yet on their official index news page):

the following index changes as a result of the semi-annual S&P/TSX Preferred Share Index Review. These changes will be effective at the open on Monday, January 18, 2010

The net effect of these changes (counting solely by issue count, not by the undisclosed index weight; and counting HIMIPref™ "Scraps" issues according to their bracketted ‘would be’ subindex) are:

Note: Sorry, folks, but with PrefLetter due out this weekend (among other things), I’m a little pushed for time! I’ll fill in the blanks as soon as I can … but just off the top of my head, it looks like fully half of the additions are below investment grade.

Update, 2010-1-9: Done!

Update, 2010-1-11: It should be noted that the summary tables do not reflect the year-end deletion of the issues that were redeemed, GWO.PR.X (Pfd-1(low), OpRet) and IGM.PR.A (Pfd-2(high), Opret). Thus, the credit quality decline from the last revision is actually more severe than may be inferred from the summary tables of this revision.

Standard & Poor’s has announced:

• • The Series E First Preferred Shares of Great-West Lifeco Inc. (TSX:GWO.PR.X) have been called for redemption on Thursday, December 31, 2009, at $26.00 per share. The shares will be removed from the S&P/TSX Preferred Share Index after the close of Wednesday, December 30, 2009.
• •The 5.75% First Preferred Shares, Series A, of IGM Financial Inc. (TSX:IGM.PR.A) have been called for redemption on Thursday, December 31, 2009, at $26.00 per share. The shares will be removed from the S&P/TSX Preferred Share Index after the close of Wednesday, December 30, 2009.

The GWO.PR.X redemption and the IGM.PR.A redemption have been reported on PrefBlog.

Standard & Poor’s has announced (although not yet on their official index news page):

the following index changes as a result of the semi-annual S&P/TSX Preferred Share Index Review. These changes will be effective at the open on Monday, July 20, 2009

The net effect of these changes (counting solely by issue count, not by the undisclosed index weight; and counting HIMIPref™ "Scraps" issues according to their bracketted ‘would be’ subindex) are:

All in all – and bearing in mind that I am not looking at the (unavailable) weightings, only at the issue counts – it looks like the index is increasingly dominated by the FixedReset structure, and that credit quality has declined marginally.

Thank you S&P! I LOVE indices that are easy to beat! The churning helps a lot, too … keep it going!

Standard & Poors Index Operations has announced:

the following index changes as a result of the semi-annual S&P/TSX Preferred Share Index Review. These changes will be effective at the open on Monday, January 19, 2009

Holy smokes! I wasn’t going to report volume figures … until after a double-take I saw that they have added not just one, but both NSI issues – which trade by appointment only. The very first line on S&P’s Methodology Brochure states:

The S&P/TSX Preferred Share Index is designed to serve the investment community’s need for an investable benchmark representing the Canadian preferred stock market.

… and in the “Eligibility” section …

The index is comprised of preferred stocks trading on the Toronto Stock Exchange that meet criteria relating to size, liquidity, and issuer rating.

… and …

Volume.The preferred stocks must have a minimum trailing three-month average daily value traded of C$100,000 at the time of the rebalancing.

I am stunned that S&P has ruled that the NSI issues meet liquidity requirements. Mind you, these are the guys who attemped to add a redeemed issue last time.

I recently wrote an essay on CPD/TXPR.

In summary and, perforce, ignoring any weightings that S&P might be assigning:

… and …

Assiduous Readers will recall that the Claymore ETF (trading as CPD on the Toronto Exchange) is based on the TXPR Index discussed here.