Category: MAPF

MAPF

eMail To A Client

There has been a very steep decline in the Canadian preferred share index in 2015 – so steep, in fact, that some investors are selling simply because their investment has lost value, which has to be one of the worst trade techniques ever (it imposes a form of negative convexity on your portfolio, among other bad things).

Still, it is unnerving. Look at the graph of the value of an investment in CPD, as published by Blackrock:

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This isn’t the smooth ride that some were expecting! The broad TXPR index was down 4.10% on the month and is down 11.47% over the past year. The FixedReset TXPL index has fared even worse, down 5.31% on the month and a horrific 17.26% on the year. I don’t have figures for the BMO-CM 50 at this time, but if I plug in the TXPR results for July, I can draw the following graph, which shows the rolling twelve month and twenty four month total returns from December 31, 1992:

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So both the one- and two-year returns for the index now show losses exceeded only by the depths of the Credit Crunch in the 20+ years of data I have available. And, I will note, the four year total return for TXPR is now negative – in fact, you have to go back to January, 2011, to find a starting point that will give you a better than zero return through the period.

So I received an eMail from a client that said, in part:

But my real problem is that in trying to decide whether to stay in your fund or pull out, I do not know what I am betting on. The prospect of rising CDN interest rates (seems unlikely that would help), the overall Cdn economy? Something else?

What is your take on what it would take for preferred values to start moving in the right direction?

What follows is my answer, with minor edits to ensure anonymity and to reflect the medium of the message.

I can appreciate your concern.

Your first investment was valued on 2012-11-19; the second on 2013-1-21.

From the end of November, 2012, to June, 2015, the fund’s total return (reinvesting dividends, before fees) was -0.35%, compared to the BMO-CM “50” index return of -3.64%. TXPR (the broad S&P/TSX Preferred Share index) returned -4.04%, while TXPL (S&P/TSX, FixedResets only) returned -9.65%.

For the period beginning 2013-1-31 I find: Fund, -1.95%; BMO, -4.86%; TXPR, -5.56%; TXPL, -11.42%.

So the problem is not with the fund so much as it is with the market.

The indices are currently comprised of about 1/3 Straight Perpetuals, 2/3 FixedResets. For an idea of what has happened to Straights, see the attached Chart #22 from the July PrefLetter, which shows the interest-equivalent spread between Straight Perpetuals and long-term Corporate bonds (the “Seniority Spread”).

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Market Yields changed as follows, from November 28, 2012 to June 30 , 2015
Five Year Canadas: 1.31% … 0.81%
Long Canadas: 2.38% … 2.37%
Long Corporates: 4.2% … 4.0%
Straight Perpetuals: 4.88% … 5.20%
Interest-Equivalent Straight Perpetuals: 6.35% … 6.76%

These changes have had the effect of widening the Seniority Spread from 215bp to 276bp. I can think of two rationales for this widening:
i) the retail investors who dominate the preferred share space are demanding a higher spread to compensate for perceived risks of losses once “interest rates start to rise”; that is, they are reacting more than the institutional investors in the bond market to risks of loss. This could be due to higher risk-aversion (defining “risk” as chance of loss), less binding duration constraints on the portfolio, simple lack of sophistication, or any combination of these three considerations. Note that I have not made a formal study of the subject and there may be other factors, but those are the ones that occur to me through my experience talking to investors.
ii) Straight Perpetual yields are being pushed up (or at least supported) by FixedReset yields (see chart FR-44, below, from the extract from the July PrefLetter ). This would be due to a perception amongst investors that Straight Perpetuals are more “risky” (whatever that means!) than FixedResets and hence deserving of a positive spread; note that this effect is not observed when comparing sovereign inflation-indexed bonds to nominals (the Inflation Risk Premium).

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These spreads use Yield-To-Worst, not Current Yield
This is Chart FR-44

With respect to FixedResets, it is clear from the horrible performance of TXPL referenced above relative to that of the broader TXPR (which one can approximate as being comprised of about 2/3 TXPL throughout the period of interest, although it has, of course, varied, with FixedReset issuance slightly overcompensating for capital losses) that FixedResets have been whacked.

I have hypothesized a rationale for this underperformance in the attached extract from PrefLetter under the heading “An Experimental Data Series”, to wit: in the face of declines in the Five-Year Canada yield (which is the basis for the resets of of this type of preferred share), investors are attempting to maintain a constant yield irregardless of what is happening with other yields. This is hard to justify on rational grounds, but there has always been an element of irrationality in preferred share pricing! Thus, declines in the GOC-5 yield have been 100% compensated for by declines in price, without referencing yields of comparable long-term instruments; this contradicts one of the features of FixedResets that was used (perhaps inadvertently through indiscriminate use of the term “interest rates”) to help sell the issues when they were developed – that price would remain constant given parallel shifts in the yield curve (with credit spreads assumed, again implicitly, to be constant).

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This 100% dependence of FixedReset price on GOC-5 has a very large effect, as derived in the last equation on page 3 of the extract:
i) The base Modified Duration of FixedResets is equal to (1 / EFCY). The term EFCY (“Expected Future Current Yield”) is about 3.75%, implying a Modified Duration of about 27 – not only far higher than long bonds, but dependent upon more volatile five-year yields to boot!
ii) The term (25/P) in the equation implies negative convexity

So to summarize, I feel that the poor performance of the market since your initial investment is due to:
i) very high dependence of FixedReset prices on GOC-5 levels, which has contradicted prior assumptions of an equal and opposite co-dependence on long-term yield levels.
ii) maintenance of a spread to PerpetualDiscounts, which has prevented Straight Perpetuals from participating in price increases due to declines in long-term corporate yields.

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The “Bozo Spread” is the Current Yield of PerpetualDiscounts less the Current Yield of FixedResets
It is not yet clear whether the market pays more attention to these Current Yields, or to the Yields-to-Worst, when relating FixedResets to PerpetualDiscounts

I will also note that to a certain extent, we’ve seen this movie before: during the Credit Crunch Floating Rate issues performed appallingly poorly, since their dividends were linked to contemporary (as opposed to expected!) Canada Prime while their yields were linked to PerpetualDiscounts (see my contemporary article and the next chart)

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Negative Total Return Over Fifteen Years!

So, while I can appreciate your dismay regarding the performance of your investment, I will point out that:
i) the key consideration is not past performance but how the characteristics of the asset class may be expected to fit into your portfolio requirements going forward.

ii) Expected income per unit in the fund has actually increased over the period, from $0.4643 in December 2012 to $0.5217 in June 2015 (see MAPF Performance: June 2015 ). This calculation is dependent upon various assumptions which you may or may not accept, but it represents my best guess!

iii) The increase in spreads over the period implies a significant reduction in expected income should you switch to another Fixed Income type of investment at this time.

iv) Expected future performance of FixedResets is highly geared to GOC-5, insofar as we can accept that the last equation on page 3 of the July PrefLetter extract reflects market reality. While I agree that we might be waiting a while for GOC-5 to increase substantially, I will suggest that current levels must be at or near a bottom. Mind you, I’ve been suggesting that continually for several years now and been wrong every time, so you may wish to disregard that particular exercise in market timing!

v) Expected future performance of Straights should be better than that of corporate long bonds over the medium term; and corporate long bonds should in turn outperform long Canadas; in both cases due to moderation of current high (by historical standards) spreads

I hope all this helps. I realize that I have used a fair bit of jargon in this eMail (and, what’s worse, jargon that I’ve developed myself!) so if there is anything in the above that makes no sense, feel free to ask for clarification. And, of course, if you would like to discuss this further prior to making an investment decision, that’s fine too – whether by eMail or telephone.

Sincerely,

MAPF

MAPF Performance: June, 2015

The fund underperformed the BMO-CM “50” in June.

ZPR, is an ETF comprised of FixedResets and Floating Rate issues and a very high proportion of junk issues, returned -3.77%, -4.37% and -12.61% over the past one-, three- and twelve-month periods, respectively (according to the fund’s data), versus returns for the TXPL index of -3.78%, -4.50% and -12.34% respectively. The fund has been able to attract assets of about $987.6-million since inception in November 2012; AUM declined by $112-million in June; given an index return of -3.78% a decrease of about $42-million was expected, so there was a significant cash outflow over the month. I feel that the flows into and out of this fund are very important in determining the performance of its constituents.

TXPR had returns over one-, three- and twelve-months of -3.10%, -3.93% and -7.40% respectively with CPD performance within expectations.

Returns for the HIMIPref™ investment grade sub-indices for the month were as follows:

HIMIPref™ Indices Performance to June 30, 2015
Sub-Index	1-Month	3-month
Ratchet	N/A	N/A
FixFloat	N/A	N/A
Floater	-0.58%	-5.11%
OpRet	-0.25%	+0.24%
SplitShare	-0.16%	+1.05%
Interest	N/A	N/A
PerpetualPremium	-0.27%	-0.49%
PerpetualDiscount	-3.61%	-5.75%
FixedReset	-2.60%	-3.22%
DeemedRetractible	-0.60%	-1.48%
FloatingReset	-0.39%	-1.29%

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close June 30, 2015, was $9.4181 after a dividend distribution of 0.128623

Returns to June 30, 2015
Period	MAPF	BMO-CM “50” Index	TXPR Total Return	CPD – according to Blackrock
One Month	-3.56%	-2.73%	-3.10%	N/A
Three Months	-4.12%	-3.44%	-3.93%	N/A
One Year	-6.49%	-7.44%	-7.40%	-7.61%
Two Years (annualized)	+0.46%	-2.17%	-2.13%	N/A
Three Years (annualized)	+2.32%	-0.47%	-0.61%	-1.05%
Four Years (annualized)	+1.70%	+0.77%	+0.51%	N/A
Five Years (annualized)	+5.07%	+3.33%	+2.62%	+2.08%
Six Years (annualized)	+7.53%	+4.83%	+3.76%
Seven Years (annualized)	+11.91%	+4.10%	+3.24%
Eight Years (annualized)	+9.73%	+3.01%	+2.00%
Nine Years (annualized)	+9.22%	+2.63%
Ten Years (annualized)	+8.74%	+2.64%
Eleven Years (annualized)	+8.84%	+2.99%
Twelve Years (annualized)	+9.76%	+3.10%
Thirteen Years (annualized)	+9.55%	+3.46%
Fourteen Years (annualized)	+9.96%	+3.44%
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
CPD Returns are for the NAV and are after all fees and expenses.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -2.51%, -2.95% and -4.25%, respectively, according to Morningstar after all fees & expenses. Three year performance is +0.82%; five year is +3.50%
Figures for Manulife Preferred Income Class Adv [into which was merged Manulife Preferred Income Fund (formerly AIC Preferred Income Fund)] (which are after all fees and expenses) for 1-, 3- and 12-months are -3.61%, -4.55% & N/A, respectively.
Figures for Horizons AlphaPro Preferred Share ETF (which are after all fees and expenses) for 1-, 3- and 12-months are -2.58%, -3.27% & -5.86%, respectively. Three year performance is +0.38%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -2.63%, -3.55% and -7.22% for one-, three- and twelve months, respectively.
The figure for BMO S&P/TSX Laddered Preferred Share Index ETF is -3.77%, -4.37% and -12.61% for one-, three- and twelve-months, respectively. Two year performance is -5.80%.
Figures for NexGen Canadian Preferred Share Tax Managed Fund (Dividend Tax Credit Class, the best performing) are -3.1%, -3.8% and -1.0% for one-, three- and twelve-months, respectively.
Figures for BMO Preferred Share Fund are -3.72% and -6.81% for the past three- and twelve-months, respectively.
Figures for PowerShares Canadian Preferred Share Index Class, Series Fare -3.32%, -4.45% and -8.76% for the past one, three and twelve months, respectively. The three- and five-year figures are -2.36% and +0.90%, respectively.
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are -3.47%, -5.32% and -9.19% for the past one, three and twelve months, respectively. The two-, three-, four- and five-year figures are -4.35%, -2.37%, -1.47% and +0.13, 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. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

A problem that has bedevilled the market over the past four years has been the OSFI decision not to grandfather Straight Perpetuals as Tier 1 bank capital, and their continued foot-dragging regarding a decision on insurer Straight Perpetuals has segmented the market to the point where trading has become much more difficult. Until the market became so grossly segmented, there were many comparables for any given issue – but now banks are not available to swap into (because they are so expensive) and non-regulated companies are likewise deprecated (because they are not DeemedRetractibles; they should not participate in the increase in value that will follow the OSFI decision I anticipate and, in addition, are analyzed as perpetuals). The fund’s portfolio was, in effect ‘locked in’ to the low coupon DeemedRetractibles due to projected long-term gains from a future OSFI decision to the detriment of trading gains, particularly in May, 2013, when the three lowest-coupon SLF DeemedRetractibles (SLF.PR.C, SLF.PR.D and SLF.PR.E) were the worst performing DeemedRetractibles in the sub-index, and in June, 2013, when the insurance-issued DeemedRetractibles behaved like PerpetualDiscounts in a sharply negative market. Nowadays, the fund is ‘locked-in’ to the low-spread FixedResets from these companies: GWO.PR.N, MFC.PR.F, and SLF.PR.G.

In May, insurance DeemedRetractibles performed worse than bank DeemedRetractibles:

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… but better than Unregulated Straight Perpetuals.

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Correlations were very poor for banks (-1%; not shown), not much good for insurance (4%; not shown) but quite good for unregulated issues (67%).

A lingering effect of the downdraft of 2013 has been the return of measurable Implied Volatility but given my recent updates in recent daily market reports, I will not discuss them further in this post.

Sometimes everything works … sometimes it’s 50-50 … 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’ – although for quite some time, noise trading has taken a distant second place to the sectoral play on insurance DeemedRetractibles; something that dismays me, particularly given that the market does not yet agree with me regarding the insurance issues! There were a lot of strongly motivated market participants during the Panic of 2007, generating a lot of noise! Unfortunately, the conditions of the Panic may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, without worrying about the level of monthly turnover.

There’s plenty of room for new money left in the fund. I have shown in PrefLetter that market pricing for FixedResets is very often irrational and I have lots of confidence – backed up by my bond portfolio management experience in the markets for Canadas and Treasuries, and equity trading on the NYSE & TSX – that there is enough demand for liquidity in any market to make the effort of providing it worthwhile (although the definition of “worthwhile” in terms of basis points of outperformance changes considerably from market to market!) I will continue to exert utmost efforts to outperform but it should be borne in mind that there will almost inevitably be periods of underperformance in the future.

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	Capital Gains Multiplier	Sustainable Income per current Unit
June, 2007	9.3114	5.16%	1.03	5.01%	1.3240	0.3524
September	9.1489	5.35%	0.98	5.46%	1.3240	0.3773
December, 2007	9.0070	5.53%	0.942	5.87%	1.3240	0.3993
March, 2008	8.8512	6.17%	1.047	5.89%	1.3240	0.3938
June	8.3419	6.034%	0.952	6.338%	1.3240	$0.3993
September	8.1886	7.108%	0.969	7.335%	1.3240	$0.4537
December, 2008	8.0464	9.24%	1.008	9.166%	1.3240	$0.5571
March 2009	$8.8317	8.60%	0.995	8.802%	1.3240	$0.5872
June	10.9846	7.05%	0.999	7.057%	1.3240	$0.5855
September	12.3462	6.03%	0.998	6.042%	1.3240	$0.5634
December 2009	10.5662	5.74%	0.981	5.851%	1.1141	$0.5549
March 2010	10.2497	6.03%	0.992	6.079%	1.1141	$0.5593
June	10.5770	5.96%	0.996	5.984%	1.1141	$0.5681
September	11.3901	5.43%	0.980	5.540%	1.1141	$0.5664
December 2010	10.7659	5.37%	0.993	5.408%	1.0298	$0.5654
March, 2011	11.0560	6.00%	0.994	5.964%	1.0298	$0.6403
June	11.1194	5.87%	1.018	5.976%	1.0298	$0.6453
September	10.2709	6.10% Note	1.001	6.106%	1.0298	$0.6090
December, 2011	10.0793	5.63% Note	1.031	5.805%	1.0000	$0.5851
March, 2012	10.3944	5.13% Note	0.996	5.109%	1.0000	$0.5310
June	10.2151	5.32% Note	1.012	5.384%	1.0000	$0.5500
September	10.6703	4.61% Note	0.997	4.624%	1.0000	$0.4934
December, 2012	10.8307	4.24%	0.989	4.287%	1.0000	$0.4643
March, 2013	10.9033	3.87%	0.996	3.886%	1.0000	$0.4237
June	10.3261	4.81%	0.998	4.80%	1.0000	$0.4957
September	10.0296	5.62%	0.996	5.643%	1.0000	$0.5660
December, 2013	9.8717	6.02%	1.008	5.972%	1.0000	$0.5895
March, 2014	10.2233	5.55%	0.998	5.561%	1.0000	$0.5685
June	10.5877	5.09%	0.998	5.100%	1.0000	$0.5395
September	10.4601	5.28%	0.997	5.296%	1.0000	$0.5540
December, 2014	10.5701	4.83%	1.009	4.787%	1.0000	$0.5060
March, 2015	9.9573	4.99%	1.001	4.985%	1.0000	$0.4964
June, 2015	9.4181	5.55%	1.002	5.539%	1.0000	$0.5217
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.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.
Calculations of resettable instruments are performed assuming constant contemporary GOC-5 and 3-Month Bill rates. For June 30, 2015, yields of 0.91% and 0.52%, respectively, were assumed.

Significant positions were held in DeemedRetractible, SplitShare and NVCC non-compliant regulated FixedReset issues on June 30; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies) or on a different date (SplitShares) This presents another complication in the calculation of sustainable yield, which also assumes that redemption proceeds will be reinvested at the same rate.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

I no longer show calculations that assume the conversion of the entire portfolio into PerpetualDiscounts, as the fund has only a small position in these issues.

Most funds report Current Yield. For instance, ZPR reports a “Dividend Yield” of 4.5% as of August 29, 2014, but this is the Current Yield, a meaningless number. The Current Yield of MAPF was 4.89% as of August 29, but I will neither report that with any degree of prominence nor take any great pleasure in the fact that it’s a little higher than the ZPR number. It’s meaningless; to discuss it in the context of portfolio reporting is misleading.

However, BMO has taken a significant step forward in that they are no longer reporting the “Portfolio Yield” directly on their website; the information is taken from the “Enhanced Fund Profile” which is available only as a PDF link. CPD doesn’t report this metric on the CPD fact sheet or on their website. I may have one less thing to mock the fundcos about!

It should be noted that the concept of this Sustainable Income calculation was developed when the fund’s holdings were overwhelmingly PerpetualDiscounts – see, for instance, the bottom of the market in November 2008. It is easy to understand that for a PerpetualDiscount, the technique of multiplying yield by price will indeed result in the coupon – a PerpetualDiscount paying $1 annually will show a Sustainable Income of $1, regardless of whether the price is $24 or $17.

Things are not quite so neat when maturity dates and maturity prices that are different from the current price are thrown into the mix. If we take a notional Straight Perpetual paying $5 annually, the price is $100 when the yield is 5% (all this ignores option effects). As the yield increases to 6%, the price declines to 83.33; and 83.33 x 6% is the same $5. Good enough.

But a ten year bond, priced at 100 when the yield is equal to its coupon of 5%, will decline in price to 92.56; and 92.56 x 6% is 5.55; thus, the calculated Sustainable Income has increased as the price has declined as shown in the graph:

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The difference is because the bond’s yield calculation includes the amortization of the discount; therefore, so does the Sustainable Income estimate.

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the long-term 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 has generally been due to 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.

Issue Comments

Low Spread FixedResets: June 2015

As noted in MAPF Portfolio Composition: June 2015, the fund now has a large allocation to FixedResets, mostly of relatively low spread.

Many of these were largely purchased with proceeds of sales of DeemedRetractibles from the same issuer; it is interesting to look at the price trend of some of the Straight/FixedReset pairs. We’ll start with GWO.PR.N / GWO.PR.I; the fund sold the latter to buy the former at a takeout of about $1.00 in mid-June, 2014; relative prices over the past year are plotted as:

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Given that the June month-end take-out was $5.84, this is clearly a trade that has not worked out very well.

In July, 2014, I reported sales of SLF.PR.D to purchase SLF.PR.G at a take-out of about $0.15:

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There were similar trades in August, 2014 (from SLF.PR.C) at a take-out of $0.35. The June month-end take-out (bid price SLF.PR.D less bid price SLF.PR.G) was $6.18, so that hasn’t worked very well either.

November saw the third insurer-based sector swap, as the fund sold MFC.PR.C to buy the FixedReset MFC.PR.F at a post-dividend-adjusted take-out of about $0.85 … given a June month-end take-out of $5.10, that’s another regrettable trade, although another piece executed in December at a take-out of $1.57 has less badly.

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This trend is not restricted to the insurance sector, which I expect will become subject to NVCC rules in the relatively near future and are thus subject to the same redemption assumptions I make for DeemedRetractibles. Other pairs of interest are BAM.PR.X / BAM.PR.N:

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… and FTS.PR.H / FTS.PR.J:

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… and PWF.PR.P / PWF.PR.S:

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I will agree that the fund’s trades highlighted in this post may be decried as cases of monumental bad timing, but I should point out that in May, 2014, the fund was 63.9% Straight / 9.5% FixedReset while in May 2015 the fund was 12% Straight / 86% FixedReset, FloatingReset and FixedFloater (The latter figures include allocations from those usually grouped as ‘Scraps’). Given that the indices are roughly 30% Straight / 60% FixedReset & FloatingReset, it is apparent that the fund was extremely overweighted in Straights / underweighted in FixedResets in May 2014 but this situation has now reversed. HIMIPref™ analytics have been heavily favouring low-spread issues and the fund’s holdings are overwhelmingly of this type.

Summarizing the charts above in tabular form, we see:

FixedReset	Straight	Take-out December 2013	Take-out MAPF Trade	Take-out December 2014	May 2015	June 2015
GWO.PR.N 3.65%+130	GWO.PR.I 4.5%	($0.04)	$1.00	$2.95	6.46	5.84
SLF.PR.G 4.35%+141	SLF.PR.D 4.45%	($1.29)	$0.25	$2.16	5.61	6.18
MFC.PR.F 4.20%+141	MFC.PR.C 4.50%	($1.29)	$0.86	$1.20	4.98	5.10
BAM.PR.X 4.60%+180	BAM.PR.N 4.75%	($2.06)		$0.17	3.62	3.57
FTS.PR.H 4.25%+145	FTS.PR.J 4.75%	$0.60		$5.68	8.02	6.40
PWF.PR.P 4.40%+160	PWF.PR.S 4.80%	($0.67)		$3.00	6.71	5.96
The ‘Take-Out’ is the bid price of the Straight less the bid price of the FixedReset; approximate execution prices are used for the “MAPF Trade” column. Bracketted figures in the ‘Take-Out’ columns indicate a ‘Pay-Up’

Changes were varied from May month-end to June month-end.

In January, a slow decline due to fears of deflation got worse with Canada yields plummeting after the Bank of Canada rate cut with speculation rife about future cuts although this slowly died away.

And in late March / early April it got worse again, with one commenter attributing at least some of the blame to the John Heinzl piece in which I pointed out the expected reduction in dividend payouts! In May, a rise in the markets in the first half of the month was promptly followed by a slow decline in the latter half; perhaps due to increased fears that a lousy Canadian economy will delay a Canadian tightening. Changes in June varied as the markets were in an overall decline.

All in all, I take the view that we’ve seen this show before: during the Credit Crunch, Floaters got hit extremely badly (to the point at which their fifteen year total return was negative) because (as far as I can make out) their dividend rate was dropping (as it was linked to Prime) while the yields on other perpetual preferred instruments were skyrocketing (due to credit concerns). Thus, at least some investors insisted on getting long term corporate yields from rates based (indirectly and with a lag, in the case of FixedResets) on short-term government policy rates. And it’s happening again!

Here’s the June performance for FixedResets that had a YTW Scenario of ‘To Perptuity’ at mid-month.:

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The market continues to be rather disorderly; correlations between Issue Reset Spread and monthly performance for June are basically zero. Interestingly, the correlation for the Pfd-2 Group issues against term to reset was a little better, although still lousy at 10%.

Click for Big

MAPF

MAPF Portfolio Composition: June, 2015

Turnover remained low in June at about 5%.

There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:

Unaffected Straight Perpetuals
DeemedRetractibles explicitly subject to the rules (banks)
DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading. Another trend that hasn’t helped was the migration of PerpetualDiscounts into PerpetualPremiums (due to price increases) in early 2013 – many of the PerpetualPremiums had negative Yields-to-Worst and those that don’t aren’t particularly thrilling; speaking very generally, PerpetualPremiums are to be avoided, not traded! While market weakness since the peak of the PerpetualDiscount subindex in May, 2013, has mitigated the situation somewhat, the population of PerpetualDiscounts is still exceeded by that of PerpetualPremiums – many of which are trading at a negative Yield-to-Worst.

To make this more clear, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to other Straights, I also have to check its peer group. This cuts down on the potential for trading.

There is no real hope that this situation will be corrected in the near-term. OSFI has indicated that the long-promised “Draft Definition of Capital” for insurers will not be issued “for public consultation in late 2012 or early 2013”, as they fear that it might encourage speculation in the marketplace. It is not clear why OSFI is so afraid of informed speculation, since the constant speculation in the marketplace is currently less informed than it would be with a little bit of regulatory clarity.

As a result of this delay, I have extended the Deemed Maturity date for insurers and insurance holding companies by three years (to 2025-1-31), in the expectation that when OSFI finally does provide clarity, they will allow the same degree of lead-in time for these companies as they did for banks. This had a major effect on the durations of preferred shares subject to the change but, fortunately, not much on their calculated yields as most of these issues were either trading near par when the change was made or were trading at sufficient premium that a par call was expected on economic grounds. However, with the declines in the market over the past nine months, the expected capital gain on redemption of the insurance-issued DeemedRetractibles has become an important component of the calculated yield.

Due to further footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another two years in the near future.

Sectoral distribution of the MAPF portfolio on June 30 was as follows:

MAPF Sectoral Analysis 2015-6-30
HIMI Indices Sector	Weighting	YTW	ModDur
Ratchet	0%	N/A	N/A
FixFloat	0%	N/A	N/A
Floater	0%	N/A	N/A
OpRet	0%	N/A	N/A
SplitShare	0% (-3.9)	N/A	N/A
Interest Rearing	0%	N/A	N/A
PerpetualPremium	0%	N/A	N/A
PerpetualDiscount	1.9% (+0.9)	5.74%	14.33
Fixed-Reset	71.4% (+5.2)	5.57%	11.50
Deemed-Retractible	9.6% (-0.1)	5.88%	7.62
FloatingReset	6.4% (-0.7)	3.79%	17.85
Scraps (Various)	10.9% (-0.1)	6.09%	12.91
Cash	-0.2% (-1.3)	0.00%	0.00
Total	100%	5.55%	11.76
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from May month-end. Cash is included in totals with duration and yield both equal to zero.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section) Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue.
Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 0.91% and a constant 3-Month Bill rate of 0.6%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2015-6-30
DBRS Rating	Weighting
Pfd-1	0 (0)
Pfd-1(low)	19.8% (+1.5)
Pfd-2(high)	30.0% (+0.7)
Pfd-2	0%
Pfd-2(low)	39.5% (-0.7)
Pfd-3(high)	1.8% (0)
Pfd-3	4.3% (-0.1)
Pfd-3(low)	4.2% (-0.1)
Pfd-4(high)	0% (0)
Pfd-4	0%
Pfd-4(low)	0% (0)
Pfd-5(high)	0% (0)
Pfd-5	0.6% (+0.1)
Cash	-0.2% (-1.3)
Totals will not add precisely due to rounding. Bracketted figures represent change from May month-end.
The fund holds a position in AZP.PR.C, which is rated P-5 by S&P and is unrated by DBRS
A position held in NPI.PR.A is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3(high).
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

Liquidity Distribution is:

MAPF Liquidity Analysis 2015-6-30
Average Daily Trading	Weighting
<$50,000	11.1% (+8.5)
$50,000 – $100,000	4.1% (+1.9)
$100,000 – $200,000	55.7% (+15.3)
$200,000 – $300,000	22.4% (-15.6)
>$300,000	7.0% (-8.6)
Cash	-0.2% (-1.3)
Totals will not add precisely due to rounding. Bracketted figures represent change from May month-end.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of August 31, 2012, and published in the October (mainly methodology), November (most funds), and December (ZPR) 2012, PrefLetter. While direct comparisons are difficult due to the introduction of the DeemedRetractible class of preferred share (see above) it is fair to say:

MAPF credit quality is better
MAPF liquidity is a bit lower
MAPF Yield is higher
Weightings
- MAPF is less exposed to Straight Perpetuals (including DeemedRetractibles)
- MAPF is less exposed to Operating Retractibles
- MAPF is more exposed to SplitShares
- MAPF is less exposed to FixFloat / Floater / Ratchet
- MAPF is overweighted in FixedResets

MAPF

MAPF Performance: May 2015

The fund slightly outperformed the TXPR index in May (the BMO-CM “50” index returns are not yet available), a month marked by a good upswing in the first half and steady losses in the second half.

ZPR, is an ETF comprised of FixedResets and Floating Rate issues and a very high proportion of junk issues, returned +%, +% and +% over the past one-, three- and twelve-month periods, respectively (according to the fund’s data), versus returns for the TXPL index of -0.20%, -1.52% and -7.38% respectively. The fund has been able to attract assets of about $1,099-million $1,111-million since inception in November 2012; AUM declined by $12-million in May; given an index return of -0.20% a decrease of about $2-million was expected, so in May 2015 the fund had a relatively rare cash outflow. I feel that the flows into and out of this fund are very important in determining the performance of its constituents.

TXPR had returns over one-, three- and twelve-months of -0.49%, -1.39% and -3.11% respectively with CPD performance within expectations.

Returns for the HIMIPref™ investment grade sub-indices for the month were as follows:

HIMIPref™ Indices Performance to May 29, 2015
Sub-Index	1-Month	3-month
Ratchet	N/A	N/A
FixFloat	N/A	N/A
Floater	-0.59%	-1.81%
OpRet	+0.58%	+0.90%
SplitShare	+0.78%	+1.41%
Interest	N/A	N/A
PerpetualPremium	+0.05%	+0.14%
PerpetualDiscount	-0.45%	-1.35%
FixedReset	-0.11%	-0.48%
DeemedRetractible	-0.42%	-0.58%
FloatingReset	+0.66%	+0.50%

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close May 29, 2015, was $9.8993

Returns to May 29, 2015
Period	MAPF	BMO-CM “50” Index	TXPR Total Return	CPD – according to Blackrock
One Month	-0.37%	-0.52%	-0.49%	N/A
Three Months	+0.37%	-0.72%	-1.31%	N/A
One Year	-1.69%	-3.36%	-3.11%	-3.36%
Two Years (annualized)	+0.41%	-1.49%	-1.68%	N/A
Three Years (annualized)	+3.47%	+0.66%	+0.69%	+0.24%
Four Years (annualized)	+2.46%	+1.47%	+1.34%	N/A
Five Years (annualized)	+6.97%	+4.49%	+3.81%	+3.25%
Six Years (annualized)	+9.05%	+5.60%	+4.56%
Seven Years (annualized)	+11.43%	+3.99%	+3.06%
Eight Years (annualized)	+10.30%	+3.23%
Nine Years (annualized)	+9.72%	+2.98%
Ten Years (annualized)	+9.26%	+2.99%
Eleven Years (annualized)	+9.35%	+3.33%
Twelve Years (annualized)	+10.30%	+3.40%
Thirteen Years (annualized)	+10.00%	+3.74%
Fourteen Years (annualized)	+10.45%	+3.60%
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
CPD Returns are for the NAV and are after all fees and expenses.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are +0.10%, -0.93% and -0.68%, respectively, according to Morningstar after all fees & expenses. Three year performance is +1.84%; five year is +4.65%
Figures for Manulife Preferred Income Class Adv [into which was merged Manulife Preferred Income Fund (formerly AIC Preferred Income Fund)] (which are after all fees and expenses) for 1-, 3- and 12-months are -0.42%, -1.76% & N/A, respectively.
Figures for Horizons AlphaPro Preferred Share ETF (which are after all fees and expenses) for 1-, 3- and 12-months are -0.36%, -1.02% & -2.16%, respectively. Three year performance is +1.49%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -0.46%, -1.32% and -3.46% for one-, three- and twelve months, respectively.
The figure for BMO S&P/TSX Laddered Preferred Share Index ETF is -0.21%, -1.41% and -7.75% for one-, three- and twelve-months, respectively. Two year performance is -4.95%.
Figures for NexGen Canadian Preferred Share Tax Managed Fund (Dividend Tax Credit Class, the best performing) are +%, +% and +% for one-, three- and twelve-months, respectively.
Figures for BMO Preferred Share Fund are -1.64% and -3.03% for the past three- and twelve-months, respectively.
Figures for PowerShares Canadian Preferred Share Index Class, Series Fare -0.36%, -2.46% and -4.49% for the past one, three and twelve months, respectively. The three- and five-year figures are -1.03% and +2.18%, respectively.
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are -0.22%, -2.27% and -4.93% for the past one, three and twelve months, respectively. The two-, three-, four- and five-year figures are -3.43%, -1.11%, -0.67% and +1.26%, respectively.

In May, insurance DeemedRetractibles performed worse than bank DeemedRetractibles:

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… and a little worse than Unregulated Straight Perpetuals.

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Correlations were very poor for banks (5%; not shown), not much good for insurance (9%; not shown) but quite reasonable for unregulated issues (52%).

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	Capital Gains Multiplier	Sustainable Income per current Unit
June, 2007	9.3114	5.16%	1.03	5.01%	1.3240	0.3524
September	9.1489	5.35%	0.98	5.46%	1.3240	0.3773
December, 2007	9.0070	5.53%	0.942	5.87%	1.3240	0.3993
March, 2008	8.8512	6.17%	1.047	5.89%	1.3240	0.3938
June	8.3419	6.034%	0.952	6.338%	1.3240	$0.3993
September	8.1886	7.108%	0.969	7.335%	1.3240	$0.4537
December, 2008	8.0464	9.24%	1.008	9.166%	1.3240	$0.5571
March 2009	$8.8317	8.60%	0.995	8.802%	1.3240	$0.5872
June	10.9846	7.05%	0.999	7.057%	1.3240	$0.5855
September	12.3462	6.03%	0.998	6.042%	1.3240	$0.5634
December 2009	10.5662	5.74%	0.981	5.851%	1.1141	$0.5549
March 2010	10.2497	6.03%	0.992	6.079%	1.1141	$0.5593
June	10.5770	5.96%	0.996	5.984%	1.1141	$0.5681
September	11.3901	5.43%	0.980	5.540%	1.1141	$0.5664
December 2010	10.7659	5.37%	0.993	5.408%	1.0298	$0.5654
March, 2011	11.0560	6.00%	0.994	5.964%	1.0298	$0.6403
June	11.1194	5.87%	1.018	5.976%	1.0298	$0.6453
September	10.2709	6.10% Note	1.001	6.106%	1.0298	$0.6090
December, 2011	10.0793	5.63% Note	1.031	5.805%	1.0000	$0.5851
March, 2012	10.3944	5.13% Note	0.996	5.109%	1.0000	$0.5310
June	10.2151	5.32% Note	1.012	5.384%	1.0000	$0.5500
September	10.6703	4.61% Note	0.997	4.624%	1.0000	$0.4934
December, 2012	10.8307	4.24%	0.989	4.287%	1.0000	$0.4643
March, 2013	10.9033	3.87%	0.996	3.886%	1.0000	$0.4237
June	10.3261	4.81%	0.998	4.80%	1.0000	$0.4957
September	10.0296	5.62%	0.996	5.643%	1.0000	$0.5660
December, 2013	9.8717	6.02%	1.008	5.972%	1.0000	$0.5895
March, 2014	10.2233	5.55%	0.998	5.561%	1.0000	$0.5685
June	10.5877	5.09%	0.998	5.100%	1.0000	$0.5395
September	10.4601	5.28%	0.997	5.296%	1.0000	$0.5540
December, 2014	10.5701	4.83%	1.009	4.787%	1.0000	$0.5060
March, 2015	9.9573	4.99%	1.001	4.985%	1.0000	$0.4964
May, 2015	9.8993	5.25%	0.989	5.308%	1.0000	$0.5255
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.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.
Calculations of resettable instruments are performed assuming constant contemporary GOC-5 and 3-Month Bill rates. For May, 2015, yields of 1.05% and 0.61%, respectively, were assumed.

Significant positions were held in DeemedRetractible, SplitShare and NVCC non-compliant regulated FixedReset issues on May 29; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies) or on a different date (SplitShares) This presents another complication in the calculation of sustainable yield, which also assumes that redemption proceeds will be reinvested at the same rate.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas (set at 1.40% for the December 31 calculation and 0.88% for the March 31 calculation) to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

I no longer show calculations that assume the conversion of the entire portfolio into PerpetualDiscounts, as the fund has only a small position in these issues.

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The difference is because the bond’s yield calculation includes the amortization of the discount; therefore, so does the Sustainable Income estimate.

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 has generally been due to exploitation of trading anomalies.

Issue Comments

Low Spread FixedResets: May 2015

As noted in MAPF Portfolio Composition: May 2015, the fund now has a large allocation to FixedResets, mostly of relatively low spread.

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Given that the May month-end take-out was $6.46, this is clearly a trade that has not worked out very well.

In July, 2014, I reported sales of SLF.PR.D to purchase SLF.PR.G at a take-out of about $0.15:

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There were similar trades in August, 2014 (from SLF.PR.C) at a take-out of $0.35. The April month-end take-out (bid price SLF.PR.D less bid price SLF.PR.G) was $5.61, so that hasn’t worked very well either.

November saw the third insurer-based sector swap, as the fund sold MFC.PR.C to buy the FixedReset MFC.PR.F at a post-dividend-adjusted take-out of about $0.85 … given a May month-end take-out of about $4.88, that’s another regrettable trade, although another piece executed in December at a take-out of $1.57 has less badly.

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… and FTS.PR.H / FTS.PR.J:

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… and PWF.PR.P / PWF.PR.S:

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I will agree that the fund’s trades highlighted in this post may be decried as cases of monumental bad timing, but I should point out that in May, 2014, the fund was 63.9% Straight / 9.5% FixedReset while in May 2015 the fund was 11% Straight / 82% FixedReset, FloatingReset and FixedFloater (The latter figures include allocations from those usually grouped as ‘Scraps’). Given that the indices are roughly 30% Straight / 60% FixedReset & FloatingReset, it is apparent that the fund was extremely overweighted in Straights / underweighted in FixedResets in May 2014 but this situation has now reversed. HIMIPref™ analytics have been heavily favouring low-spread issues and the fund’s holdings are overwhelmingly of this type.

Summarizing the charts above in tabular form, we see:

FixedReset	Straight	Take-out December 2013	Take-out MAPF Trade	Take-out December 2014	Take-out April 2015	May 2015
GWO.PR.N 3.65%+130	GWO.PR.I 4.5%	($0.04)	$1.00	$2.95	$5.69	6.46
SLF.PR.G 4.35%+141	SLF.PR.D 4.45%	($1.29)	$0.25	$2.16	$6.25	5.61
MFC.PR.F 4.20%+141	MFC.PR.C 4.50%	($1.29)	$0.86	$1.20	$5.35	4.98
BAM.PR.X 4.60%+180	BAM.PR.N 4.75%	($2.06)		$0.17	$4.18	3.62
FTS.PR.H 4.25%+145	FTS.PR.J 4.75%	$0.60		$5.68	$8.07	8.02
PWF.PR.P 4.40%+160	PWF.PR.S 4.80%	($0.67)		$3.00	$6.50	6.71
The ‘Take-Out’ is the bid price of the Straight less the bid price of the FixedReset; approximate execution prices are used for the “MAPF Trade” column. Bracketted figures in the ‘Take-Out’ columns indicate a ‘Pay-Up’

There was not much change from April month-end to May month-end.

In January, a slow decline due to fears of deflation got worse with Canada yields plummeting after the Bank of Canada rate cut with speculation rife about future cuts although this slowly died away.

Here’s the May performance for FixedResets that had a YTW Scenario of ‘To Perptuity’ at mid-month.:

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The market continues to be rather disorderly; correlations between Issue Reset Spread and monthly performance for May are basically zero. Interestingly, the correlation for the Pfd-2 Group issues against term to reset was a little better, although still lousy at 12%.

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MAPF

MAPF Portfolio Composition: May, 2015

Turnover declined precipitously in May, to about 7%.

Unaffected Straight Perpetuals
DeemedRetractibles explicitly subject to the rules (banks)
DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

Due to further footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another two years in the near future.

Sectoral distribution of the MAPF portfolio on May 29 was as follows:

MAPF Sectoral Analysis 2015-5-29
HIMI Indices Sector	Weighting	YTW	ModDur
Ratchet	0%	N/A	N/A
FixFloat	0%	N/A	N/A
Floater	0%	N/A	N/A
OpRet	0%	N/A	N/A
SplitShare	3.9% (+0.4)	4.72%	5.50
Interest Rearing	0%	N/A	N/A
PerpetualPremium	0%	N/A	N/A
PerpetualDiscount	1.0% (0)	5.46%	14.63
Fixed-Reset	66.2% (-2.1)	5.43%	11.20
Deemed-Retractible	9.7% (-0.3)	5.51%	7.74
FloatingReset	7.1% (0)	3.32%	18.99
Scraps (Various)	11.0% (+0.9)	5.90%	14.63
Cash	1.1% (+1.1)	0.00%	0.00
Total	100%	5.25%	11.32
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from April month-end. Cash is included in totals with duration and yield both equal to zero.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section) Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue.
Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 1.05% and a constant 3-Month Bill rate of 0.61%

Credit distribution is:

MAPF Credit Analysis 2015-5-29
DBRS Rating	Weighting
Pfd-1	0 (0)
Pfd-1(low)	18.3% (-0.6)
Pfd-2(high)	29.3% (-6.2)
Pfd-2	0%
Pfd-2(low)	40.2% (+4.7)
Pfd-3(high)	1.8% (0)
Pfd-3	4.4% (0)
Pfd-3(low)	4.3% (+1.0)
Pfd-4(high)	0% (-0.7)
Pfd-4	0%
Pfd-4(low)	0% (0)
Pfd-5(high)	0% (0)
Pfd-5	0.5% (0)
Cash	1.1% (+1.1)
Totals will not add precisely due to rounding. Bracketted figures represent change from April month-end.
The fund holds a position in AZP.PR.C, which is rated P-5 by S&P and is unrated by DBRS
A position held in NPI.PR.A is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3(high).
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

There was some shifting from Pfd-2(high) to Pfd-2(low); this was due largely to sales of BNS.PR.Z throughout the month at prices ranging from 23.20 to 23.78 and purchases HSE.PR.A at prices ranging from 17.20 to 17.89; BAM.PR.X at 18.01 to 18.74; and BAM.PR.R at 21.05 to 21.39.

Liquidity Distribution is:

MAPF Liquidity Analysis 2015-5-29
Average Daily Trading	Weighting
<$50,000	2.6% (0)
$50,000 – $100,000	2.2% (0)
$100,000 – $200,000	40.4% (+7.9)
$200,000 – $300,000	38.0% (-3.7)
>$300,000	15.6% (-4.3)
Cash	1.1% (+1.1)
Totals will not add precisely due to rounding. Bracketted figures represent change from April month-end.

MAPF credit quality is better
MAPF liquidity is a bit lower
MAPF Yield is higher
Weightings
- MAPF is less exposed to Straight Perpetuals (including DeemedRetractibles)
- MAPF is less exposed to Operating Retractibles
- MAPF is more exposed to SplitShares
- MAPF is less exposed to FixFloat / Floater / Ratchet
- MAPF is overweighted in FixedResets

MAPF

MAPF Performance: April 2015

The fund strongly broke even with the index in April, a month marked by a January-style crash in the first half and an impressive rally in the second half.

ZPR, is an ETF comprised of FixedResets and Floating Rate issues and a very high proportion of junk issues, returned +%, +% and +% over the past one-, three- and twelve-month periods, respectively (according to the fund’s data), versus returns for the TXPL index of -0.55%, -1.63% and -8.33% respectively. The fund has been able to attract assets of about $1,111-million since inception in November 2012; AUM increased by $15-million in April; given an index return of -0.55% a decrease of about $6-million was expected, so in March 2015 the fund was able to attract assets. I feel that the flows into and out of this fund are very important in determining the performance of its constituents.

TXPR had returns over one-, three- and twelve-months of -0.36%, -0.66% and -3.19% respectively with CPD performance within expectations.

Returns for the HIMIPref™ investment grade sub-indices for the month were as follows:

HIMIPref™ Indices Performance to April, 2015
Sub-Index	1-Month	3-month
Ratchet	N/A	N/A
FixFloat	N/A	N/A
Floater	-3.99%	+3.57%
OpRet	-0.08%	+0.54%
SplitShare	+0.43%	+1.51%
Interest	N/A	N/A
PerpetualPremium	-0.27%	+0.30%
PerpetualDiscount	-1.78%	+0.81%
FixedReset	-0.53%	+0.02%
DeemedRetractible	-0.46%	+0.37%
FloatingReset	-1.55%	+1.86%

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close April 30, 2015, was $9.9359.

Returns to April 30, 2015
Period	MAPF	BMO-CM “50” Index	TXPR Total Return	CPD – according to Blackrock
One Month	-0.21%	-0.21%	-0.36%	N/A
Three Months	+0.98%	-0.46%	-0.66%	N/A
One Year	-0.11%	-3.79%	-3.19%	-3.46%
Two Years (annualized)	+0.64%	-1.37%	-1.56%	N/A
Three Years (annualized)	+3.38%	+0.60%	+0.67%	+0.21%
Four Years (annualized)	+3.53%	+2.06%	+1.80%	N/A
Five Years (annualized)	+7.28%	+4.67%	+4.11%	+3.55%
Six Years (annualized)	+10.53%	+6.55%	+5.34%
Seven Years (annualized)	+11.71%	+4.27%	+3.35%
Eight Years (annualized)	+10.23%	+2.98%
Nine Years (annualized)	+9.83%	+3.11%
Ten Years (annualized)	+9.48%	+3.14%
Eleven Years (annualized)	+9.51%	+3.38%
Twelve Years (annualized)	+10.74%	+3.62%
Thirteen Years (annualized)	+10.03%	+3.80%
Fourteen Years (annualized)	+10.46%	+3.59%
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
CPD Returns are for the NAV and are after all fees and expenses.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -0.55%, -0.82% and -1.17%, respectively, according to Morningstar after all fees & expenses. Three year performance is +1.64%; five year is +4.71%
Figures for Jov Leon Frazer Preferred Equity Fund Class I Units (which are after all fees and expenses) for 1-, 3- and 12-months are +%, -% and -% respectively, according to Morningstar. Three Year performance is +%; five-year is +%
Figures for Manulife Preferred Income Class Adv [into which was merged Manulife Preferred Income Fund (formerly AIC Preferred Income Fund)] (which are after all fees and expenses) for 1-, 3- and 12-months are -0.55%, -1.11% & N/A, respectively.
Figures for Horizons AlphaPro Preferred Share ETF (which are after all fees and expenses) for 1-, 3- and 12-months are -0.35%, -0.68% & -2.17%, respectively. Three year performance is +1.45%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -0.48%, -0.95% and -3.49% for one-, three- and twelve months, respectively.
The figure for BMO S&P/TSX Laddered Preferred Share Index ETF is -0.41%, -1.55% and -8.72% for one-, three- and twelve-months, respectively. Two year performance is -4.92%.
Figures for NexGen Canadian Preferred Share Tax Managed Fund (Dividend Tax Credit Class, the best performing) are +0.2%, +0.9% and +4.8% for one-, three- and twelve-months, respectively.
Figures for BMO Preferred Share Fund are -4.20% and -1.89% for the past three- and twelve-months, respectively.
Figures for PowerShares Canadian Preferred Share Index Class, Series Fare -0.81%, -2.41% and -4.91% for the past one, three and twelve months, respectively. The three- and five-year figures are -1.16% and +2.45%, respectively.

In March, insurance DeemedRetractibles performed somewhat worse than bank DeemedRetractibles:

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… but better than Unregulated Straight Perpetuals.

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Correlations were very poor for banks (6%; not shown), not much good for insurance (11%) but quite reasonable for unregulated issues (56%).

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	Capital Gains Multiplier	Sustainable Income per current Unit
June, 2007	9.3114	5.16%	1.03	5.01%	1.3240	0.3524
September	9.1489	5.35%	0.98	5.46%	1.3240	0.3773
December, 2007	9.0070	5.53%	0.942	5.87%	1.3240	0.3993
March, 2008	8.8512	6.17%	1.047	5.89%	1.3240	0.3938
June	8.3419	6.034%	0.952	6.338%	1.3240	$0.3993
September	8.1886	7.108%	0.969	7.335%	1.3240	$0.4537
December, 2008	8.0464	9.24%	1.008	9.166%	1.3240	$0.5571
March 2009	$8.8317	8.60%	0.995	8.802%	1.3240	$0.5872
June	10.9846	7.05%	0.999	7.057%	1.3240	$0.5855
September	12.3462	6.03%	0.998	6.042%	1.3240	$0.5634
December 2009	10.5662	5.74%	0.981	5.851%	1.1141	$0.5549
March 2010	10.2497	6.03%	0.992	6.079%	1.1141	$0.5593
June	10.5770	5.96%	0.996	5.984%	1.1141	$0.5681
September	11.3901	5.43%	0.980	5.540%	1.1141	$0.5664
December 2010	10.7659	5.37%	0.993	5.408%	1.0298	$0.5654
March, 2011	11.0560	6.00%	0.994	5.964%	1.0298	$0.6403
June	11.1194	5.87%	1.018	5.976%	1.0298	$0.6453
September	10.2709	6.10% Note	1.001	6.106%	1.0298	$0.6090
December, 2011	10.0793	5.63% Note	1.031	5.805%	1.0000	$0.5851
March, 2012	10.3944	5.13% Note	0.996	5.109%	1.0000	$0.5310
June	10.2151	5.32% Note	1.012	5.384%	1.0000	$0.5500
September	10.6703	4.61% Note	0.997	4.624%	1.0000	$0.4934
December, 2012	10.8307	4.24%	0.989	4.287%	1.0000	$0.4643
March, 2013	10.9033	3.87%	0.996	3.886%	1.0000	$0.4237
June	10.3261	4.81%	0.998	4.80%	1.0000	$0.4957
September	10.0296	5.62%	0.996	5.643%	1.0000	$0.5660
December, 2013	9.8717	6.02%	1.008	5.972%	1.0000	$0.5895
March, 2014	10.2233	5.55%	0.998	5.561%	1.0000	$0.5685
June	10.5877	5.09%	0.998	5.100%	1.0000	$0.5395
September	10.4601	5.28%	0.997	5.296%	1.0000	$0.5540
December, 2014	10.5701	4.83%	1.009	4.787%	1.0000	$0.5060
March, 2015	9.9573	4.99%	1.001	4.985%	1.0000	$0.4964
April, 2015	9.9359	5.06%	1.000	5.060%	1.0000	$0.5028
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.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

Significant positions were held in DeemedRetractible, SplitShare and NVCC non-compliant regulated FixedReset issues on April 30; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies) or on a different date (SplitShares) This presents another complication in the calculation of sustainable yield, which also assumes that redemption proceeds will be reinvested at the same rate.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas (set at 1.40% for the December 31 calculation and 0.88% for the March 31 calculation) to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

I no longer show calculations that assume the conversion of the entire portfolio into PerpetualDiscounts, as the fund has only a small position in these issues.

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The difference is because the bond’s yield calculation includes the amortization of the discount; therefore, so does the Sustainable Income estimate.

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 has generally been due to exploitation of trading anomalies.

Issue Comments

Low Spread FixedResets: April, 2015

As noted in MAPF Portfolio Composition: April 2015, the fund now has a large allocation to FixedResets, mostly of relatively low spread.

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Given that the April month-end take-out was $5.69, this is clearly a trade that has not worked out very well.

In July, 2014, I reported sales of SLF.PR.D to purchase SLF.PR.G at a take-out of about $0.15:

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There were similar trades in August, 2014 (from SLF.PR.C) at a take-out of $0.35. The April month-end take-out (bid price SLF.PR.D less bid price SLF.PR.G) was $6.25, so that hasn’t worked very well either.

November saw the third insurer-based sector swap, as the fund sold MFC.PR.C to buy the FixedReset MFC.PR.F at a post-dividend-adjusted take-out of about $0.85 … given a February month-end take-out of about $5.29, that’s another regrettable trade, although another piece executed in December at a take-out of $1.57 has less badly.

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… and FTS.PR.H / FTS.PR.J:

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… and PWF.PR.P / PWF.PR.S:

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I will agree that the fund’s trades highlighted in this post may be decried as cases of monumental bad timing, but I should point out that in May, 2014, the fund was 63.9% Straight / 9.5% FixedReset while in April 2015 the fund was 10% Straight / 85% FixedReset, FloatingReset and FixedFloater (The latter figures include allocations from those usually grouped as ‘Scraps’). Given that the indices are roughly 30% Straight / 60% FixedReset & FloatingReset, it is apparent that the fund was extremely overweighted in Straights / underweighted in FixedResets in May 2014 but this situation has now reversed. HIMIPref™ analytics have been heavily favouring low-spread issues and the fund’s holdings are overwhelmingly of this type.

Summarizing the charts above in tabular form, we see:

FixedReset	Straight	Take-out December 2013	Take-out MAPF Trade	Take-out December 2014	Take-out March 2015	Take-out April 2015
GWO.PR.N 3.65%+130	GWO.PR.I 4.5%	($0.04)	$1.00	$2.95	$5.74	$5.69
SLF.PR.G 4.35%+141	SLF.PR.D 4.45%	($1.29)	$0.25	$2.16	$6.16	$6.25
MFC.PR.F 4.20%+141	MFC.PR.C 4.50%	($1.29)	$0.86	$1.20	$5.46	$5.35
BAM.PR.X 4.60%+180	BAM.PR.N 4.75%	($2.06)		$0.17	$4.76	$4.18
FTS.PR.H 4.25%+145	FTS.PR.J 4.75%	$0.60		$5.68	$8.86	$8.07
PWF.PR.P 4.40%+160	PWF.PR.S 4.80%	($0.67)		$3.00	$6.43	$6.50
The ‘Take-Out’ is the bid price of the Straight less the bid price of the FixedReset; approximate execution prices are used for the “MAPF Trade” column. Bracketted figures in the ‘Take-Out’ columns indicate a ‘Pay-Up’

There was not much change from March month-end to April month-end, although the charts show some great excitement in mid-March, with spreads widening dramatically. The following chart shows the normalized total return of the HIMIPref™ FixedReset index through the month:

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So why is all this happening? One should take care in explaining market movements, but it is my belief that in the latter half of 2013 we were dealing with the ‘taper tantrum’ – the market’s fears that Fed tapering and subsequent tapering would lead to massive spikes in yields; this led to a great preference for FixedResets over Straights. Now, with the economic news getting less inflationary with every news story and Europe and Japan desperately trying to reflate their sluggish economies, the market seems to think that these rate increases are still a long way off … leading to a great preference for Straights over FixedResets.

In addition, the graphs show a sharp spike in early December, during which the low-spread FixedResets were very badly hurt; I believe this to be due to a combination of tax-loss selling and a panicky response to the 29% reduction in the TRP.PR.A dividend.

And in January it just got worse with Canada yields plummeting after the Bank of Canada rate cut with speculation rife about future cuts although this slowly died away.

And in late March / early April it got worse again, with one commenter attributing at least some of the blame to the John Heinzl piece in which I pointed out the expected reduction in dividend payouts! Insofar as I am willing to guess what motivates ‘the market’, I will guess that the rally in the latter half of April is due to a feeling that the previously scheduled European deflation has been cancelled, which in turn encouraged an increase in Treasury yields which fed through to the Canadian market.

There was some good discussion about the declining phase in the comments to the January 29 market action report. I take the view that we’ve seen this show before: during the Credit Crunch, Floaters got hit extremely badly (to the point at which their fifteen year total return was negative) because (as far as I can make out) their dividend rate was dropping (as it was linked to Prime) while the yields on other perpetual preferred instruments were skyrocketing (due to credit concerns). Thus, at least some investors insisted on getting long term corporate yields from rates based (indirectly and with a lag, in the case of FixedResets) on short-term government policy rates. And it’s happening again!

Here’s the April performance for FixedResets that had a YTW Scenario of ‘To Perptuity’ at mid-month.:

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The end-of-month rally has been rather disorderly; correlations between Issue Reset Spread and monthly performance for April are basically zero.

MAPF

MAPF Portfolio Composition: April 2015

Turnover continued to be above average in April, at about 24%.

Unaffected Straight Perpetuals
DeemedRetractibles explicitly subject to the rules (banks)
DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading. Another trend that hasn’t helped was the migration of PerpetualDiscounts into PerpetualPremiums (due to price increases) in early 2013 – many of the PerpetualPremiums had negative Yields-to-Worst and those that don’t aren’t particularly thrilling; speaking very generally, PerpetualPremiums are to be avoided, not traded! While market weakness since the peak of the PerpetualDiscount subindex in May, 2013, has mitigated the situation somewhat, the population of PerpetualDiscounts is still exceeded by that of PerpetualPremiums – most of which are trading at a negative Yield-to-Worst.

Due to further footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another two years in the near future.

Sectoral distribution of the MAPF portfolio on April 30 was as follows:

MAPF Sectoral Analysis 2015-4-30
HIMI Indices Sector	Weighting	YTW	ModDur
Ratchet	0%	N/A	N/A
FixFloat	0%	N/A	N/A
Floater	0%	N/A	N/A
OpRet	0%	N/A	N/A
SplitShare	3.5% (-5.0)	4.93%	5.51
Interest Rearing	0%	N/A	N/A
PerpetualPremium	0%	N/A	N/A
PerpetualDiscount	1.0% (0)	5.29%	14.94
Fixed-Reset	68.3% (+18.9)	5.09%	10.55
Deemed-Retractible	10.0% (-11.4)	5.28%	7.76
FloatingReset	7.1% (0)	3.42%	18.69
Scraps (Various)	10.1% (-2.7)	5.86%	14.28
Cash	0% (+0.1)	0.00%	0.00
Total	100%	5.06%	11.05
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from February month-end. Cash is included in totals with duration and yield both equal to zero.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section) Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue.

The big shift during the month was from DeemedRetractibles into FixedResets; there were a number of trades; the following table excludes trades taken as a result of portfolio cash flows. So please make careful note that this is not a complete list; that many of the prices are averages of trades performed on different days; that some of the issues were both bought and sold during the month and that, basically, anybody trying to reconstruct the MAPF portfolio with any precision with the help of this table is going to get extremely frustrated. This table has been prepared to give the ‘flavour’ of the month’s trading; you will have to wait for detail to be published with the semi-annual financials in July if you’re extremely interested. Have I made enough disclaimers yet?

Major Position Changes
Issue	Portfolio Weight	Average Price	Sector	DBRS Rating
Net Purchases
HSE.PR.A	1%	16.66	FixedReset	Pfd-2(low)
PWF.PR.P	2%	17.70	FixedReset	Pfd-1(low)
BNS.PR.Z	6%	23.35	FixedReset	Pfd-1(low)
BMO.PR.Q	3%	22.60	FixedReset	Pfd-2(high)
BAM.PR.X	1%	18.50	FixedReset	Pfd-2(low)
AIM.PR.A	1%	19.60	FixedReset (Scraps)	Pfd-3(low)
INE.PR.A	1%	15.80	FixedReset (Scraps)	P-3(low) (S&P)
Net Sales
SLF.PR.C	2%	23.55	DeemedRetractible	Pfd-2(high)
IAG.PR.A	6%	24.66	DeemedRetractible	Pfd-2(high)
CGI.PR.D	2%	25.25	SplitShare	Pfd-1(high)
GWO.PR.I	2%	24.20	DeemedRetractible	Pfd-1(low)
AX.PR.E	1%	17.75	Scraps (FixedReset)	Pfd-3(low)
DF.PR.A	1%	10.20	Scraps (SplitShare)	Pfd-3(low)
FTN.PR.A	1%	10.11	Scraps (SplitShare)	Pfd-4(high)
PVS.PR.D	3%	24.60	SplitShare	Pfd-2(low)
BNS.PR.Y	1%	22.40	FixedReset	Pfd-2(high)

Credit distribution is:

MAPF Credit Analysis 2015-4-30
DBRS Rating	Weighting
Pfd-1	0 (0)
Pfd-1(low)	18.9% (-2.1)
Pfd-2(high)	35.5% (+2.3)
Pfd-2	0%
Pfd-2(low)	35.5% (+0.5)
Pfd-3(high)	1.8% (+0.5)
Pfd-3	4.4% (0)
Pfd-3(low)	3.3% (-0.7)
Pfd-4(high)	0% (-0.7)
Pfd-4	0%
Pfd-4(low)	0% (0)
Pfd-5(high)	0% (0)
Pfd-5	0.5% (0)
Cash	0% (+0.1)
Totals will not add precisely due to rounding. Bracketted figures represent change from March month-end.
The fund holds a position in AZP.PR.C, which is rated P-5 by S&P and is unrated by DBRS
A position held in NPI.PR.A is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3(high).
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

The credit quality changes are largely explained by the table of issues with major weighting changes, above.

Liquidity Distribution is:

MAPF Liquidity Analysis 2015-4-30
Average Daily Trading	Weighting
<$50,000	2.6% (-7.6)
$50,000 – $100,000	2.2% (-0.8)
$100,000 – $200,000	32.5% (-6.4)
$200,000 – $300,000	41.7% (+7.3)
>$300,000	20.9% (+7.3)
Cash	0% (+0.1)
Totals will not add precisely due to rounding. Bracketted figures represent change from March month-end.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission) or those who subscribe for $150,000+ (this exemption is about to expire). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

MAPF credit quality is better
MAPF liquidity is a bit lower
MAPF Yield is higher
Weightings
- MAPF is less exposed to Straight Perpetuals (including DeemedRetractibles)
- MAPF is less exposed to Operating Retractibles
- MAPF is more exposed to SplitShares
- MAPF is less exposed to FixFloat / Floater / Ratchet
- MAPF is overweighted in FixedResets

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MAPF Performance: June, 2015

Low Spread FixedResets: June 2015

MAPF Portfolio Composition: June, 2015

MAPF Performance: May 2015

Low Spread FixedResets: May 2015

MAPF Portfolio Composition: May, 2015

MAPF Performance: April 2015

Low Spread FixedResets: April, 2015

MAPF Portfolio Composition: April 2015

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