Category: MAPF

This is grossly abbreviated. My apologies, but since the OSFI announcement on extant Tier 1 Capital, time has been at a premium.

The fund got the year off to a good start by outperforming its benchmark significantly, assisted by its relatively heavy weight in PerpetualDiscounts, which outperformed.

The fund’s Net Asset Value per Unit as of the close January 31 was $11.1030.

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.

Sometimes everything works … sometimes the trading works, but sectoral shifts overwhelm the increment … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There 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, whether that implies monthly turnover of 10% or 100%.

There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid 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.

Significant positions were held in Fixed-Reset issues on December 31; all of which (with the exception of YLO.PR.C) currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity. This presents another complication in the calculation of sustainable yield. The fund also holds a position in a SplitShare (BNA.PR.C) which also has its yield calculated with the expectation of a maturity.

However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 5.46% shown in the MAPF Portfolio Composition: January 2011 analysis (which is in excess of the 5.28% index yield on January 31). Given such reinvestment, the sustainable yield would be $11.1030 * 0.0546 = $0.6062, a slight increase from the $0.6029 reported last month.

Note that there will be a drag on the calculation in up-markets due to presence of shorter-term issues (or, at least, presumed shorter term issues!); the question is whether the positive effect of these issues in down markets will outweight their negative effect in up-markets – all I can say is … it has in the past!

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

• the very good performance against the index
• the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

This is grossly abbreviated. My apologies, but since the OSFI announcement on extant Tier 1 Capital, time has been at a premium.

Turnover picked up in January, to about 54%

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may be thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

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:

Liquidity Distribution is:

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+. 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) as of August 31, 2010, and published in the September, 2010, PrefLetter. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is a higher
• MAPF Yield is higher
• Weightings in
  • MAPF is much more exposed to Straight Perpetuals
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is slightly more exposed to SplitShares
  • MAPF is less exposed to FixFloat / Floater / Ratchet
  • MAPF weighting in FixedResets is much lower

The fund had a sub-par, but hardly disastrous, month in December, due mostly to its large holdings in deeply discounted Straight Perpetuals, which underperformed. Results for the quarter and the year look pretty good.

The fund’s Net Asset Value per Unit as of the close December 31 was $10.7659 after a Capital Gains distribution of $0.882239 and a Dividend Distribution of $0.159708.

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.

Sometimes everything works … sometimes the trading works, but sectoral shifts overwhelm the increment … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There 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, whether that implies monthly turnover of 10% or 100%.

The fund’s returns were diminished this month by the overweighting in deeply discounted PerpetualDiscounts in which the fund is still overweighted (see MAPF Portfolio Composition: December 2010) although not as overweighted as it has been for much of the year.

Click for Big

The relative performances are interesting. SLF.PR.E had the worst performance of the selected issues (in fact, it had the worst performance of all the HIMIPref™ index constituents), clocking in at -4.05% – and the fund had a 7.0% weighting in this issue as of November 30. The position was not traded during the month, so we can estimate that all by itself this position cost the fund 28bp of performance. Even if we say the position “should have” returned -2.00%, in line with comparable issues, that’s still 14bp of underperformance, a significant chunk of the fund’s relative performance.

Even worse, the last bid price on this issue declined from 20.52 on December 30 to 19.91 on December 31, a decline of 2.97% on the day; and the last quote was 19.91-20.60. Its bid yield on 12/31 was significantly above its peers, so this is is almost certainly a glitch – albeith not certainly enough and not significant enough for me to take the rather awesome step of substituting a different price for fund valuation purposes.

It’s not really a big deal – the issue still pays 1.125 and still has exactly the same credit quality as the other SLF issues. Its undervaluation relative to its peers provides the fund with something of a tailwind for January!

There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid 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.

Significant positions were held in Fixed-Reset issues on December 31; all of which (with the exception of YLO.PR.C) currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity. This presents another complication in the calculation of sustainable yield. The fund also holds a position in a SplitShare (BNA.PR.C) which also has its yield calculated with the expectation of a maturity.

However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 5.60% shown in the MAPF Portfolio Composition: December 2010 analysis (which is in excess of the 5.46% index yield on December 31). Given such reinvestment, the sustainable yield would be $10.7659 * 0.0560 = $0.6029, basically unchanged from the (adjusted for capital gains) $0.6034 reported last month.

Note that there will be a drag on the calculation in up-markets due to presence of shorter-term issues (or, at least, presumed shorter term issues!); the question is whether the positive effect of these issues in down markets will outweight their negative effect in up-markets – all I can say is … it has in the past!

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

• the very good performance against the index
• the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

Update: The SLF.PR.E is a legitimate closing quote, although it does mean that the market-maker fell down on the job.

I have sent the following eMail to info@tsx.com:

According to information reported by DataLinx for December 31, the closing quotation for SLF.PR.E was 19.91-60, 2×27.

I have four questions that arise from the closing quotation:

i) Who is the market-maker for this security?

ii) Will the TMX be investigating the circumstances that led to the wide spread on this closing quotation?

iii) Will the TMX be announcing the results of such an investigation?

iv) Will the TMX be implementing any sanctions against the market maker for this security?

Update, 2011-01-13: The TMX response to the eMail, and my follow-up, are reported in the post TMX: Close, Schmose!.

Turnover remained fairly constant in December, at about 27%.

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may be thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

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.

The increase in PerpetualDiscount holdings at the expense of PerpetualPremiums is largely due to migration of two positions, CM.PR.P and GWO.PR.M, from the latter class to the former. Both accrued dividends during the month.

Analysis of the data using the Straight Perpetual Implied Volatility Calculator produces the following table:

The decline in volatility is interesting and probably reflects a market view on the future direction of market yields. Given the high level of uninformed emotion in the preferred share market – particularly the Straight Preferred sector – this could be a fruitful area of research.

Graphs from the Straight Perpetual Volatility Calculator for December 31 are:

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The yield pick-up for holding high-coupon Straights remains such that one should no longer automatically buy the deepest-discount issue in a series!

Credit distribution is:

Liquidity Distribution is:

As was the case with the sector distribution, the large shift from the $300,000+ liquidity bucket to the $200,000-$300,000 was not due to trading, but rather to migration, as positions were held in BAM.PR.N, SLF.PR.B and YLO.PR.C which all experienced declines in Average Trading Value over the month.

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+. 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) as of August 31, 2010, and published in the September, 2010, PrefLetter. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is a higher
• MAPF Yield is higher
• Weightings in
  • MAPF is much more exposed to Straight Perpetuals
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is slightly more exposed to SplitShares
  • MAPF is less exposed to FixFloat / Floater / Ratchet
  • MAPF weighting in FixedResets is much lower

The fund had another good month in November.

The fund’s Net Asset Value per Unit as of the close November 30 was $11.8495.

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.

Sometimes everything works … sometimes the trading works, but sectoral shifts overwhelm the increment … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There 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, whether that implies monthly turnover of 10% or 100%.

The fund’s returns were helped along by the overweighting in deeply discounted PerpetualDiscounts in which the fund is still overweighted (see MAPF Portfolio Composition: November 2010) although not as overweighted as it has been. While this type of issue generally outperformed, the effect is nowhere near as marked as was reported in October.

Click for Big

There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid 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.

Significant positions were held in Fixed-Reset issues on November 30; all of which (with the exception of the two YLO issues) currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity. This presents another complication in the calculation of sustainable yield. The fund also holds a position in a SplitShare (BNA.PR.C) which also has its yield calculated with the expectation of a maturity.

However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 5.51% shown in the MAPF Portfolio Composition: November 2010 analysis (which is in excess of the 5.41% index yield on November 30). Given such reinvestment, the sustainable yield would be $11.8495 * 0.0551 = $0.6529, a nice increase from the $0.6474 reported last month.

Note that there will be a drag on the calculation in up-markets due to presence of shorter-term issues (or, at least, presumed shorter term issues!); the question is whether the positive effect of these issues in down markets will outweight their negative effect in up-markets – all I can say is … it has in the past!

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

• the very good performance against the index
• the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

Turnover remained fairly constant in November, at just under 30%.

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may be thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

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.

The increase in PerpetualPremium holdings at the expense of PerpetualDiscounts is related to a shift in credit quality from the Pfd-1(low) bucket to the Pfd-2(high) bucket and will be discussed below.

As reported in the post HIMIPref™ Index Performance, November 2010, PerpetualDiscounts significantly outperformed PerpetualPremiums over the month; unfortunately, heterogeniety of the data set does not allow us to conclude that Implied Volatility increased. In fact, for the three issuers with a sufficient sample of dividend rates, volatility was relatively constant, although it became more homogeneous between these specific issuers.

Analysis of the data using the Straight Perpetual Implied Volatility Calculator produces the following table:

As discussed in the October edition of PrefLetter, the implied volatility calculated for GWO is very high and implies a questionable assessment of the probability distribution of future yields, but it looks like the market is finding a level for Implied Volatility in the mid- to high-twenties.

Graphs from the Straight Perpetual Volatility Calculator for November 30 are:

Click for Big

Click for Big

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The yield pick-up for holding high-coupon Straights is such one should no longer automatically buy the deepest-discount issue in a series!

Credit distribution is:

As noted earlier, the shift in holdings weight from Pfd-1(low) to Pfd-2(high) is related to the shift from PerpetualDiscounts to PerpetualPremiums. Most of the move is explained by the following trades:

Liquidity Distribution is:

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) and those who subscribe for $150,000+. 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) as of August 31, 2010, and published in the September, 2010, PrefLetter. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is a higher
• MAPF Yield is higher
• Weightings in
  • MAPF is much more exposed to Straight Perpetuals
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is slightly more exposed to SplitShares
  • MAPF is less exposed to FixFloat / Floater / Ratchet
  • MAPF weighting in FixedResets is much lower

The fund had another good month in October.

The fund’s Net Asset Value per Unit as of the close September 30 was $11.6856.

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.

Sometimes everything works … sometimes the trading works, but sectoral shifts overwhelm the increment … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There have been a lot of strongly motivated market participants in the recent past, generating a lot of noise! Unfortunately, the conditions of the Panic of 2007 may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, whether that implies monthly turnover of 10% or 100%.

The fund’s returns were helped along by the overweighting in deeply discounted PerpetualDiscounts; as discussed in MAPF Portfolio Composition: October 2010, volatility has been rising while yields have been falling, which resulted in this type of issue strongly outperforming.

Click for Big

There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid 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.

Significant positions were held in Fixed-Reset issues on October 29; all of which (with the exception of YPG.PR.D) currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity. This presents another complication in the calculation of sustainable yield.

However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 5.54% shown in the MAPF Portfolio Composition: October 2010 analysis (which is in excess of the 5.41% index yield on October 29). Given such reinvestment, the sustainable yield would be $11.6856 * 0.0554 = $0.6474, a slight increase from the 0.6435 reported last month.

It is no surprise that this estimate is down, since there will be a drag on the calculation in up-markets due to presence of shorter-term issues (or, at least, presumed shorter term issues!); the question is whether the positive effect of these issues in down markets will outweight their negative effect in up-markets – all I can say is … it has in the past!

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

• the very good performance against the index
• the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

Turnover picked up slightly in October to 28%

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may be thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

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.

Prices of PerpetualDiscounts increased during the month, as did implied volatility. The fund increased its position in near-par PerpetualDiscounts over the month.

Following last month’s performance report, analysis of the data using the Straight Perpetual Implied Volatility Calculator produces the following table:

As discussed in the October edition of PrefLetter, the implied volatility calculated for GWO is ludicrously high and implies a ridiculous assessment of the probability distribution of future yields; now it appears that PWF issues are headed that way as well.

Graphs from the Straight Perpetual Volatility Calculator for October 29 are:

Click for Big
 
 

Click for Big
 
 

Click for Big

The yield pick-up for holding high-coupon Straights is such one should no longer automatically buy the deepest-discount issue in a series!

Credit distribution is:

The decline in holdings of issues rated Pfd-2(high) was due mainly to swaps out of MFC.PR.D:

Liquidity Distribution is:

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) and those who subscribe for $150,000+. 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) as of August 31, 2010, and published in the September, 2010, PrefLetter. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is a higher
• MAPF Yield is higher
• Weightings in
  • MAPF is much more exposed to PerpetualDiscounts
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is slightly more exposed to SplitShares
  • MAPF is less exposed to FixFloat / Floater / Ratchet
  • MAPF weighting in FixedResets is much lower

The fund had a very good month in September.

The fund’s Net Asset Value per Unit as of the close September 30 was $11.3901, after a dividend distribution of $0.151525.

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.

My personal benchmark for a “good year” is index+500bp before fees; a glance at the annualized performance to September, 2010 shows that I’ve been able to meet that goal four times out of nine attempts, when measured to September month-ends.

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

The fund’s returns were helped along by the overweighting in deeply discounted PerpetualDiscounts; as discussed in MAPF Portfolio Composition: September 2010, volatility has been rising while yields have been falling, which resulted in this type of issue strongly outperforming.

Click for Big

There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid 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 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.

Significant positions were held in Fixed-Reset issues on June 30; all of which (with the exception of YPG.PR.C) currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity. This presents another complication in the calculation of sustainable yield.

However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 5.65% shown in the MAPF Portfolio Composition: September 2010 analysis (which is in excess of the 5.53% index yield on September 30). Given such reinvestment, the sustainable yield would be $11.3901 * 0.565 = 0.6435, down from the 0.6463 reported in June 2010 (the best comparator due to the influence of dividends earned but not yet distributed).

It is no surprise that this estimate is down, since there will be a drag on the calculation in up-markets due to presence of shorter-term issues (or, at least, presumed shorter term issues!); the question is whether the positive effect of these issues in down markets will outweight their negative effect in up-markets – all I can say is … it has in the past!

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

• the very good performance against the index
• the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

Turnover picked up in September to 23%

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may be thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

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.

September marked a distinct change in the market: with the increasing price and implied volatility of PerpetualDiscount preferred shares (see MAPF Performance: August 2010) the fund not only took a position in PerpetualPremium Preferred Shares, but also increased its holdings of PerpetualDiscounts priced in the 24.00-25.00 range.

Following last month’s performance report, analysis of the data using the Straight Perpetual Implied Volatility Calculator produces the following table:

Graphs from the Straight Perpetual Volatility Calculator for September 30 are:

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It is very clear that Implied Volatility has increased dramatically over the past two months – so dramatically, in fact, that the percentage of the portfolio comprised of PerpetualDiscounts priced between 24.00 and 25.00 has increased to 6.2% in September, from 4.9% in August and 0% in July; this is in addition to the more dramatic inclusion of PerpetualPremiums in the portfolio.

The yield pick-up for holding high-coupon Straights is such that the fund is starting to toy with the idea of selling the more deeply discounted PerpetualDiscounts to buy the higher priced ones; only nibbles as yet, but it has been a long, long time since the fund has “sold volatility”.

Credit distribution is:

Liquidity Distribution is:

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) and those who subscribe for $150,000+. 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) as of August 31, 2010, and published in the September, 2010, PrefLetter. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is a higher
• MAPF Yield is higher
• Weightings in
  • MAPF is much more exposed to PerpetualDiscounts
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is now about equally exposed to SplitShares
  • MAPF is less exposed to FixFloat / Floater / Ratchet
  • MAPF weighting in FixedResets is much lower