Category: MAPF

The fund performed well in a volatile month, in which a sharp early drop in values was overtaken by a slow and steady gain:

And … the end of this month marked the eighth full year of operation for Malachite Aggressive Preferred Fund. Since its inception in March, 2001, it has delivered a cumulative return of +100.38% (after expenses, before fees), doubling its money, while the benchmark index has returned a cumulative total of +4.92%.

The fund’s Net Asset Value per Unit as of the close March 31 was $8.8317 after giving effect to a distribution of $0.191322 per unit.

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 yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

As discussed in the post MAPF Portfolio Composition: March 2009, the fund has positions in splitShares (almost all BNA.PR.C) and an operating retractible (YPG.PR.B), both of which skew the calculation. Since the yield on thes positions is higher than that of the perpetuals despite the fact that the term is limited, the sustainability of the calculated “sustainable yield” is suspect, as discussed in August.

Additionally, the calculated yield for the fixed-floater in the portfolio, BCE.PR.I, depends on the presumed value of Canada Prime (3.00%) and the percentage of Canada Prime paid on par value (100%); both of these figures may change. Prime is, in fact, now only 2.50% – while this change will affect the calculation of sustainable yield, this issue has a fixed yield until August 1, 2011.

And finally, the yield calculations with respect to FixedReset issues is dependent upon a constant yield of the 5-Year Canada bonds whence the reset rate is calculated. Calculations include the contemporary yield on 5-Year Canada’s; if this value were to be increased, the calculated yield-to-worst on the Fixed-Reset issues held would also increase.

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 7.60% shown in the March 31 Portfolio Composition analysis (which is in excess of the 7.29% index yield on March 31). Given such reinvestment, the sustainable yield would be 8.8317 * 0.0760 = $0.6712., an slight decrease from the $0.6850 derived by a similar calculation last month; the decline may be attributed to the increase in credit quality over the month.

Different assumptions lead to different calculations, 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.

Trading eased off a little in March, with portfolio turnover of about 80%, in a market notable for its volatility – PerpetualDiscounts were down 5.28% at the nadir on March 10, but recovered to post a return of +1.05% for the month. There was continued huge issuance of Fixed-Resets during the month, with over $1.2-billion hitting the streets.

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the 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:

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed. The overall credit quality of the portfolio is now superior to the credit quality of CPD at August month-end (when adjusted for the downgrade of BCE).

Claymore provides the following ratings breakdown:

Two events have occurred since the Dec. 31 calculation date of CPD’s credit quality:

• Rebalancing of TXPR index with only a slight change in quality
• Downgrade of BCE: CPD holds about 4.3% of its portfolio in BCE issues

As was the case with the February Composition Report, the changes in MAPF’s credit quality defy simple explanation; there were simply too many trades to allow for one or two trades to be highlighted as the source of the change. In sum however, the major changes were:

• In the FixedReset Sector, IAG.PR.C (Pfd-2(high)) was sold and BMO.PR.O (Pfd-1) was purchased,
• In the PerpetualDiscounts sector, several SLF issues (Pfd-1(low)) were sold and CU.PR.B (Pfd-2(high)) was purchased.

A plot of the Yields-to-Worst of SLF.PR.A (the most liquid SLF issue) and CU.PR.B is instructive. The peak in SunLife yields was enormous – and sadly, the fund got in too early to realize the full benefit of the return to more normal levels, having topped up its position in the week of February 13-17. However, the need to act quickly is well illustrated by CU.PR.B, for which it appears that a large sale order was executed in pieces over a two week period, driving the pre-tax bid-YTW to an elevated plateau. The fund was able to take advantage of the market impact of this trade, supplying liquidity to the seller at what appears – so far! – to have been a very nice price.

Trade details will be published with the semi-annual report to unitholders, due in July.

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. 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 29. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is similar
• MAPF Yield is higher
• Weightings in
  • MAPF weighting in PerpetualDiscounts is higher
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is more exposed to SplitShares
  • FixFloat / Floater / Ratchet is similar
  • MAPF is slightly less exposed to Fixed-Resets

In a poor month for preferreds, the fund was able to eke out a slight degree of outperformance against its benchmark index. This is actually better than it sounds, given the fund’s overweighting in PerpetualDiscounts, but the value-added as part of trading did show up in the estimation of sustainable income, which increased again this month.

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 yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

As discussed in the post MAPF Portfolio Composition: February 2009, the fund has positions in splitShares (almost all BNA.PR.C) and an operating retractible (YPG.PR.B), both of which skew the calculation. Since the yield on thes positions is higher than that of the perpetuals despite the fact that the term is limited, the sustainability of the calculated “sustainable yield” is suspect, as discussed in August.

Additionally, the calculated yield for the fixed-floater in the portfolio, BCE.PR.I, depends on the presumed value of Canada Prime (3.00%) and the percentage of Canada Prime paid on par value (100%); both of these figures may change. Prime is, in fact, now only 2.50% – while this change will affect the calculation of sustainable yield, this issue has a fixed yield until August 1, 2011.

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 7.82% shown in the February 27 Portfolio Composition analysis (which is in excess of the 7.29% index yield on February 27). Given such reinvestment, the sustainable yield would be 8.7600 * 0.0782 = $0.6850, an increase from the $0.6470 derived by a similar calculation last month.

Different assumptions lead to different calculations, 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.

Trading was relatively heavy in February, with portfolio turnover of about 135%, as the market showed an increasing distaste for insurers that eventually spread to banks by month-end. The huge issuance of bank Fixed-Resets ceased during the month, but MFC led the way with an issue that proved wildly popular towards month-end, followed by three bank announcements as quarterly results were unveiled.

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the 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 fund’s credit quality was affected by the downgrade of BCE, which did not have a great effect on its price. However, as a precautionary measure, holdings in this name were reduced by a partial swap into YPG.PR.B, an operating retractible also rated Pfd-3(high) by DBRS which is currently trading with an extraordinary yield. Both issues will be swapped into higher grade names as opportunities to do so on an attractive basis permit.

While I am not thrilled at the presence of Pfd-3(high) names in the portfolio, the total exposure and the exposure to individual names is well within reasonable limits and the credit quality of the portfolio remains higher than that of the benchmark indices.

Credit distribution is:

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed. The overall credit quality of the portfolio is now superior to the credit quality of CPD at August month-end (when adjusted for the downgrade of BCE).

Claymore provides the following ratings breakdown:

Two events have occurred since the Dec. 31 calculation date of CPD’s credit quality:

• Rebalancing of TXPR index with only a slight change in quality
• Downgrade of BCE: CPD holds about 4.3% of its portfolio in BCE issues

The other event impacting MAPF’s credit quality was a wholesale move into insurers, with the fund taking positions in SLF, GWO, IAG and ELF. The trading is too “messy” to present fairly in a table (the move itself was done in pieces; after the move was made there were many opportunities to swap between issues of the same name), so I will content myself with an illustration of the yields of the most liquid CM perpetualDiscount (CM.PR.H) vs. the most liquid SLF perpetualDiscount (SLF.PR.A):

• Yields-to-Worst
• Spread

Trade details will be published with the semi-annual report to unitholders, due in July.

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. 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 29. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is higher
• MAPF Yield is higher
• Weightings in
  • PerpetualDiscounts is similar
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is more exposed to SplitShares
  • FixFloat / Floater / Ratchet is similar
  • MAPF is slightly less exposed to Fixed-Resets

The fund was able to post superb performance in January, greatly in excess of its benchmark. In fact, all I need to do to have a great year is to break even for the next eleven months!

For clients, I must say that I am relieved that absolute return has finally joined relative return in the black.

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.

All I can say is … don’t expect this every month, folks! Extreme inefficiency in the preferred share market made trading highly profitable and returns were also enhanced by receipt of retraction proceeds from the split-shares WFS.PR.A and FFN.PR.A

When it works, it really, really works!

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

As discussed in the post MAPF Portfolio Composition: January 2009, the fund has positions in splitShares, which complicate the calculation greatly. Since the yield is, by and large, higher than that of the perpetuals despite the fact that the term is limited, the sustainability of the calculated “sustainable yield” is suspect, as discussed in August.

Additionally, the calculated yield for the fixed-floater in the portfolio, BCE.PR.I, depends on the presumed value of Canada Prime (3.00%) and the percentage of Canada Prime paid on par value (100%); both of these figures may change. Prime did, in fact, change this month and the presumed future dividend payments for BCE.PR.I changed from $25 * 0.035 = 0.875 to $25 * 0.03 = 0.75. This effect accounted for the bulk of the decline in estimated sustainable income … but frankly, I’m happy that trading in the fund was effective in offsetting the negative effects on the calculation of reducing the holdings of high-yielding short-term instruments, the split shares.

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 7.28% shown in the January 30 Portfolio Composition analysis (which is in excess of the 6.85% index yield on January 30). Given such reinvestment, the sustainable yield would be 8.8875 * 0.0728 = $0.6470, an increase from the $0.6027 derived by a similar calculation last month.

Different assumptions lead to different calculations, 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.

The fixed-floater postion discussed last month remains – but is much more profitable than it was

So, 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.

Trading was relatively heavy in January, with portfolio turnover of about 120%, as the late-December rally continued for the first half of the month and then settled in for a more traditional grind. The market was also affected by heavy issuance of Fixed-Resets, many of which had their issue sizes bumped upwards to meet investor demand. These Fixed-Reset issues seem to have found a new level for the initial fixed rate: 6.25% which is much more interesting than the 5.00% of last year. While still rather expensive as a class, the newer issues are at the point where they are becoming competitive with straight perpetuals.

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the 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.

Positions held in the split-share corporations WFS.PR.A and FTN.PR.A were tendered for their monthly retraction in mid-December and retraction proceeds were received in mid-January. The retraction was highly profitable.

The fund’s closing position in the Fixed-Reset BNS.PR.X arrived by a circuitous route:

Perhaps not the most profitable sequence of trades ever presented on this website, but they did a reasonable job of protecting the capital gains earned at mid-month! It should be noted that HIMIPref™ works by comparing like securities to like and is very cautious when swapping between classes … the impetus of initial trade was only partially direct analysis that NA.PR.O was more attractive than BMO.PR.K & BMO.PR.L; a major driving force of the trade was that the NA issue when taken relative to other fixed-resets was more attractive than the BMO issues relative to other PerpetualDiscounts.

Credit distribution is:

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed. The overall credit quality of the portfolio is now superior to the credit quality of CPD at August month-end.

The lowest rated issues in the portfolio are BCE.PR.I and BNA.PR.C. The latter issue is an entirely reasonable credit; a split share secured by shares of BAM.A with asset coverage that continues to be about 1.8:1.

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. 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 29. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is higher
• MAPF Yield is higher
• Weightings in
  • PerpetualDiscounts is similar
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is more exposed to SplitShares
  • FixFloat / Floater / Ratchet is similar
  • MAPF is slightly less exposed to Fixed-Resets

Sometimes everything works.

There are times – such as June of this year – when everything goes wrong. The market doesn’t just behave in a manner differently from that expected by quantitative models, but differently from basic common sense. All you can do at such times is review your models, review your assumptions, review your application … and if everything seems all right, sit tight! It will happen occasionally; no permanent harm is done unless you’re a leveraged forced seller, as were the quants in August ’07.

But sometimes the market cooperates enthusiastically, being just inefficient enough to allow a trade to be put on and then snapping back to normalcy to allow a profitable reversal. That’s what happened in December:

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.

All I can say is … don’t expect this every month, folks! My indices – and my records of external indices – go back to 1993-12-31; the worst month according to the HIMIPref™ PerpetualDiscount index and the “BMO-CM 50” was November, 2008. The best month in that period, by both measures, was December, 2008. The mood swing of the market exacerbated normal inefficiency and made huge bargains available that were promptly resold at ludicrous profit.

When it works, it really, really works!

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

As discussed in the post MAPF Portfolio Composition: December 2008, the fund has positions in splitShares, which complicate the calculation greatly. Since the yield is, by and large, higher than that of the perpetuals despite the fact that the term is limited, the sustainability of the calculated “sustainable yield” is suspect, as discussed in August. Additionally, the calculated yield for the fixed-floater in the portfolio, BCE.PR.I, depends on the presumed value of Canada Prime (3.50%) and the percentage of Canada Prime paid on par value (100%); both of these figures may change.

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 7.49% currently shown for the PerpetualDiscounts segment of the portfolio and the sustainable yield would be calculated as $8.0464 * 7.49% = $0.6027, significantly less than the figure calculated above, but still an increase from last month’s adjusted figure and continuing the long-term upward trend.

Additionally, the bulk of SplitShares held at month end were tendered for retraction; the remainder is almost entirely BNA.PR.C which does not mature until 2019, so the fat yield will be enjoyed for some time yet!

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.

Trading in December was frenetic, with portfolio turnover of about 200%. Many of these trades were not just intra-sector, but intra-issuer; that is, between similar issues of the same issuer, notably the PerpetualDiscount issues of CM, BMO and SLF. These trades were, in aggregate, highly profitable.

Of interest is the position held in November of FFN.PR.A. Readers will remember that I mourned the fact that it had been unprofitable to month-end, but that sad situation was rectified in December:

A major trade was executed from PerpetualDiscounts into SplitShares when – against all reason – the split share with a short term maturity and well-buffered against default underperformed the PerpetualDiscount index. This trade – into FFN.PR.A; discussed in the post on portfolio composition – is not yet profitable, but I am confident that it will become so in the near future.

Readers will also remember the November 24 trade from WFS.PR.A to FBS.PR.B; to continue that table:

2008 has been a tumultuous year, with declines in prices unparalleled in recent memory. The fund has not escaped unscathed, but has greatly outperformed its benchmark while remaining fully invested at all times. Enormous volatility in the market aggravated the normal inefficiency, particularly in the third quarter and provided the fund with ample opportunites for favourable trading.

And now we will see what 2009 brings…

Trading was frenzied in December as a hesitant rally in PerpetualDiscounts was swamped by a wave of tax-loss selling and then skyrocketted after the selling pressure lifted. Meanwhile, SplitShares enjoyed a sharp recovery from their November trough and BCE issues (which comprised the whole of the FixFloat index until the month-end rebalancing) reacted very badly to news of the failure of the BCE / Teachers’ Deal:

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the 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.

Positions held in WFS.PR.A and FTN.PR.A were tendered for their monthly retraction on their final dates (as per the fund’s sub-custodian): Dec 18 & Dec 11, respectively. I expect these retractions to be profitable, but not as profitable as they seemed at the time, since the market closed much of the gap between the trading price and the estimated retraction price between the tender date and the retraction dates of December 31:

Click Image for full-size PDF

Still, that’s the price you pay for caution! My very rough estimate of the retraction prices are $9.60 for WFS.PR.A and $8.32 for FTN.PR.A, but much depends on what price the issuer paid for the capital units required to make matched pairs.

Many readers will be more interested in the fixed-floater position: BCE.PR.I was purchased in two pieces on December 22 and December 23, following news that the normal course issuer bid would be restricted to 5% of outstanding common (which gives some comfort that the company will remain investment grade) and the DBRS pronouncement that Bell Canada (the operating subsidiary) is under credit review positive. These pieces of reassurance and the continued collapse of the share price (see chart above for fixed-floater total return) tipped the scales.

I mourn the absence of the PerpetualDiscounts which were swapped into the BCE.PR.I, but that’s life! I will note that on January 2, BCE.PR.I closed with a bid of $14.71 having traded as high as $15.49 on the day … so I won’t throw away the valuation model just yet! I will note that these trades have decreased the mis-match between the fund and the index.

Credit distribution is:

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed. The overall credit quality of the portfolio is now roughly equal to the credit quality of CPD at August month-end.

The lowest rated issues in the portfolio are the previously discussed BCE.PR.I and BNA.PR.C. The latter issue is an entirely reasonable credit; a split share secured by shares of BAM.A with asset coverage of about 1.8:1. In fact, the fund topped up its holdings of BNA.PR.C in December … the price has continued weak, but the yield of approximately 19% is very hard to resist! I will note that given a price of $9.00 for BNA.PR.C the asset coverage of the market price is approximately 5:1 … so I consider the investment well secured!

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. 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 29. When comparing CPD and MAPF:

• MAPF credit quality is similar
• MAPF liquidity is higher
• MAPF Yield is higher
• Weightings in
  • PerpetualDiscounts is similar
  • MAPF is less exposed to Fixed-Resets and Operating Retractibles
  • MAPF is more exposed to SplitShares
  • FixFloat / Floater / Ratchet is similar

The fund handsomely outperfomed its benchmark in November, but was dragged down by an unprecedented decline in preferred share prices. The immense volatility of the market is leading to most unusual trading opportunities.

How bad and how unprecedented was November? The BMOCM-50 Index was down 10.70%. Taking data from the BMOCM-50, I can say it was the worst month I have on record, with records beginning on December 31, 1992. And, you might well ask, what was the second-worst month? October 2008, down 8.16%. Third-worst? August, 1998 (Russian crisis) down a mere 4.51%.

In fact, of the twelve worst months since 1992-12-31, six have been in the last year.

The fund’s price at November 28, 2008 was $7.0106, after expenses, but before fees (which are billed individually to each client).

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 yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

The fund has positions in three “Split Share” preferreds – terribly out of fashion at this time and trading at yields higher than the perpetuals – which, as explained in August results in the calculation being rendered somewhat suspect. If these positions were sold – at the closing bid on 11/28 – and all cash reinvested in rest of the portfolio, the resultant portfolio would yield 8.22% and the estimated sustainable dividend per unit (before fees and expenses) would be $0.5763; significantly less than the figure calculated above, but still an increase from last month’s adjusted figure and continuing the long-term upward trend.

The current situation whereby investment-grade SplitShare preferreds yield more than PerpetualDiscounts cannot last forever, and it may be anticipated that the calculated Sustainable will fall towards the adjusted figure of $0.5763 … the current calculation assumes that the yield will last forever, rather than the two or three years remaining until the maturity of the SplitShares. On the other hand, it is possible – unlikely, perhaps, in the current climate, but possible – that the yield on the split shares will fall so rapidly that profits may be taken as a capital gain in the near term and reinvested at sustainable yields close to the assumed level of 8.22%, which would lock in the currently estimated sustainable yield. I am not sure how the analysis may be best presented; perhaps at some point I will recalculate all the data using a sustainable yield equal to the PerpetualDiscount index.

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.

Trading in November continued to be heavy, with portfolio turnover at about 175%. Most of these trades were not just intra-sector, but intra-issuer; that is, between similar issues of the same issuer, notably the PerpetualDiscount issues of CM, BMO and SLF. These trades were, in aggregate, highly profitable.

A major trade was executed from PerpetualDiscounts into SplitShares when – against all reason – the split share with a short term maturity and well-buffered against default underperformed the PerpetualDiscount index. This trade – into FFN.PR.A; discussed in the post on portfolio composition – is not yet profitable, but I am confident that it will become so in the near future.

Of greater interest – and greater profitability, so far – was the November 24 trade from WFS.PR.A to FBS.PR.B:

The position in WFS.PR.A was largely established in July, with smaller purchases and sales since then. The largest single day’s trade was a purchase of 6,800 shares on July 9, funded by a sale of GWO.PR.G:

Most satisfactory! It should be noted that trades both in and out of GWO.PR.G have been performed against different issues as the market allowed in the interim.

At some point – and I won’t guess when that time will be! – the market will cease its decline and, probably, return to its normal levels of between 100bp and 150bp above long term corporates, which in turn will return to more normal levels against long term Canadas. This could happen extremely quickly and attempting to time the market is folly. At the moment, however, people are scared, the market is sloppy and trading opportunities abound.

The absolute performance of the fund is terrible, but the performance relative to the index and tradeable benchmark is superb. The sustainable yield – however calculated – is increasing. As the market recovers – or even stabilizes! – the steady drip, drip, drip of dividends will make itself felt in long-term returns.

Trading was heavy in November as a disorderly decline in a confused market brought many opportunities to the Fund, although there was a decline from October’s extraordinary level of activity.

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the 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 proportion of SplitShares held increased as the fund took a position in FFN.PR.A on November 19, following a preciptuous price decline.

FFN.PR.A was one of November’s worst performers:

Asset coverage of 1.4+:1 as of November 14 according to the company. Now with a pre-tax bid-YTW of 17.40% based on a bid of 5.63 and a hardMaturity 2014-12-1 at 10.00. XFN may be used as a proxy (albeit not a terribly good one) for the holdings and is down 7.2% since Nov. 14, so estimate the month-end asset coverage as $13.00. Given that the ask price of the FFN capital units was 4.10 at month-end, this implies a retraction price of $8.43 … although retractions are tricky with this issue in this environment because the company requires ten notice days prior to the month-end retraction valuation date. Still, it’s tempting!

Although the asset coverage of the preferred share’s obligations is only about 1.3:1, the coverage of the capital invested is over 2:1. Additionally, the estimated retraction – as of November 28 – is very attractive, providing a large, immediate profit. The fly in the ointment regarding retraction is the lengthy notice period – ten days – required prior to the retraction date; this problem is exacerbated by all the holidays in December. The fund may elect to retract its holding of FFN.PR.A, but a decision will not be made until the last minute!

Sadly, this has been an unprofitable trade to date, but the enormous yield, good asset coverage (relative to invested capital) and favourable retraction possibility means my only regret is missing the bottom by a few days!

Credit distribution is:

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed. The overall credit quality of the portfolio is now roughly equal to the credit quality of CPD at August month-end. The fund has a position in FBS.PR.B, currently under review-negative by DBRS and the position in FFN.PR.A is vulnerable, but is should be noted that while the asset coverage relative to obligations is under pressure, the asset coverage relative to invested capital remains comfortable.

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. 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 29. When comparing CPD and MAPF:

• MAPF credit quality is similar
• MAPF liquidity is somewhat higher
• MAPF Yield is higher
• But … MAPF is more exposed to PerpetualDiscounts and SplitShares
• MAPF is less exposed to Fixed-Resets and Operating Retractibles