Category: MAPF

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

The fund handsomely outperfomed its benchmark in October, 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.

The fund’s price at October 31 was $7.7247, 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 two “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 10/31 – and all cash reinvested in rest of the portfolio, the resultant portfolio would yield 7.19% and the estimated sustainable dividend per unit (before fees and expenses) would be $0.5554; significantly less than the figure calculated above, but still an increase from last month’s adjusted figure and continuing the long-term upward trend.

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

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. At the moment, however, people are scared, the market is sloppy and trading opportunities abound.

As has been noted, the fund maintains a credit quality superior to the index; outperformance is due to constant exploitation of trading anomalies.

Trading was heavy in October as a disorderly decline in a confused market brought many opportunities to the Fund. Turnover was approximately 200% for the month, but a high proportion of these trades were intra-issuer (trades between the CM issues were particularly frequent) and most others were intra-sector (PerpetualDiscounts rose at different rates).

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 was due to a small trade executed to maximize holdings of WFS.PR.A when the price declined in early October. A post-mortem of this trade is:

So the return of BMO.PR.H since the trade has been -7.67% (including the dividend) while the return of WFS.PR.A has been -6.20%. Thus far, the trade has been successful.

The decline in price of WFS.PR.A is probably due to concerns over credit quality. Asset coverage over the period, according to Mulvihill has been:

As of June 30, according to Mulvihill, the underlying portfolio for WFS was:

• Canada, 35.9%
• United States, 23.3%
• International, 23.0%
• Cash & Other, 17.8%

Of the 93.2% of total assets held in equities, 17.6% was hedged with put options.

WFS.PR.A has a scheduled maturity of 2011-6-30, so the remaining term is just 2 years & 8 months. The price should be supported by a valuable monthly retraction privilege – but this is not happening for reasons I don’t understand. As a count against the position, it should be noted that DBRS has the issue under Credit Review Negative and it may be downgraded from its current Pfd-2(low) rating.

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 improvement in credit quality was driven largely by movement out of PWF and GWO issues (which comprised 18.7% of the portfolio on 9/30) into BMO (from 7.3% of the portfolio to 25.5%). BMO issues were hit by weakness in the latter part of the month and these quality improvements have not yet borne fruit: the quality spread continued to narrow to the point where the lower quality issues are trading at even-yield (or through!) the higher quality issues. On the positive side, there has been significant opportunity for trading amongst the BMO issues, so the effort has not been a total loss.

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 superior
• 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

There was a substantial amount of trading in September, as a sometimes disorderly decline in prices of PerpetualDiscounts in a confused market brought many opportunities to the Fund. Turnover was again close to 100% for the month, but a high proportion of these trades were intra-issuer (trades between the CM issues were particularly frequent) and most others were intra-sector (PerpetualDiscounts rose at different rates).

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.

As may be seen, overall portfolio composition is little changed. There were a few small trades in WFS.PR.A which affected the weight in SplitShares; the change in the PerpetualDiscount weight was due to normal fluctuations as trades are entered to the extent that the market provides good prices; zero cash is targetted but is not an over-riding objective as long as the amount is relatively small.

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.

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 CPD as of May month end; it should be noted that the underlying TXPR index has been rebalanced and the rebalancing analyzed in Canadian Moneysaver; this article will be republished on PrefBlog in the near future. When comparing CPD and MAPF:

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

The fund underperfomed its benchmark in September, but strongly outperformed the index over the quarter. As an investor, I can’t say I like the volatility any more than my clients do, but as an investment manager I have to say that the immense volatility of the market is leading to most unusual trading opportunities.

The fund’s price at September 30 was $8.1886, after a distribution of $0.168825 per unit, 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 two “Split Share” preferreds – terribly out of fashion at this time and trading at yields higher than the perpetuals – which, as explained last month results in the calculation being rendered somewhat suspect. If these positions were sold – at the closing bid on 9/30 – and the proceeds reinvested in rest of the portfolio, the resultant portfolio would yield 6.608% and the estimated sustainable dividend per unit (before fees and expenses) would be $0.5411; significantly less than the figure calculated above, but still an increase from last month’s adjusted figure and continuing the long-term upward trend.

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

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. At the moment, however, people are scared, the market is sloppy and trading opportunities abound.

More later.

Update, 2008-10-19: I note that according to Claymore the performance of CPD – as measured by its NAV – was -8.38% in the year to September 30. This figure is net of all fees and expenses; but is significantly worse than the actively traded MAPF.

The market continued its post-July-16 recovery in August, with the PerpetualDiscount index up 3.91% for the month, with only four of the twenty trading days showing a negative total return.

The fund, with its heavy weighting in PerpetualDiscounts (see MAPF Portfolio Composition, August 2008), had a superb return as a result of both the market’s overall move and very frequent trading. The fund unit price increased 5.86% before fees but after expenses.

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.

It is very gratifying to see the sharp increase in expected income per unit – if there was no trading in the fund, this would be a constant number.

I must point out, however, that the expected income is a little skewed this month due to the extraordinarily high yields calculated for WFS.PR.A (purchased during July) and BNA.PR.C (purchased in August). At month-end, these positions comprised 19.4% of the portfolio and were valued with an average yield of 8.40% (as a dividend!). Sadly, these yields cannot be expected to last forever, due to the embedded options in the structures – so, while the calculation shown is accurate as far as it goes, as a long-term indicator it is expected to decline upon redemption, when the proceeds reinvested in securities that will not necessarily yield 8.40%.

If these two issues had been sold at market value at the end of August and the proceeds reinvested proportionately in the existing portfolio, the “Securities Average YTW” in the table above would have fallen about fifty basis points (0.50%) to approximately 6.25%; this would result in an estimate of “Sustainable Income” of $0.5391; less than is reported, but still a substantial increase from previous figures. It is hoped, of course, that the market will shortly recognize the merits of the two issues and bid up their prices until the yield is – according to me! – more reasonable, which should allow the fund to take a good-sized capital gain when swapping it for another issue with upside potential.

Note that if the yields on these two securities with a limited life had been less than that on the perpetuals, I would not suggest that the calculation be revised upward! It is in the natural order of things that retractible issues should yield less than perpetuals; it is much more reasonable to suppose that funds received at maturity would be reinvested in similar, lower yielding securities than to suppose (as the actual, unadjusted calculation would assume) that similarly higher-yielding securities will be available in the future.

I should emphasize, however, that the fund does not explicitly seek to maximize this number. Yield on the portfolio will be given up when it is possible to exchange it for something else that is attractive: credit quality, say, or retractibility. Over the very long term, however, it is the prime objective of fixed income management to maximize the income received from a given amount of capital.

As was the case in July, the fund was able to improve its performance by heavy trading, particularly within the CM issues. The performance report for July highlighted some advantageous swaps within the CM credit, ending the month with a position in CM.PR.P. This month, I’ll show what happened to the position in CM.PR.P over the month of August – as always, remember that this table is a best efforts attempt to show the flow of trading; details will be released in the transactions summary on the fund’s web page in due course.

As may be seen in the table above, there was considerable chaos in the upward movement of the CM issues, which allowed opportunistic trading between the issues. These trades did not, in and of themselves, change the portfolio’s credit risk or have a material effect on any element of the portfolio’s overall risk profile. Opportunistic trading is what MAPF is all about!

All in all, it was a very good month for the fund – in fact, it was the third-highest one-month return since the fund’s inception at the end of March 2001. While the depredations of the year – or even of the summer – have not yet been fully erased, the fund has a performance far in excess of its benchmark for periods of a year or greater and projected sustainable income per unit continues to grow. On August 29 the PerpetualDiscount index had a weighted average bid-yield-to-worst of 6.11%, equivalent to 8.55% interest at the standard 1.4x conversion factor, while long corporates were yielding about 6.2%. This yield spread of 235bp is very high by historical standards and is rich compensation for volatility endured.

There was a substantial amount of trading in August, as the resurgence in prices of PerpetualDiscounts in a confused market brought many opportunities to the Fund. Turnover was close to 100% for the month, but a high proportion of these trades were intra-issuer (trades between the CM issues were particularly frequent) and most others were intra-sector (PerpetualDiscounts rose at different rates).

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 increase in SplitShares is due to purchases of BNA.PR.C net of a small sale of WFS.PR.A. Assiduous readers will recall that I consider exposure to BNA to be equivalent, for credit risk control purposes, to exposure to BAM. These readers will not be surprised, therefore, to learn that the purchase of BNA.PR.C was not only funded by a sale of BAM.PR.N, but that this trade reversed swaps undertaken last February.

As may be seen, the February-August swap was immensely profitable: there would have been a loss of $3.02 on the BNA.PR.C had it been held, about 14.6% of the February trading price. Instead, the BAM.PR.N lost $1.63, about 8.5% of the February trading price. The outperformance of BAM.PR.N by 6.1% is massive and leaves an old bond guy like me just shaking his head.

There will be those who will shout that it would have been better to have held cash during this period and lost nothing; but that would be market timing. I cannot predict the overall direction of the market, nor have I ever met anybody who can. The way to make money is to outperform the market whether it goes up or down; in time the rewards will be tangible.

As of month-end, the trade back into BNA.PR.C has not borne fruit – but given the substantial yield pick-up (over 2 points!) I consider it to be only a matter of time before the BNA.PR.C experiences a substantial price increase.

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.

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 CPD as of May month end; it should be noted that the underlying TXPR index has been rebalanced and I have not yet fully analyzed the changes. While the changes affect the allocation to the different sectors, I do not believe the credit or liquidity metrics will have changed much.

• MAPF credit quality is superior
• MAPF liquidity is somewhat lower
• MAPF Yield is higher
• But … MAPF is more exposed to PerpetualDiscounts
• MAPF is less exposed to Fixed-Resets