Category: MAPF

There was heavy trading in November.

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.), which doesn’t make much of a difference this month. 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 shift from PerpetualDiscount issues into SplitShares was very dramatic, but I must stress that this was not done – and is never done – as a market call on the overall direction of the market. During the month it appeared that there were dramatic undervaluations in specific issues in the SplitShare sector; in order to buy them, something had to get sold!

It’s always useful to do a post-mortem on trades. The following tables are as accurate as I can make them, but I will stress that the trades are rarely precisely cash neutral. If, for instance, I have bought half the number I want of a particular issue at 21.00 during the day, I will not lift an offer at 21.50 just to complete the buying programme! Maybe there is something else that’s attractive on offer; maybe I’ll just keep the cash exposure overnight and put in another bid the next day. It’s important to avoid being too mechanical when trading in a relatively thin market such as preferred shares.

Anyway, here are the basic trades involving the sale of PerpetualDiscounts and the purchase of SplitShares, as well as I can disentangle them!

It should be noted that I am reporting only the specific trades illustrating the transfer of assets from the PerpetualDiscount sector to SplitShares; and at that, there are a few scrappy pieces missing. Full disclosure of all trades is made regularly; the full reports are regularly published on the fund’s main page together with the annual and semi-annual reports.

I will emphasize again that these trades were opportunistic and do not reflect any view on the market; I will also note that I considered BNA.PR.C to be ludicrously cheap, but had to sell the BAM.PR.N perpetuals to get into it in good size without overweighting my exposure to BAM (recall that BNA.PR.C is backed by BAM.A shares).

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 on 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.

I’m happy with the portfolio as it now stands. Credit quality and liquidity are good, and yields are well in excess of benchmarks. The positions should do very well as the situation normalizes.

A discussion of November’s performance will be posted shortly.

I received a call today from a client who is most concerned about the preferred share market in general and Malachite Aggressive Preferred Fund in particular. It will not have escaped notice that the fund price has been declining in recent months – when will it end?

However, the most important thing about fixed-income investing – and an investment in preferred shares is, for broad asset allocation purposes, an investment in fixed income – is that it is represents an investment in fixed income. A very circular definition to be sure, but I hope my meaning will be made plain shortly.

From now on, I will report sustainable dividends per unit as part of my regular portfolio disclosures. This number will be calculated as follows:

where

• SustDiv is the expected income per unit per year
• NAVPU is the Net Asset Value Per Unit
• PortYield is the Yield-to-Worst of the Portfolio
• Leverage is the degree of leverage in the portfolio

First – I should emphasize that “Leverage” should not be taken as meaning that the fund is leveraged on a regular basis. The fund can often hold relatively large cash balances, either positive or negative, to facilitate trading. If I attempt to purchase one security and sell another, I might not get filled on both sides to the same extent. If I don’t, I won’t force the cash to zero, by buying or selling something at whatever price it takes … I’ll (generally) wait until the next day and patiently wait until the market cooperates. These cash positions are normally wiped out fairly quickly – but when they exist at month end, the fund reporting can look a little odd! Note that in the table below, most of the “Leverage Factors” are less than 1.0, indicating that the fund was holding cash until it could be invested advantageously.

While the figures for Sustainable Income have been worked out in a mathematically precise manner, I must caution investors that these amounts will not necessarily be paid out to them in four equal installments annually. As may be seen from the historical distributions recorded on the Quarterly Performance Reporting Page, distributions are ‘lumpy’. This results from several factors:

• Sometimes, the market wants to capture the dividend a lot more than I want to keep it! Let us say that an issue is fairly priced at $25.00 (flat) and earns a $0.30 dividend tomorrow. The market price should be $25.30. Sometimes, the market really wants to capture the dividend, and the price goes up to $25.40. Why would I keep the issue? Why not just sell, and take $0.40 as a capital gain, instead of $0.30 as a dividend? I don’t have a good answer for that … so I sell. Naysayers may whine that this requires me to have a fairly good idea of what the “fair price” is … but that’s what I do!
• Sometimes I want to capture the dividend more than the market wants to keep it. Perhaps, in the above example, the market price of the issue is only $25.20. Well – I’ll be trying to buy it! If I can get it at that price then I will earn a $0.30 dividend right away and be left with an issue fairly priced at $25.00 … which is good business!
• The fund does not exclusively seek to maximize yield. I do not blindly purchase whatever yields the most.
  • I might, for instance, trade so that while I’m giving up yield, I’m picking up credit (e.g., I might wish to sell a Pfd-2(low) issue at a yield of 5.00% in order to buy a Pfd-1 issue at a yield of 4.80%).
  • There might be other instances whereby I can increase my ‘fair value’ while decreasing yield … I might wish to sell a perpetual at 5.00% in order to buy a retractible at 4.80%.

The first item on the above list will have the effect of reducing the dividend distribution, but increasing the capital gain distribution. The second item will have the opposite effect. The third item will not have a direct effect on distributions, but will reduce my reported portfolio yield. When the trades are successful, each will have the effect of ultimately putting more money in the unitholders’ pockets.

The fund is managed with an objective of maximizing fair value. I am indifferent as to whether this comes in the form of dividends or capital gains; I am indifferent as to whether the quarterly distributions of dividends are bigger or smaller than average.

From the above discussion, it should be understood that these calculations are a guide, intended to illustrate the idea that expected income per unit will be fairly constant. Successful trading – as has occurred in the past – will lead, eventually, to excess distributions and hence, more units.

Many will observe that this is much like one’s attitude should be when holding a bond, preferred share, or other fixed income vehicle directly: in the absence of credit disasters, it keeps on paying its agreed rate.

The RY.PR.F issue, for instance, is now quoted at 20.73, down a lot from its issue price of $25.00, but it’s still paying the same dividend now as when it started: $1.1125 annually. It would have been a lot nicer to have bought that dividend stream for $20.73, of course, rather than having paid $25.00 … but I can’t time the markets and I don’t think anybody else can either (as I have discussed elsewhere). What I do think MAPF can do – and what MAPF has historically been able to do – is to trade between issues, selling them when they’re ten cents expensive in order to buy something else that’s ten cents cheap, and passing those gains through to unitholders.

Malachite Aggressive Preferred Fund has been valued for October, 2007, month-end. The unit value is $8.8084. Returns over various periods are:

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 October returns are disappointing. As has been stated in the post regarding portfolio composition, the fund made a major move into the PerpetualDiscount sector during the course of the month. The sector looked thoroughly undervalued at the time of the trades … but it just kept on going down. The ghastly performance of the PerpetualDiscount sector has been discussed elsewhere.

As noted in the discussion of portfolio composition, I am very happy with the portfolio as it stood on October 31. HIMIPref™ was, perhaps, too early in determining that sufficient value existed in the sector to be worth a switch – and a switch between sectors requires a much greater increase in value than an intra-sector trade – but that’s the way it goes sometimes. A less sensitive system would miss potentially profitable trades.

More later.

There was heavy trading in October.

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.), which doesn’t make much of a difference this month. 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 shift from PerpetualPremium issues into PerpetualDiscounts was very dramatic, but I must stress that this was not done – and is never done – as a market call on the overall direction of the market. During the month it appeared that there were dramatic undervaluations in specific issues in the PerpetualDiscount sector; in order to buy them, something had to get sold!

It’s always useful to do a post-mortem on trades. The following tables are as accurate as I can make them, but I will stress that the trades are rarely precisely cash neutral. If, for instance, I have bought half the number I want of a particular issue at 21.00 during the day, I will not lift an offer at 21.50 just to complete the buying programme! Maybe there is something else that’s attractive on offer; maybe I’ll just keep the cash exposure overnight and put in another bid the next day. It’s important to avoid being too mechanical when trading in a relatively thin market such as preferred shares.

Anyway, here are the basic trades involving the sale of issues that were “PerpetualPremiums” as of 9/28, as well as I can disentangle them!

It should be noted that I am reporting only the trades out of securities held in the  PerpetualPremium sector as of last month end; and at that, there are a few scrappy pieces missing. Full disclosure of all trades is made regularly; the full reports are published on the fund’s main page together with the annual and semi-annual reports.

The above tables make the trend of the portfolio during the month fairly clear:

• PerpetualDiscounts dived
• PerpetualPremiums as a group were cushioned from the blow (as readers of Perpetual Hockey Sticks will have expected)
• The PerpetualPremiums in the portfolio actually outperformed their benchmark during the holding period
• When the PerpetualDiscounts had reached a large discount relative to the premiums, the trades were made
• The PerpetualDiscounts kept falling anyway.

A sad story, but one familiar to most value investors: there is usually a lot more “noise” in the marketplace than “signal”, but occasionally some presumed noise can actually represent a trend. And such was the case this time. 

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 on 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.

I’m very happy with the portfolio as it now stands. Credit quality is very high, as is liquidity, but yields are well in excess of benchmarks anyway. The positions should do very well as the situation normalizes.

A discussion of October’s performance will be posted prior to November 5.

There was heavy trading in September, with the main shift being sales of Split-Share corporations and purchase of Perpetual Premium issues. As always, these changes do not imply a change in view of overall future market performance, but are the result of tactical trades which aim to take advantage of pricing inefficiencies between issues; given that the HIMIPref™ PerpetualPremium index dropped by 93bp while the split-share index rose by 10bp, it is not really very surprising that such trades started looking a lot more attractive in September than they did in August!

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.), and readers may make their own adjustments to reflect interest. 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 shift from SplitShares into PerpetualPremiums had the effect of improving credit quality; perpetuals of all prices were being hit fairly indiscriminately, with the effect of making the higher quality issues relatively more attractive. 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 on 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 discussion of September’s performance is available here.

Malachite Aggressive Preferred Fund has been valued for September, 2007, month-end. The unit value is $9.1489, after a distribution of dividends of $0.116224. Returns over various periods are:

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.

Claymore has published their final monthly numbers and I have derived the following table:

It should be explicitly noted that the CPD returns are shown AFTER ALL FEES AND EXPENSES, while the MAPF numbers are shown after expenses, but before fees … so to make the numbers more comparable, take the annual fee from the fund’s web page and divide by the appropriate number to obtain the period’s fee.

So … perhaps not the greatest of all quarters, but considering that MAPF did not get the benefit of the huge rise in BCE preferreds in the quarter, staying even – actually, just a tad better than the ‘CPD Competition – after fees isn’t the worst thing that could happen. The last few days of September didn’t help, in either relative or absolute terms, when the market did very poorly, presumably due to digestive problems with the new issues.

More later.

Update, 2007-10-02

The DPS.UN NAV for September 26 has been published, so we can calculate the September-ish returns for it:

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for August and July to derive:

I will also note that the “BMO Capital Markets 50” index returned -1.35% for the month and +0.53% for the quarter, but will not analyze the situation further due to the proprietary nature of this index.

This is an unusual quarter. The basic problem is the BCE/Teachers deal, which had the effect of changing the BCE preferreds from junk issues into speculations on a takeover bid at blue-chip prices. This had a marked effect on returns for these issues, which ranged from a low of +9.52% (BCE.PR.H) to +23.52% (BCE.PR.G). The BMOCM-50 is 8.05% BCE issues as of 2007-9-30, but let’s look at the CPD holdings, which are publicly disclosed:

DPS.UN reported its portfolio in the June 30 Semi-Annual Report:

Anyway, my point in performing this minor piece of attribution analysis is simply to show the enormous influence the presence or absence of BCE issues has had this quarter in preferred share fund returns. A conscious decision was made to avoid these issues for the fund; this action was taken due to a feeling that with BCE in play, the instruments had become unanalyzable by quantitative measures (in addition to my general disdain for issued tied to Canada Prime!). This helped MAPF’s relative returns during the second quarter of this year and has hurt in the third. I have no regrets about the decision – but it certainly has made relative returns more volatile than would otherwise be the case.

Update, 2007-10-14: A discussion of portfolio composition as of September 28, 2007, is available here.

Not a lot of change in the sectoral composition of the fund’s holdings since the July 31, 2007 analysis. There is an increased allocation (up 6%) to PerpetualDiscount issues, a decreased amount (down 13%) to PerpetualPremium and an increase (+12%) in cash. As always, these changes do not imply a change in view of overall future market performance, but are the result of tactical trades which aim to take advantage of pricing inefficiencies between issues.

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.), and readers may make their own adjustments to reflect interest. 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 cash is not held in the portfolio for any kind of market-timing reason – I have bids in the marketplace to get it invested … as soon as someone gets desperate to unload their holdings! 

Credit distribution is:

Credit quality of the portfolio has improved a little since last month and remains within normal bounds. The variances in credit be constant as opportunistic trades are executed.

Liquidity Distribution is:

Liquidity has increased 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 on 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 discussion of August’s performance is available here.

Malachite Aggressive Preferred Fund has been valued for August, 2007, month-end. The unit value is $9.3309. Returns over various periods are:

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 underperformed this month; there were two major reasons for this:

• A position in BAM.PR.M / BAM.PR.N underperformed. What can I say? The fund bought them when they were cheap (according to me!) and they promptly declined to a level where they’re stupid-cheap (according to me!). It happens. Volume in these issues has picked up substantially since the mid-month price collapse and the price has recovered somewhat.
• The fund has a large weighting in split-shares, which underperformed this month. The market is currently deeply discounting split shares as a class, as I noted in a post on August 28 

A disappointing month, but beating the index every single month is a difficult thing to do!  I’ll just keep grinding away and swapping issues when the odds (according to me!) are in my favour.

Claymore has published their final monthly numbers and I have derived the following table:

It should be explicitly noted that the CPD returns are shown AFTER ALL FEES AND EXPENSES, while the MAPF numbers are shown after expenses, but before fees … so to make the numbers more comparable, take the annual fee from the fund’s web page and divide by the appropriate number to obtain the period’s fee.

So, while August’s returns were sub-par, the quarterly number still looks very good. 

Trading in August was actually very quiet (with the exception of a BAM.PR.M / BAM.PR.N swap). Volumes were low, spreads were high; I put in quite a few limit orders to try to take advantage of the high spreads, but there were only a few traders out there sufficiently desperate to trade that they were willing to accept my lousy prices. A return of volume in September will, I hope, lead to increased trading possibilities. 

The DPS.UN NAV for August 29 has been published, so we can calculate the August-ish returns for it:

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for June-ish and July-ish to derive:

So we have the same pattern: underperformance over a one-month period, but out-performance over three months.  

Note that the DPS.UN returns are net of all fees and expense, while the MAPF returns shown above are after expenses, but BEFORE FEES.

To see MAPF performance for a wide variety of periods, with comparisons to the BMO Capital Markets 50 Index (formerly the BMO-NB 50 Index), please see the fund’s main page, where there are numerous links under the heading “Performance”.

Update: Portfolio composition as of August 31 is discussed here.

Not a lot of change in the sectoral composition of the fund’s holdings since the June 29, 2007 analysis. Were it not for the other tables, readers might be forgiven for wondering whether there have been any changes at all!

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.), and readers may make their own adjustments to reflect interest. 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:

There has been a slight decline in credit quality,  but quality is still well within normal bounds. The variances in credit be constant as opportunistic trades are executed.

Liquidity Distribution is:

Liquidity has declined somewhat from June’s elevated levels and are now comparable to that found in the analysis of the Claymore ETF April Portfolio.

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 on 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 discussion of July’s performance is available here.

Malachite Aggressive Preferred Fund has been valued for July, 2007, month-end. The unit value is $9.3627. Returns over various periods are:

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.

I’m very happy with the results. The NAV for the Claymore ETF (CPD on the TSX) is not yet available, but as of July 30, they were up only 5bp-and-a-hair on the month, so it looks like I earned my fees. Note that last month I expressed concern that I would underperform this month, since the BCE/Teachers deal was announced subsequent to month-end and was expected to boost returns of the BCE Prefs considerably. Well, returns of BCE Prefs were outrageous this month, I didn’t hold any, CPD did … but I outperformed anyway. Sometimes it works! (Not all the time, unfortunately!)

I will discuss performance further tomorrow, in an update to this post.

Update & Bump, 2007-08-01:

Claymore has published their final monthly numbers and I have derived the following table:

It should be explicitly noted that the CPD returns are shown AFTER ALL FEES AND EXPENSES, while the MAPF numbers are shown after expenses, but before fees … so to make the numbers more comparable, take the annual fee from the fund’s web page and divide by the appropriate number to obtain the period’s fee.

Still, I’m very pleased with these recent results.

Trading during the month returned to normal levels (about 30-35% of the portfolio turned over in July) from June’s frenetic activity. I would certainly like to see more volatility, but I’ll take what I can get! The recent excitement with US Junk Bonds hasn’t really affected the Canadian Preferred market to any huge degree, but it should be noted that Pfd-3 credit spread has increased markedly. The spreads referred to in the linked graph, by the way, represents the spread between Pfd-2 and Pfd-3, and are shown on an after-tax basis.

However, MAPF doesn’t really care a lot about the Pfd-3 spread – holdings continue to be of higher quality and this is not expected to change. Those tempted by the higher yields on Pfd-3 issues should take to heart my cardinal rule: no more than 10% of total holdings in Pfd-3 issues, and no more than 5% in any single Pfd-3 name.

And now … we will see what August brings!

Update, 2007-08-03 The DPS.UN NAV for August 1 has been published, so we can calculate the July-ish returns for it:

It should be noted that the DPS.UN returns for July, estimated as +1.38%, slightly exceed the “BMO Capital Markets 50” index, which came in at +1.33%. DPS.UN strongly outperformed CPD, with a heartfelt ‘thank-you’ to its overweighting in BCE issues.

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for June-ish and May-ish and construct the following table:

So by this measure MAPF did indeed underperform the competition in July, due to relative weightings in BCE, but out-performed quite handsomely over the prior three months. Note that the DPS.UN returns are net of all fees and expense, while the MAPF returns shown at the top of this post are after expenses, but BEFORE FEES.

To see MAPF performance for a wide variety of periods, with comparisons to the BMO Capital Markets 50 Index (formerly the BMO-NB 50 Index), please see the fund’s main page, where there are numerous links under the heading “Performance”.

Update #2, 2007-08-03: Y’know, something’s just occurred to me, looking at that quarterly data and particularly the monthly data whence it is derived.

At some point in the future some extremely sophisticated ultra-quantitative high-powered analytical shop is going to look at these results with a view towards recommending whether their client should allocate Hymas Investment some assets. They’ll put an MBA in charge of the research.

As we all know, a long time ago, MBA stood for “More Bad Assets”. Then it stood for “Mexico, Brazil, Argentina”. I suppose that someday soon it will stand for “Mortgages, Banks, ABXs”. But that’s beside the point.

Anyway, this MBA won’t know or care about what I held vis a vis the index in the past few months. “Meaningless details!”, he’ll bark. “I’m an extremely sophisticated high-powered ultra-quant! Just yesterday, I showed my mummy a spreadsheet! Results! Don’t give me stories, give me results! Do you know who I had lunch with last week?”

So he’ll look at my results. While the past few months, taken as a whole, will certainly improve the relative returns of my fund, they will also significantly increase the standard deviation of my returns.

I’ll end up losing the account. “Too much variance! Nice returns – but too risky!” Disdaining BCE prefs might end up costing me business.

Update, 2007-8-6: Portfolio composition is discussed here.