Category: MAPF

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.

Well, if you thought portfolio composition changed dramatically from April 30 to May 31, just take a gander at the June 29 composition!

Sharp-eyed readers will observe that 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 may make their own adjustments to reflect interest. The average YTW on the securities-only portion of the portfolio, for instance, is actually about 5.01% … it is the 3% leverage factor that brings it up to 5.16%. MAPF will often have relatively large cash balances to facilitate trading.
These sharp-eyed readers will also note, with a certain amount of glee, that the percentages do not add up to exactly 100% in the above or the following tables. This is due to rounding. You know something? Sharp-eyed readers really bug me.
Credit distribution is:

Liquidity Distribution is:

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available 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 June’s performance is available here.

Malachite Aggressive Preferred Fund has been valued for June, 2007, month-end. The unit value is $9.3114, after a dividend distribution of $0.066279. 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.

Well, that’s the worst quarter for the fund since 2Q04. So why am I happy? Let’s have a look at how the Claymore ETF did on the month – regular readers of this blog will be familiar with this fund, which is a useful passive benchmark.

Diversified Preferred Share Trust, DPS.UN on the Toronto exchange, has the anti-social practice of not publishing month-end NAV numbers, but we’ll do what we can: 

So Malachite, after expenses but before fees, beat the passive alternative (after expenses & fees) by nearly two percent in a single month.

It is, of course, unpleasant to lose money. A sensible investor will expect such things to happen occasionally and will not attempt to time the market, but will make an overall asset allocation based on reasonable medium term expectations of returns. The asset allocation should be reviewed on a regular basis, of course, to ensure that changes in expectations and investment needs are reflected in the portfolio, but a rationally active investor will attempt to outperform within each relatively homogeneous asset class without market timing. From this perspective, an outperformance of nearly 2% in a bad month is just as good as the same outperformance in a good one.

While June 29 BMO-NB50 index numbers are not yet available, I expect to see a return of roughly -5.25% on the quarter … which makes the MAPF return (after expenses, before fees) of -1.59% look pretty good! If the fund can outperform at the rate of about 3.6% per quarter forever … well, I’d be very happy, but I’m not going to bet on it! I’m happy when I can earn my fees by delivering net out-performance within the asset class to unitholders. 

Trading during the month was frantic, as I predicted last month. Shares with a book value in excess of 90% of the total book value at the end of May were sold and replaced with new purchases. This incurred commission expenses of about 0.50% , so those who have been hoodwinked into the belief that the Trading Expense Ratio is an important number will certainly not wish to invest in the fund! I suspect that the BCE/Teachers deal and the proposed redemption of the BCE Preferreds at a very high price relative to current market will lead to continued turmoil in the market and lots more trading in July … but we will see!

The noted BCE/Teachers deal may be expected to boost the market price of BCE preferreds considerably when markets re-open on July 3 – and MAPF doesn’t hold any! Such is life … as I’ve noted before, in the absence of good information about a deal (and remember, preferred shareholders haven’t actually seen any Teachers’ money yet) BCE preferreds are just a crapshoot on credit … and MAPF doesn’t play craps! The underlying philosophy of the fund continues to be that investment-grade preferred shares are bundles of cash-flows trading at fluctuating prices and that money can be made by weighing these bundles of cash-flows to determine value based on reliable public information and trading to exploit inefficiencies – not by taking a wild guess and hoping to strike the jackpot.

If the BCE Prefs move to within “arbitrage difference” of the offering prices disclosed in the BCE press release, I expect DPS.UN & CPD to outperform MAPF over the next month. However, if something should happen to the deal … like, maybe, Telus moving in, or some private equity guys coming along with a credible hostile bid, negatively affecting perceptions of the BCE prefs’ quality … maybe they won’t. But you will not see MAPF making bets like that! Once credit gets called into question, I start getting very nervous! At worst, I do not anticipate that MAPF underperformance due to BCE will exceed the outperformance in the second quarter that is largely due to not holding in on the downside. Note that BCE prefs represent about 7-10% of the value of the passive funds.

The distribution of dividend income for the quarter was small, which is most gratifying. Given that the fund now has a realized capital loss on the year to date, it is tax-efficient to emphasize capital gains (or reduced capital losses!) over receipt of dividend income and some trading took advantage of this … particularly since it seemed that RBC had a client pursuing an aggressive dividend capture strategy! I don’t have a lot of control over the capital gain/dividend split, but HIMIPref™ does account for the difference in taxation and potential trades are nudged a little.

Portfolio characteristics as of the end of June are discussed in another post.

Malachite Aggressive Preferred Fund has been valued for May, 2007, month-end. The unit value is $9.3259. 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.

Well, this month’s returns remind me of the story about the broken-down old gambler, heading to the racetrack with the milk money and telling his buddy “I hope I break even today – I need the money!”.

The total return before fees was -0.88% and I certainly don’t want too many more months in a row of that stuff! However, when it is compared with the various HIMI indices, one realizes that it could have been a lot worse.

When one examines the returns of the passive funds in that last link, one realizes that for most people, it was indeed a lot worse: the Net Asset Value Per Share of CPD was down 2.36% on the month and DPS.UN probably did worse.

The markets will fluctuate. An investor who does not indulge a penchant for market-timing will simply select an appropriate asset allocation and try to outperform within each asset class … and, when looked at from the perspective of such an investor, losing less money in a bad month is just as good as making more money in an up month. I’m very pleased that the fund was fully invested throughout May and yet still managed to lose so little money.

The fund did a fair amount of trading during the month and a fair amount of investment was shifted from the SplitShare sector into the PerpetualPremium sector, as retail scrambled to sell anything with the word “Perpetual” in its description. I have already posted the sectoral characteristics at month-end.

I anticipate a heavy trading volume in June, when the non-engaged segment of retail gets a look at their statements and as the fundcos attempt to beautify their portfolio statements for their semiannual reports. But who knows? Stay tuned!

Update, 2007-6-15: Sentry Select has posted the historical returns for DPS.UN:

There have been a fair number of changes in portfolio composition since the April 30 analysis. With the huge volatility in the market, trading opportunities have been numerous!

Sharp-eyed readers will observe that 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 may make their own adjustments to reflect interest. The average YTW on the securities-only portion of the portfolio, for instance, is 4.85%. MAPF will often have relatively large cash balances to facilitate trading.

These sharp-eyed readers will also note, with a certain amount of glee, that the percentages do not add up to exactly 100% in the above or the following tables. This is due to rounding. You know something? Sharp-eyed readers really bug me.

Credit distribution is:

Liquidity Distribution is:

Update: I forgot the ad! 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.