I received a query today regarding the fund I offer, Malachite Aggressive Preferred Fund, and on PrefLetter, my monthly newsletter recommending preferred share issues of all classes to buy-and-hold retail investors.
A couple of quick questions as I consider your fund or letter:
– How do you balance the pref letter recommendations with with the buying/selling for the fund and any segregated accounts you control?
– Is there enough liquidity in the issues that you recommend or is there price movement soon after you issue the monthly letter?
Balancing Recommendations
PrefLetter is prepared after the close on the second Friday of each month according to the closing quotations and delivered to subscribers prior to the opening on the following Monday. The fact that the market is closed during the preparation of recommendations helps to reduce conflict between the two sets of duties.
Additionally, PrefLetter is oriented towards long term investment, while assets under management are more trading oriented. While there is necessarily a great deal of overlap between the two methods used to rank potential purchases, this overlap is not total. Briefly, PrefLetter is more yield oriented, while discretionary assets are more pricing-discrepency oriented.
Beyond that, I can only offer my integrity. When I do a job for somebody, I do the best job I can.
Sufficient Liquidity
It varies. The turnover in the issues recommended in PrefLetter is about 50% per issue; and those issues losing their status as top-of-the-list have rarely become unwise investments due to price movements or credit changes, they’ve just become less good than the issues chosen to replace them.
While some issues that are dropped might experience their change very shortly after publication, others just slowly drift off the list. Sometimes this is due to trades that other managers are executing on the market … if a manager wants to sell something and his dealer can’t find a counterparty with whom to cross the block, they will sometimes put in an iceberg order to execute it in pieces; that is, there may be a sell order of 100,000 shares entered with the exchange, but only 1,000 shares at a time will show on the board.
These icebergs are generally at attractive prices; the seller may know as well as I do that the issue is cheap to its comparables, but it doesn’t matter to him: he has to sell! Buyers at this attractive price are essentially selling him liquidity, charging him X cents for the service they are doing of taking it off his hands.
And when I make the recommendation, I have no way of knowing whether there ar 99,000 or 1,000 shares left in the total order: that’s the point of an iceberg!
Another technique seen recently is more labour intensive for the seller: there was an issue recommended recently for which there was, for practical purposes, no large offer on the board. However, whenever a limit bid was placed in excess of the seller’s price, he would hit that bid (this might have been an algorithmic trade).
In short, it depends on the vagaries of the market, but recommendations are reasonably stable and I provide alternatives where possible – similar issues from the same issuer – that increase the effective life of each recommendation.