PrefBlog

An analysis of the CPD portfolio in March 2021.

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An analysis of the ZPR portfolio in September 2020.

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An analysis of the CPD portfolio in mid-2017.

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My footnote to the title probably says it best (hyperlinks added):

This essay is largely copy-pasted from the appendix to the October, 2009, edition of this newsletter (charts have been updated and the text lightly edited), which in turn borrowed heavily from my blog post of 2008-6-21, Market Timing, available on-line at http://www.prefblog.com/?p=2294 (accessed 2009-10-8). Reduce Reuse and Recycle, that’s me!

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On November 19, 2012, S&P announced a new index, the S&P/TSX Preferred Share Laddered index (TXPL) and the next day BMO announced the establishment of the BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR), based on TXPL.

In this essay I examine the properties of the new fund, opining that there was a very good chance that ZPR will become an important part of the Canadian preferred share in a relatively short period of time.

At this remove, though, it is the digressions that are of greater interest:

• Digression: Money Market Funds and Spread-WAM
• Digression: The Importance of Time-Weighted vs. Dollar Weighted Returns
• Nested Digression: Cost of Mandatory Reporting of Dollar-Weighted Returns

Regulators have done a lot of stupid things, but the creme de la creme is the mandatory reporting of Dollar-Weighted Returns.

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In this essay, I looked at the portfolios of MAPF and some of its (much) larger competitors to highlight the differences between them. For example, I looked at the sustainability of their dividends, given that at the time of writing a great many of the issues were trading at a premium and therefore expected to be called and replaced with lower coupon issues in the future.

But I remember this article mainly for its revelation regarding the revolving door nature of TXPR at the time:

It is in everybody’s interest that the reported index fund tracking fund [sic – I meant ‘tracking error’] be minimized: it’s good for the fund sponsors and it’s good for the organizations that calculate their indices. However, the practice of pre-announcing index changes does nothing to address the poor effects on performance that results when many index players are all attempting to take the same investment action – it serves merely to bury this frictional cost of index investing in the index itself.
…
There is no way to eliminate the problem – it is clear that a great many people want index funds and that therefore there will be a large pool of capital that executes trades on the market for reasons that are irrelevant either to the intrinsic value of the security, or to a (possibly informed) view on the price at which such a trade can be reversed. Any market player who does such a thing must expect to incur market impact costs.

However, Table A-2 and the related discussion make it clear that the methodology currently in use by S&P for the TXPR index has given rise to a whipsaw effect: there were many issues added to the index in the 12Q4 revision for no reason other than an increase in measured volume; and the increase in measured volume arose as a direct result of deletion in the 12Q3 revision.

This problem was eventually fixed (I think by imposing a time-out during which reinstatement of issues was not allowed) but I forget when. I’ll update this post if I can ever find the reference! Update: It didn’t take long! On November 24, 2012, S&P announced the introduction of the TXPL index and revisions to TXPR methodology, including “Issues deleted from the index are not eligible for re-inclusion until six months after the effective date of the exclusion; they may no longer be added back at the following rebalancing”

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In this essay, I look at how the fund companies report their sectoral distribution to current and prospective unitholders and conclude:

It’s too early for conclusions, I’ve only just finished describing the data!

It is clear, however, that the funds report to unitholders in an inconsistent manner, sometimes (as is often the case with reporting the structural breakdown of the fund) not even internally consistent. While this is clearly an indication of a certain level of sloppiness, it should not necessarily be taken as a reflection of the portfolio manager’s skill, as the portfolio manager will typically be involved in the audit and preparation of financial statements in a very minor way, if at all.

However, it does show that there can be no such thing as a casual investment in a preferred share vehicle, as (unlike bond funds) funds and their strategies cannot be compared directly via summaries prepared by the fund companies with any confidence whatsoever.

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It’s not really an issue any more, given this year’s jump in yields, but owning premium bonds can lead to undesirable tax effects, which are examined in this essay. There is also a section discussing the effects of bond liquidity.

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What is “risk”? Well, it ain’t the standard deviation of monthly returns, I’ll tell you that much right now. For the rest, you’ll have to read the essay!

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I examine instances of interconversion among FixedFloater / RatchetRate shares and conclude:

Interconvertability is an arcane nuance to preferred share investing, but can be used to boost returns on occasion. I expect the field to become more important as FixedResets become a more seasoned element of the preferred share investment universe and Strong Pairs, created at the first exchange date, become interconvertible at the second and successive exchange dates.

At the very least, when one has made a decision to invest in one element of a strong pair, the impact of interconversion should be examined, as it may be possible to buy the type of share that is not desired and convert to the desired element at a lower overall price.

This follows an an earlier look at the subject from the February, 2011, edition of PrefLetter

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