Archive for the ‘Publications’ Category

Research : SplitShare Credit Quality (PrefLetter Version)

Monday, June 20th, 2022

The innumeracy of regulators knows no bounds, so they permit statements in prospectuses such as:

In order to achieve the Company’s initial targeted dividends of $1.20 per Class A Share per annum, the Company will be required to generate an average annual return on the Portfolio of 8.58% if the value of the Portfolio is maintained intact until the Termination Date.

This calculation goes beyond the word ‘average’. Due to Sequence of Returns Risk, the required long term average will increase with the price volatility of the underlying portfolio, as the targeted dividends will be a significant cash drag on the company – just like a normal retirement portfolio!

In this essay, which was later distilled into a shorter version for popular appeal, I look at the determinants of credit quality for SplitShare preferreds.

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Research : Market Impact

Friday, June 17th, 2022

The concept of ‘market impact’ – the effect an order might have on the market price of the security being traded – achieved headline status with the 2010 ‘Flash Crash’. In this essay, I examine the role of market impact in more ordinary trading – very important in thin markets such as Canadian preferred shares! – and discuss the Flash Crash and its subsequent SEC investigation.

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Research : Market Adoption of Implied Volatility Theory

Thursday, June 16th, 2022

In October, 2010, it became apparent that the market was ascribing increased importance to Implied Volatility Theory as it applied to Straigh Perpetuals. In this essay, I review the evidence supporting this statement and consider the investment implications of this increased sophistication.

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Research : Fund Comparison 2010

Wednesday, June 15th, 2022

Preferred share funds can have very different characteristics; sometimes well explained by the issuer; sometimes less so. In this article I look at a few funds as they existed in 2010.

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Research : FixedReset Pricing

Tuesday, June 14th, 2022

Pricing of FixedReset issues was bizarre in the first few years of their existence, until the surprising (for many) and traumatic (for many more) December, 2014, reset of TRP.PR.A, convinced the market that maybe something a little more rational was required.

In this effort, I continued my investigation of what on earth was driving relative pricing in the FixedReset market in 2010, with the ‘Total Expected Loss Model’ and the ‘Expected Loss Rate Model’.

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Research : The Potential for Straight Perpetual Redemptions

Monday, June 13th, 2022

This essay continues a discussion of Implied Volatility Theory in the world of preferred shares, although I wasn’t referring to it in that manner. Only Straight Perpetuals were examined (a taxonomy of preferred shares is included in the article), and a rudimentary calculator was provided. This essay builds upon the earlier effort, Implied Volatility of Straight Perpetuals.

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Research : Closed Form Yield Calculation

Friday, June 10th, 2022

In this essay I began by briefly reviewing the previous month’s effort, Resarch : April, 2010, FixedReset Slump:

In the appendix to the May, 2010, edition, we looked at the behaviour of FixedResets during their Slump Period from 2010-3-26 to 2010-4-29 and concluded that issues of this type are trading on the basis of Current Yield – that is, the current dividend divided by the price. There appears to be an adjustment to valuation based on the total expected capital loss.

This is despite the fact that this is a completely insane methodology. It ignores:

  • • The rate (total/time) of the expected capital loss should the issue be called (virtually a certainty for most extant FixedResets)
  • • The change in dividend should the issue not be called and the dividend reset for the ensuing five years to the defined spread about Canadas
  • • The proximity of the ex-Dividend Date

This led to a fair bit of high-school algebra that derived a closed-form approximation to the yield of a perpetual preferred share with a constant dividend rate to perpetuity; as well as an approximation for the yield of a maturing instrument.

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Resarch : April, 2010, FixedReset Slump

Friday, June 10th, 2022

Prices of FixedResets slumped in April, 2010, but the market didn’t really have a rational valuation model at that time. Changes in valuation differences between issues were difficult to understand.

In this 2010 essay I attempted to determine just what the market was considering to be important.

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Research : Annuities, Part 1

Wednesday, June 8th, 2022

Annuities arouse strong emotions in many investors. Some despise them, others won’t consider anything else – and, I’ve noticed, few of these antagonists are able to back up their views with hard data and logical argument. In many cases, it seems that many investors will strongly deprecate Straight Preferred shares, while expressing adoration for annuities simply because the price of Straights is so volatile … ignoring the fact that the price of annuities is also extremely volatile, but since it is not reported honestly to the purchaser nobody notices. It’s a lot like GICs!

In this 2010 essay (which builds upon the PrefBlog post Preferred Shares & Annuities) I looked at annuities as a component of a retirement portfolio and concluded in part:

They are a lousy investment, but they are great insurance!

There is a follow-up article available via Annuities, Part 2.

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Research : FixedResetPremium Tax Effects

Tuesday, June 7th, 2022

Tax effects are an important consideration in preferred share investing, but there are nuances that sometimes snare the unwary into making bad decisions. If one takes the view that a particular issue is likely to be called at the next opportunity, for instance, one may then calculate the yield in the usual manner – but the income received will be heterogeneous, comprised of a dividend stream punctuated by a capital loss. Taxes on the dividend income (which will be higher than ‘normal’) will be paid in the year following receipt, while the offsetting tax benefit on the capital loss will be realized only in the year following redemption – and even then, will not be claimable until the investor has an offsetting capital gain. Another issue is the effect of the dividend stream on the OAS clawback, which is also discussed.

While I have little patience for the tax-obsessed naifs who are willing to spend a dollar on worry, market action and missed opportunities in order to save a quarter on taxes, these effects should be understood; there has been a brief discussion of tax effects on PrefBlog and a calculator is available; but this essay is a more detailed exposition.

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