PrefBlog

The fund was able to post superb performance in January, greatly in excess of its benchmark. In fact, all I need to do to have a great year is to break even for the next eleven months!

For clients, I must say that I am relieved that absolute return has finally joined relative return in the black.

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.

All I can say is … don’t expect this every month, folks! Extreme inefficiency in the preferred share market made trading highly profitable and returns were also enhanced by receipt of retraction proceeds from the split-shares WFS.PR.A and FFN.PR.A

When it works, it really, really works!

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

As discussed in the post MAPF Portfolio Composition: January 2009, the fund has positions in splitShares, which complicate the calculation greatly. Since the yield is, by and large, higher than that of the perpetuals despite the fact that the term is limited, the sustainability of the calculated “sustainable yield” is suspect, as discussed in August.

Additionally, the calculated yield for the fixed-floater in the portfolio, BCE.PR.I, depends on the presumed value of Canada Prime (3.00%) and the percentage of Canada Prime paid on par value (100%); both of these figures may change. Prime did, in fact, change this month and the presumed future dividend payments for BCE.PR.I changed from $25 * 0.035 = 0.875 to $25 * 0.03 = 0.75. This effect accounted for the bulk of the decline in estimated sustainable income … but frankly, I’m happy that trading in the fund was effective in offsetting the negative effects on the calculation of reducing the holdings of high-yielding short-term instruments, the split shares.

However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 7.28% shown in the January 30 Portfolio Composition analysis (which is in excess of the 6.85% index yield on January 30). Given such reinvestment, the sustainable yield would be 8.8875 * 0.0728 = $0.6470, an increase from the $0.6027 derived by a similar calculation last month.

Different assumptions lead to different calculations, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

• the very good performance against the index
• the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.

The fixed-floater postion discussed last month remains – but is much more profitable than it was

So, again, there are no predictions for the future. The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

Trading was relatively heavy in January, with portfolio turnover of about 120%, as the late-December rally continued for the first half of the month and then settled in for a more traditional grind. The market was also affected by heavy issuance of Fixed-Resets, many of which had their issue sizes bumped upwards to meet investor demand. These Fixed-Reset issues seem to have found a new level for the initial fixed rate: 6.25% which is much more interesting than the 5.00% of last year. While still rather expensive as a class, the newer issues are at the point where they are becoming competitive with straight perpetuals.

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

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.). 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.

Positions held in the split-share corporations WFS.PR.A and FTN.PR.A were tendered for their monthly retraction in mid-December and retraction proceeds were received in mid-January. The retraction was highly profitable.

The fund’s closing position in the Fixed-Reset BNS.PR.X arrived by a circuitous route:

Perhaps not the most profitable sequence of trades ever presented on this website, but they did a reasonable job of protecting the capital gains earned at mid-month! It should be noted that HIMIPref™ works by comparing like securities to like and is very cautious when swapping between classes … the impetus of initial trade was only partially direct analysis that NA.PR.O was more attractive than BMO.PR.K & BMO.PR.L; a major driving force of the trade was that the NA issue when taken relative to other fixed-resets was more attractive than the BMO issues relative to other PerpetualDiscounts.

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. The overall credit quality of the portfolio is now superior to the credit quality of CPD at August month-end.

The lowest rated issues in the portfolio are BCE.PR.I and BNA.PR.C. The latter issue is an entirely reasonable credit; a split share secured by shares of BAM.A with asset coverage that continues to be about 1.8:1.

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 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 similar portfolio composition analysis has been performed on The Claymore Preferred Share ETF (symbol CPD) as of August 29. When comparing CPD and MAPF:

• MAPF credit quality is better
• MAPF liquidity is higher
• MAPF Yield is higher
• Weightings in
  • PerpetualDiscounts is similar
  • MAPF is much less exposed to Operating Retractibles
  • MAPF is more exposed to SplitShares
  • FixFloat / Floater / Ratchet is similar
  • MAPF is slightly less exposed to Fixed-Resets