PrefBlog

The fund performed well in a volatile month, in which a sharp early drop in values was overtaken by a slow and steady gain:

And … the end of this month marked the eighth full year of operation for Malachite Aggressive Preferred Fund. Since its inception in March, 2001, it has delivered a cumulative return of +100.38% (after expenses, before fees), doubling its money, while the benchmark index has returned a cumulative total of +4.92%.

The fund’s Net Asset Value per Unit as of the close March 31 was $8.8317 after giving effect to a distribution of $0.191322 per unit.

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 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: March 2009, the fund has positions in splitShares (almost all BNA.PR.C) and an operating retractible (YPG.PR.B), both of which skew the calculation. Since the yield on thes positions is 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 is, in fact, now only 2.50% – while this change will affect the calculation of sustainable yield, this issue has a fixed yield until August 1, 2011.

And finally, the yield calculations with respect to FixedReset issues is dependent upon a constant yield of the 5-Year Canada bonds whence the reset rate is calculated. Calculations include the contemporary yield on 5-Year Canada’s; if this value were to be increased, the calculated yield-to-worst on the Fixed-Reset issues held would also increase.

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 7.60% shown in the March 31 Portfolio Composition analysis (which is in excess of the 7.29% index yield on March 31). Given such reinvestment, the sustainable yield would be 8.8317 * 0.0760 = $0.6712., an slight decrease from the $0.6850 derived by a similar calculation last month; the decline may be attributed to the increase in credit quality over the 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.

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 eased off a little in March, with portfolio turnover of about 80%, in a market notable for its volatility – PerpetualDiscounts were down 5.28% at the nadir on March 10, but recovered to post a return of +1.05% for the month. There was continued huge issuance of Fixed-Resets during the month, with over $1.2-billion hitting the streets.

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.

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 (when adjusted for the downgrade of BCE).

Claymore provides the following ratings breakdown:

Two events have occurred since the Dec. 31 calculation date of CPD’s credit quality:

• Rebalancing of TXPR index with only a slight change in quality
• Downgrade of BCE: CPD holds about 4.3% of its portfolio in BCE issues

As was the case with the February Composition Report, the changes in MAPF’s credit quality defy simple explanation; there were simply too many trades to allow for one or two trades to be highlighted as the source of the change. In sum however, the major changes were:

• In the FixedReset Sector, IAG.PR.C (Pfd-2(high)) was sold and BMO.PR.O (Pfd-1) was purchased,
• In the PerpetualDiscounts sector, several SLF issues (Pfd-1(low)) were sold and CU.PR.B (Pfd-2(high)) was purchased.

A plot of the Yields-to-Worst of SLF.PR.A (the most liquid SLF issue) and CU.PR.B is instructive. The peak in SunLife yields was enormous – and sadly, the fund got in too early to realize the full benefit of the return to more normal levels, having topped up its position in the week of February 13-17. However, the need to act quickly is well illustrated by CU.PR.B, for which it appears that a large sale order was executed in pieces over a two week period, driving the pre-tax bid-YTW to an elevated plateau. The fund was able to take advantage of the market impact of this trade, supplying liquidity to the seller at what appears – so far! – to have been a very nice price.

Trade details will be published with the semi-annual report to unitholders, due in July.

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 similar
• MAPF Yield is higher
• Weightings in
  • MAPF weighting in PerpetualDiscounts is higher
  • 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