The fund performed well in a month that was as remarkable for its consistency as it was for the strong performance of the preferred share market. As noted in the report of Index Performance, April 2009, the PerpetualDiscount index experienced only three down-days in the month, compared to eighteen gainers:
The fund’s Net Asset Value per Unit as of the close April 30 was $9.8406.
| Returns to April 30, 2009 | |||
| Period | MAPF | Index | CPD according to Claymore |
| One Month | +11.42% | +6.37% | +6.97% |
| Three Months | +13.12% | +5.08% | +6.36% |
| One Year | +19.08% | -8.46% | -8.33% |
| Two Years (annualized) | +9.35% | -7.05% | |
| Three Years (annualized) | +8.44% | -3.44% | |
| Four Years (annualized) | +7.93% | -1.77% | |
| Five Years (annualized) | +8.29% | -0.31% | |
| Six Years (annualized) | +10.96% | +0.76% | |
| Seven Years (annualized) | +9.61% | +1.49% | |
| Eight Years (annualized) | +10.41% | +1.42% | |
| The Index is the BMO-CM “50” | |||
| CPD Returns are for the NAV and are after all fees and expenses. | |||
| Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +6.3%, +5.1% and -8.6%, respectively, according to Morningstar after all fees & expenses | |||
| Figures for Jov Leon Frazer Preferred Equity Fund (which are after all fees and expenses) for 1-, 3- and 12-months are N/A, N/A & N/A, respectively, according to Morningstar | |||
| Figures for AIC Preferred Income Fund (which are after all fees and expenses) for 1-, 3- and 12-months are N/A, N/A & N/A, respectively | |||
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.
| Calculation of MAPF Sustainable Income Per Unit | |||||
| Month | NAVPU | Portfolio Average YTW |
Leverage Divisor |
Securities Average YTW |
Sustainable Income |
| June, 2007 | 9.3114 | 5.16% | 1.03 | 5.01% | 0.4665 |
| September | 9.1489 | 5.35% | 0.98 | 5.46% | 0.4995 |
| December, 2007 | 9.0070 | 5.53% | 0.942 | 5.87% | 0.5288 |
| March, 2008 | 8.8512 | 6.17% | 1.047 | 5.89% | 0.5216 |
| June | 8.3419 | 6.034% | 0.952 | 6.338% | $0.5287 |
| September | 8.1886 | 7.108% | 0.969 | 7.335% | $0.6006 |
| December, 2008 | 8.0464 | 9.24% | 1.008 | 9.166% | $0.7375 |
| March 2009 | $8.8317 | 8.60% | 0.995 | 8.802% | $0.7633 |
| April 2009 | 9.8406 | 7.82% | 0.994 | 7.867% | $0.7742 |
| NAVPU is shown after quarterly distributions. “Portfolio YTW” includes cash (or margin borrowing), with an assumed interest rate of 0.00% “Securities YTW” divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings. “Sustainable Income” is the resultant estimate of the fund’s dividend income per unit, before fees and expenses. |
|||||
As discussed in the post MAPF Portfolio Composition: April 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, 2008.
Significant positions were also held in Fixed-Reset issues on April 30 (HSB.PR.E, BMO.PR.O & CM.PR.M); all of which currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity.
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 7.13% shown in the April 30 Portfolio Composition analysis (which is in excess of the 6.80% index yield on April 30). Given such reinvestment, the sustainable yield would be 9.8406 * 0.0713 = $0.7016, an increase from the $0.6712 derived by a similar calculation last month; which I consider rather good considering the increased allocation in April to the lower-yielding Fixed-Reset issues.
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.
Bank Sub-Debt Redemptions
Saturday, May 2nd, 2009On an unrelated thread, Assiduous Reader GAndreone asked:
So, let’s review:
RY has recently redeemed some sub-debt:
According to their 2008 Annual Report (page 162 of the PDF), these bonds mature June 1, 2014; first par call June 1, 2009; and:
Which leaves us with another puzzle, since Three-months BAs are now at 0.29% (!) and they had the opportunity to cut their interest rate costs by almost 70%; from $41.8-million annually to $12.9-million annually (assuming BAs are constant).
Similarly with CM:
The 2008 CM Annual Report (page 131 of the PDF) shows the first par call being June 1, 2009, maturity 2014-6-1 … but they make us go to SEDAR to get the May 3, 2004, prospectus supplement, which says:
Which leaves us with the same conundrum.
This behaviour was also discussed in the post National Bank Honours Sub-Debt Pretend Maturity.
It all stems back to the way the bond market really works. There are not many actual bond analysts in Canada – or the world, for that matter. Bonds are not bought – typically – after rigourous analysis of their terms and comparison with other opportunities. Bonds are bought because Joe at the brokerage has some to sell and says they’re pretty good. In the case of sub-debt, it is understood that the banks will call these issues on their pretend-maturity date, which is just before they go floating, or step-up to the penalty rate, or whatever. When brokerages calculate yields and spreads on these issues, they perform these calculations based on the pretend-maturity date.
This occurs because the value of sub-debt to the issuing bank changes (in Canada, anyway. Most other places, I think, have the same rules, but I haven’t done a survey) five years prior to maturity. On May 31, the issuers can count 100% of this sub-debt towards their Tier 2 capital. On June 1, they can only count 80%, and the rate declines by another 20% every year until formal maturity. Thus, four years and three hundred and sixty four days prior to maturity, the banks are (theoretically) paying full sub-debt prices for their debt, but only getting 80% of sub-debt value. Therefore, the theory goes, they will call, come hell or high water.
Deutsche Bank did the business-like thing and didn’t call their sub-debt on the pretend-maturity. The market ripped their faces off. Why? Because Joe at the brokerage had sold all that paper to his customers while telling them that the pretend-maturity would be honoured, and then it wasn’t. Deutsche made poor old Joe look silly – and worse, uninformed. It is preferable to go bankrupt than to break the comfortable rules of the bond-traders’ boys’ club.
It is clear that the current rules are not working; the rules for sub-debt need to be revised somehow. The most obvious first step is to change the rules so that fixed-floating sub-debt, or paper with a step-up, is simply not allowed (this would also, I hope, affect fixed-resets!). The absence of a clearly defined break in the investment terms might go a little way towards eliminating this type of expectation.
Because this type of expectation is dangerous! It seems pretty clear that BAs+100 is a wonderful rate for banks to borrow five-year money, even with no Tier 2 allowance at all; but they are pseudo-honour bound to conduct business in a non-business-like fashion. I consider any unbusinesslike behaviour to be a destabilizing force on the financial system; and how come the banks are getting 100% sub-debt credit for the paper on May 31, when it is clear that if they don’t cough up the cash PDQ the market will squash them like a bug?
The trouble is, nod-and-wink behaviour is awfully hard to stamp out. If the regulators are truly interested in financial stability, I think they’ll have to come up with other ideas … up to and including elimination of the concept of maturity dates on Tier 2 capital completely (as well as, in Canada, the idiotic redefinition of Tier 1).
Posted in Banking Crisis 2008, Reader Initiated Comments | 1 Comment »