Turnover continued to be above average in April, at about 24%.
There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:
- Unaffected Straight Perpetuals
- DeemedRetractibles explicitly subject to the rules (banks)
- DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)
This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading. Another trend that hasn’t helped was the migration of PerpetualDiscounts into PerpetualPremiums (due to price increases) in early 2013 – many of the PerpetualPremiums had negative Yields-to-Worst and those that don’t aren’t particularly thrilling; speaking very generally, PerpetualPremiums are to be avoided, not traded! While market weakness since the peak of the PerpetualDiscount subindex in May, 2013, has mitigated the situation somewhat, the population of PerpetualDiscounts is still exceeded by that of PerpetualPremiums – most of which are trading at a negative Yield-to-Worst.
To make this more clear, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to other Straights, I also have to check its peer group. This cuts down on the potential for trading.
There is no real hope that this situation will be corrected in the near-term. OSFI has indicated that the long-promised “Draft Definition of Capital” for insurers will not be issued “for public consultation in late 2012 or early 2013”, as they fear that it might encourage speculation in the marketplace. It is not clear why OSFI is so afraid of informed speculation, since the constant speculation in the marketplace is currently less informed than it would be with a little bit of regulatory clarity.
As a result of this delay, I have extended the Deemed Maturity date for insurers and insurance holding companies by three years (to 2025-1-31), in the expectation that when OSFI finally does provide clarity, they will allow the same degree of lead-in time for these companies as they did for banks. This had a major effect on the durations of preferred shares subject to the change but, fortunately, not much on their calculated yields as most of these issues were either trading near par when the change was made or were trading at sufficient premium that a par call was expected on economic grounds. However, with the declines in the market over the past nine months, the expected capital gain on redemption of the insurance-issued DeemedRetractibles has become an important component of the calculated yield.
Due to further footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another two years in the near future.
Sectoral distribution of the MAPF portfolio on April 30 was as follows:
| MAPF Sectoral Analysis 2015-4-30 | |||
| HIMI Indices Sector | Weighting | YTW | ModDur |
| Ratchet | 0% | N/A | N/A |
| FixFloat | 0% | N/A | N/A |
| Floater | 0% | N/A | N/A |
| OpRet | 0% | N/A | N/A |
| SplitShare | 3.5% (-5.0) | 4.93% | 5.51 |
| Interest Rearing | 0% | N/A | N/A |
| PerpetualPremium | 0% | N/A | N/A |
| PerpetualDiscount | 1.0% (0) | 5.29% | 14.94 |
| Fixed-Reset | 68.3% (+18.9) | 5.09% | 10.55 |
| Deemed-Retractible | 10.0% (-11.4) | 5.28% | 7.76 |
| FloatingReset | 7.1% (0) | 3.42% | 18.69 |
| Scraps (Various) | 10.1% (-2.7) | 5.86% | 14.28 |
| Cash | 0% (+0.1) | 0.00% | 0.00 |
| Total | 100% | 5.06% | 11.05 |
| Totals and changes will not add precisely due to rounding. Bracketted figures represent change from February month-end. Cash is included in totals with duration and yield both equal to zero. | |||
| DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section)
Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue. |
|||
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.
The big shift during the month was from DeemedRetractibles into FixedResets; there were a number of trades; the following table excludes trades taken as a result of portfolio cash flows. So please make careful note that this is not a complete list; that many of the prices are averages of trades performed on different days; that some of the issues were both bought and sold during the month and that, basically, anybody trying to reconstruct the MAPF portfolio with any precision with the help of this table is going to get extremely frustrated. This table has been prepared to give the ‘flavour’ of the month’s trading; you will have to wait for detail to be published with the semi-annual financials in July if you’re extremely interested. Have I made enough disclaimers yet?
| Major Position Changes | ||||
| Issue | Portfolio Weight | Average Price | Sector | DBRS Rating |
| Net Purchases | ||||
| HSE.PR.A | 1% | 16.66 | FixedReset | Pfd-2(low) |
| PWF.PR.P | 2% | 17.70 | FixedReset | Pfd-1(low) |
| BNS.PR.Z | 6% | 23.35 | FixedReset | Pfd-1(low) |
| BMO.PR.Q | 3% | 22.60 | FixedReset | Pfd-2(high) |
| BAM.PR.X | 1% | 18.50 | FixedReset | Pfd-2(low) |
| AIM.PR.A | 1% | 19.60 | FixedReset (Scraps) | Pfd-3(low) |
| INE.PR.A | 1% | 15.80 | FixedReset (Scraps) | P-3(low) (S&P) |
| Net Sales | ||||
| SLF.PR.C | 2% | 23.55 | DeemedRetractible | Pfd-2(high) |
| IAG.PR.A | 6% | 24.66 | DeemedRetractible | Pfd-2(high) |
| CGI.PR.D | 2% | 25.25 | SplitShare | Pfd-1(high) |
| GWO.PR.I | 2% | 24.20 | DeemedRetractible | Pfd-1(low) |
| AX.PR.E | 1% | 17.75 | Scraps (FixedReset) | Pfd-3(low) |
| DF.PR.A | 1% | 10.20 | Scraps (SplitShare) | Pfd-3(low) |
| FTN.PR.A | 1% | 10.11 | Scraps (SplitShare) | Pfd-4(high) |
| PVS.PR.D | 3% | 24.60 | SplitShare | Pfd-2(low) |
| BNS.PR.Y | 1% | 22.40 | FixedReset | Pfd-2(high) |
Credit distribution is:
| MAPF Credit Analysis 2015-4-30 | ||
| DBRS Rating | Weighting | |
| Pfd-1 | 0 (0) | |
| Pfd-1(low) | 18.9% (-2.1) | |
| Pfd-2(high) | 35.5% (+2.3) | |
| Pfd-2 | 0% | |
| Pfd-2(low) | 35.5% (+0.5) | |
| Pfd-3(high) | 1.8% (+0.5) | |
| Pfd-3 | 4.4% (0) | |
| Pfd-3(low) | 3.3% (-0.7) | |
| Pfd-4(high) | 0% (-0.7) | |
| Pfd-4 | 0% | |
| Pfd-4(low) | 0% (0) | |
| Pfd-5(high) | 0% (0) | |
| Pfd-5 | 0.5% (0) | |
| Cash | 0% (+0.1) | |
| Totals will not add precisely due to rounding. Bracketted figures represent change from March month-end. | ||
| The fund holds a position in AZP.PR.C, which is rated P-5 by S&P and is unrated by DBRS | ||
| A position held in NPI.PR.A is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3(high). | ||
| A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3. | ||
The credit quality changes are largely explained by the table of issues with major weighting changes, above.
Liquidity Distribution is:
| MAPF Liquidity Analysis 2015-4-30 | |
| Average Daily Trading | Weighting |
| <$50,000 | 2.6% (-7.6) |
| $50,000 – $100,000 | 2.2% (-0.8) |
| $100,000 – $200,000 | 32.5% (-6.4) |
| $200,000 – $300,000 | 41.7% (+7.3) |
| >$300,000 | 20.9% (+7.3) |
| Cash | 0% (+0.1) |
| Totals will not add precisely due to rounding. Bracketted figures represent change from March month-end. | |
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. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. 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) or those who subscribe for $150,000+ (this exemption is about to expire). 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) (and other funds) as of August 31, 2012, and published in the October (mainly methodology), November (most funds), and December (ZPR) 2012, PrefLetter. While direct comparisons are difficult due to the introduction of the DeemedRetractible class of preferred share (see above) it is fair to say:
- MAPF credit quality is better
- MAPF liquidity is a bit lower
- MAPF Yield is higher
- Weightings
- MAPF is less exposed to Straight Perpetuals (including DeemedRetractibles)
- MAPF is less exposed to Operating Retractibles
- MAPF is more exposed to SplitShares
- MAPF is less exposed to FixFloat / Floater / Ratchet
- MAPF is overweighted in FixedResets
Low Spread FixedResets: April, 2015
Sunday, May 3rd, 2015As noted in MAPF Portfolio Composition: April 2015, the fund now has a large allocation to FixedResets, mostly of relatively low spread.
Many of these were largely purchased with proceeds of sales of DeemedRetractibles from the same issuer; it is interesting to look at the price trend of some of the Straight/FixedReset pairs. We’ll start with GWO.PR.N / GWO.PR.I; the fund sold the latter to buy the former at a takeout of about $1.00 in mid-June, 2014; relative prices over the past year are plotted as:
Click for Big
Given that the April month-end take-out was $5.69, this is clearly a trade that has not worked out very well.
In July, 2014, I reported sales of SLF.PR.D to purchase SLF.PR.G at a take-out of about $0.15:
Click for Big
There were similar trades in August, 2014 (from SLF.PR.C) at a take-out of $0.35. The April month-end take-out (bid price SLF.PR.D less bid price SLF.PR.G) was $6.25, so that hasn’t worked very well either.
November saw the third insurer-based sector swap, as the fund sold MFC.PR.C to buy the FixedReset MFC.PR.F at a post-dividend-adjusted take-out of about $0.85 … given a February month-end take-out of about $5.29, that’s another regrettable trade, although another piece executed in December at a take-out of $1.57 has less badly.
Click for Big
This trend is not restricted to the insurance sector, which I expect will become subject to NVCC rules in the relatively near future and are thus subject to the same redemption assumptions I make for DeemedRetractibles. Other pairs of interest are BAM.PR.X / BAM.PR.N:
Click for Big
… and FTS.PR.H / FTS.PR.J:
Click for Big
… and PWF.PR.P / PWF.PR.S:
Click for Big
I will agree that the fund’s trades highlighted in this post may be decried as cases of monumental bad timing, but I should point out that in May, 2014, the fund was 63.9% Straight / 9.5% FixedReset while in April 2015 the fund was 10% Straight / 85% FixedReset, FloatingReset and FixedFloater (The latter figures include allocations from those usually grouped as ‘Scraps’). Given that the indices are roughly 30% Straight / 60% FixedReset & FloatingReset, it is apparent that the fund was extremely overweighted in Straights / underweighted in FixedResets in May 2014 but this situation has now reversed. HIMIPref™ analytics have been heavily favouring low-spread issues and the fund’s holdings are overwhelmingly of this type.
Summarizing the charts above in tabular form, we see:
December 2013
MAPF Trade
December 2014
April 2015
3.65%+130
4.5%
4.35%+141
4.45%
4.20%+141
4.50%
4.60%+180
4.75%
4.25%+145
4.75%
4.40%+160
4.80%
There was not much change from March month-end to April month-end, although the charts show some great excitement in mid-March, with spreads widening dramatically. The following chart shows the normalized total return of the HIMIPref™ FixedReset index through the month:
Click for Big
So why is all this happening? One should take care in explaining market movements, but it is my belief that in the latter half of 2013 we were dealing with the ‘taper tantrum’ – the market’s fears that Fed tapering and subsequent tapering would lead to massive spikes in yields; this led to a great preference for FixedResets over Straights. Now, with the economic news getting less inflationary with every news story and Europe and Japan desperately trying to reflate their sluggish economies, the market seems to think that these rate increases are still a long way off … leading to a great preference for Straights over FixedResets.
In addition, the graphs show a sharp spike in early December, during which the low-spread FixedResets were very badly hurt; I believe this to be due to a combination of tax-loss selling and a panicky response to the 29% reduction in the TRP.PR.A dividend.
And in January it just got worse with Canada yields plummeting after the Bank of Canada rate cut with speculation rife about future cuts although this slowly died away.
And in late March / early April it got worse again, with one commenter attributing at least some of the blame to the John Heinzl piece in which I pointed out the expected reduction in dividend payouts! Insofar as I am willing to guess what motivates ‘the market’, I will guess that the rally in the latter half of April is due to a feeling that the previously scheduled European deflation has been cancelled, which in turn encouraged an increase in Treasury yields which fed through to the Canadian market.
There was some good discussion about the declining phase in the comments to the January 29 market action report. I take the view that we’ve seen this show before: during the Credit Crunch, Floaters got hit extremely badly (to the point at which their fifteen year total return was negative) because (as far as I can make out) their dividend rate was dropping (as it was linked to Prime) while the yields on other perpetual preferred instruments were skyrocketing (due to credit concerns). Thus, at least some investors insisted on getting long term corporate yields from rates based (indirectly and with a lag, in the case of FixedResets) on short-term government policy rates. And it’s happening again!
Here’s the April performance for FixedResets that had a YTW Scenario of ‘To Perptuity’ at mid-month.:
Click for Big
The end-of-month rally has been rather disorderly; correlations between Issue Reset Spread and monthly performance for April are basically zero.
Posted in Issue Comments, MAPF | 6 Comments »