PrefBlog

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close May 31, 2024, was $10.1600.

Performance was affected by RY.PR.J underperforming (-1.13%, following three months of outperformance) outweighed by good performance from MFC.PR.C (+7.39%, after two months of underperformance), CU.PR.C (+5.68%), IFC.PR.C (+5.47%) and PWF.PR.R (+5.43%, following last month’s underperformance) [small holdings are not considered for individual mention here].

The last six months has been very good to preferred shareholders, following the lows of the TXPR price index on 2023-10-31, but yields remain elevated well above those available on instruments with similar risk; for instance, Brookfield Renewable Partners L.P. recently noted they are refinancing BEP.PR.O on the “green perpetual subordinated notes” market at 70bp under the presumed reset rate of BEP.PR.O.

FixedResets continue to yield more, in general, than PerpetualDiscounts although the spread has narrowed considerably despite a bounce upwards in May; on May 31, I reported median YTWs of 7.30% and 6.53%, respectively, for these two indices; compare with mean Current Yields of 5.23% and 6.33%, respectively.

As the yield spread between FixedResets and PerpetualDiscounts has narrowed, there has been less and less reason to overweight the former class in portfolios; as those who pay close attention to the MAPF Portfolio Composition: May, 2024 will notice, the proportion of Straight Perpetuals held by the fund has been increasing over the past few months.

The five-year Canada yield increased, with the five-year Canada yield (“GOC-5”) moving from 3.85% at April month-end to 3.74% at May month-end.

The Seniority Spread (between long-term corporate bonds and interest-equivalent PerpetualDiscounts) was 315bp on 2024-5-29 a significant narrowing from the 345bp on 2024-5-1 (chart end-date 2024-5-10) :

The situation with FixedResets is interesting, with the spread between GOC-5 and the interest-adjusted FixedReset (Discount) rate widening significantly (despite recent narrowing) from its 2021-11-10 low of 344bp to a level of 536bp (as of 2024-5-29) … (chart end-date 2024-05-10):

…while at the same time the interest-equivalent spread between FixedReset (Discounts) and PerpetualDiscounts has narrowed to -71bp (as of 2024-5-29) from its 2021-7-28 level of +170bp (chart end-date 2024-05-10):

There is no significant correlation between the Issue Reset Spread and 1-month performance for discounted FixedResets for either the Pfd-2 or Pfd-3 Group issues.

There is no significant correlation between the Issue Reset Spread and 3-month performance for discounted FixedResets for either the Pfd-2 or Pfd-3 Group issues.

There is a small correlations for the Pfd-2 Group (14%) but none for the Pfd-3 Group for 1-Month performance against term-to-reset:

… and we see similar behaviour for three-month returns vs. Term to Reset, with correlation for the Pfd-2 Group (27%) but none for the Pfd-3 Group:

It is of great interest to note that the slope of the correlation between the Pfd-2 group and term changes sign between the one-month and three=month correlations. Is this indicative of a change in sentiment? Or a statistical blip? Or perhaps simply due to widespread speculation that all bank issues will be redeemed, yielding immense profits, being … more muted?

It should be noted that to some extent a dependence (of performance on term-to-reset) can be justified as the nearer-term issues will receive the benefit of higher projected dividend rates sooner as a result of higher GOC-5 yields and therefore, perhaps, for longer. Equations for the relationship between correlation slope and change in GOC-5 were derived in the August 2022 PrefLetter.

Upwards-sloping correlations of Performance vs. Term are to be expected when GOC-5 declines.

I keep talking about ‘Sustainable Income’ and nowadays it’s far higher than the dividends that are currently being distributed. This is because Sustainable Income is the average yield-to-worst (YTW) of the portfolio when the YTW is calculated to perpetuity (or to redemption, of course, if the yield to redemption is lower), including resets at the current GOC-5 rate. The sharp increase in GOC-5 in the past year-odd has caused the difference between YTW and Current Yield to skyrocket, but one way or another I expect that these two values will become much closer – slowly at first, but quickening in about two years. We have to wait for the reset date of the MAPF portfolio securities before we see a change in actual cash receipts – and, of course, there is no guarantee whatsoever that the rate used for estimation purposes now will be used for the actual calculation in the future (chart prepared as of 2024-5-10).

I will note that the fund’s current holdings of FixedResets are now paying dividends based on their previous reset at an average GOC-5 rate of 1.66% (weighted by shares held). The jump from last month’s measurement of 1.59% is due to the fund’s continued purchases of CM.PR.S (which reset 2023-1-31, with a GOC-5 rate of 3.43%) and FTS.PR.K (reset 2024-3-1 with GOC-5 at 3.42%). However, CM.PR.S has not yet earned a dividend at the new rates – nor has the fund’s extant holding in TRP.PR.D (reset 2024-4-30 at 3.60%), while FTS.PR.K remains a very small holding.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Turnover eased to 12% in May, but remained healthy partly due to a continued move into Straight Perpetuals.

Sectoral distribution of the MAPF portfolio on May 31, 2024, were:

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:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

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 directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.