MAPF Portfolio Composition: June 2010

Turnover picked up substantially in June to about 53%. It’s about time we saw some useful volatility!

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.

MAPF Sectoral Analysis 2010-6-30
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 2.9% (-1.1) 7.97% 6.79
Interest Rearing 0% N/A N/A
PerpetualPremium 0.0% (0) N/A N/A
PerpetualDiscount 82.4% (+1.1) 6.11% 13.77
Fixed-Reset 9.8% (+0.6) 3.86% 3.44
Scraps (FixedReset) 4.4% (-0.5) 7.01% 12.53
Cash 0.4% (-0.1) 0.00% 0.00
Total 100% 5.96% 12.45
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from May month-end. Cash is included in totals with duration and yield both equal to zero.

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.

I recently received a question from a potential investor:

I just had a look at MAPF’s portfolio composition and noticed that it is very heavily in perpetual preferreds at a discount. I’m a bit surprised. I would think the general expectation is that interest rates will rise, which would reduce prices for perpetuals. What is the transient mispricing in the market for perpetuals that you are seeing now? Thanks very much in advance and best wishes,

I replied:

HIMIPref assigns a valuation to each issue which may be approximated as

V = Y + D

where Y is yield and D is Disparity.

Since PerpetualDiscounts yield so much more than FixedResets, there is somthing of a hurdle the latter class must get over before they are valued sufficiently highly to be included in a portfolio, but this effect is relatively small (see

Disparity is calclated according to the individual issue’s distance from the self-consistent yield curve. Fitting the yield curve provides several normalization factors, so that, for instance, the average disparity of all FixedResets will be zero, of all PerpetualDiscounts to be zero, of all issues rated Pfd-1(low) to be zero, etc. Note, however that the yield curve fitting is done with squared error, so that this will not be precisely true.

PerpetualDiscounts are far more widely dispersed about their mean than FixedResets; for instance, there is very obvious evidence of Credit Stratification (see in this class, whereas the market appears to treat all FixedResets of like credit identically (see last two issues of PrefLetter).

Thus, the issues with the highest Valuation will tend to be PerpetualDiscounts.

When you write “the general expectation is that interest rates will rise”, I have to ask: which interest rates? Long, short, corporate, government? Long Corporates have been on wheels lately, fuelled by increasing speculation regarding deflation.

I guess I didn’t really answer one part of his question in detail: What is the transient mispricing in the market for perpetuals that you are seeing now? However, I show a sequence of trades below in which the fund was able to improve credit quality at what may be considered to be a low cost.

Credit distribution is:

MAPF Credit Analysis 2010-6-30
DBRS Rating Weighting
Pfd-1 0 (0)
Pfd-1(low) 69.2% (+8.2)
Pfd-2(high) 11.8% (-5.5)
Pfd-2 0 (0)
Pfd-2(low) 14.1% (-2.2)
Pfd-3(high) 4.4% (-0.5)
Cash 0.4% (-0.1)
Totals will not add precisely due to rounding. Bracketted figures represent change from Junel month-end.

The increase in credit quality was due in part to swaps from POW.PR.D (Pfd-2(high)) to GWO.PR.I (Pfd-1(low)):

5/31 19.77
6/18 Sold
6/23 Sold
6/25 Sold
6/30 20.69
Dividends Ex 6/21
Only major trades are shown. Not all trades affecting credit quality are reported. Details are incomplete and approximate. All trades wil be published at the time the Semi-annual report is released.

Liquidity Distribution is:

MAPF Liquidity Analysis 2010-6-30
Average Daily Trading Weighting
<$50,000 0.0% (0)
$50,000 – $100,000 2.9% (+2.9)
$100,000 – $200,000 40.8% (+13.4)
$200,000 – $300,000 32.0% (-18.5)
>$300,000 24.0% (+0.4)
Cash 0.4% (-0.1)
Totals will not add precisely due to rounding. Bracketted figures represent change from May 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. 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 17, 2009, and published in the September, 2009, PrefLetter. When comparing CPD and MAPF:

  • MAPF credit quality is better
  • MAPF liquidity is a little lower
  • MAPF Yield is higher
  • Weightings in
    • MAPF is much more exposed to PerpetualDiscounts
    • MAPF is much less exposed to Operating Retractibles
    • MAPF is more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF weighting in FixedResets is much lower

2 Responses to “MAPF Portfolio Composition: June 2010”

  1. […] PrefBlog Canadian Preferred Shares – Data and Discussion « MAPF Portfolio Composition: June 2010 […]

  2. […] Significant positions were held in Fixed-Reset issues on June 30; all of which (with the exception of YPG.PR.C) currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity. A split-share issue (BNA.PR.C) is also held; since this has a maturity date, the yield cannot be regarded as permanently sustainable. This presents another complication in the calculation of sustainable yield. […]

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