MAPF Performance: August 2010

The fund had a good month in August, outperforming its benchmark and the passive funds despite being hurt by holdings in MFC.

The fund’s Net Asset Value per Unit as of the close August 31 was $11.0637.

Returns to August 31, 2010
Period MAPF Index CPD
according to
One Month +1.66% +1.31% +1.12%
Three Months +10.34% +6.17% +5.35%
One Year +9.49% +6.26% +5.08%
Two Years (annualized) +31.76% +7.35% +5.48% *
Three Years (annualized) +19.66% +2.90% +1.20%
Four Years (annualized) +15.36% +2.26%  
Five Years (annualized) +13.41% +2.54%  
Six Years (annualized) +12.23% +2.94%  
Seven Years (annualized) +13.04% +3.36%  
Eight Years (annualized) +13.70% +3.74%  
Nine Years (annualized) +12.95% +3.68%  
The Index is the BMO-CM “50”
MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees.
CPD Returns are for the NAV and are after all fees and expenses.
* CPD does not directly report its two-year returns. The figure shown is the square root of product of the current one-year return and the similar figure reported for August 2009.
Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +1.39%, +6.23% and +6.42%, respectively, according to Morningstar after all fees & expenses
Figures for Jov Leon Frazer Preferred Equity Fund Class I Units (which are after all fees and expenses) for 1-, 3- and 12-months are +1.14%, +5.56% & +3.61% respectively, according to Morningstar
Figures for AIC Preferred Income Fund (which are after all fees and expenses) for 1-, 3- and 12-months are +0.74%, +5.21% & +3.65%, respectively

MAPF 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 fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

My personal benchmark for a “good year” is index+500bp before fees; a glance at the annualized performance to June, 2010 shows that I’ve been able to meet that goal five times out of nine attempts.

Sometimes everything works … sometimes the trading works, but sectoral shifts overwhelm the increment … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There have been a lot of strongly motivated market participants in the past year, generating a lot of noise! The conditions of the past two years may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, whether that implies monthly turnover of 10% or 100%.

As mentioned, the fund was hurt by a significant position in MFC shares, but this was more than offset by an overweight position in PerpetualDiscounts and, more particularly, more deeply discounted PerpetualDiscounts. If we look at returns for the month in the sector, plotted against their 2010-7-30 bid price, we get, essentially, a mess:

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The slope of the regression line is -0.23%/dollar, but the adjusted R-Square is only 6.2%.

… but when we disaggregate the date, we see things of greater interest:

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The regression on CM has adjusted R-Square = 92%, slope = -0.62%/$; GWO -14.4% and -0.12%/$; PWF 46% and -0.32%/$.

Further analysis of the data using the Straight Perpetual Implied Volatility Calculator produces the following table:

Fits to Implied Volatility
Issuer 2010-08-31 2010-07-30
Yield Volatility Yield Volatility
PWF 5.85% 9% 5.89% 9%
CM 5.46% 11% 5.77% 0.01%
GWO 5.77% 10% 5.82% 10%
CM 2010-07-30

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CM 2010-08-31

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GWO 2010-07-30

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GWO 2010-08-31

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PWF 2010-07-30

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PWF 2010-08-31

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There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid and I have lots of confidence – backed up by my bond portfolio management experience in the markets for Canadas and Treasuries, and equity trading on the TSX – that there is enough demand for liquidity in any market to make the effort of providing it worthwhile (although the definition of “worthwhile” in terms of basis points of outperformance changes considerably from market to market!) I will continue to exert utmost efforts to outperform but it should be borne in mind that there will almost inevitably be periods of underperformance in the future.

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
June, 2007 9.3114 5.16% 1.03 5.01% 1.1883 0.3926
September 9.1489 5.35% 0.98 5.46% 1.1883 0.4203
December, 2007 9.0070 5.53% 0.942 5.87% 1.1883 0.4448
March, 2008 8.8512 6.17% 1.047 5.89% 1.1883 0.4389
June 8.3419 6.034% 0.952 6.338% 1.1883 $0.4449
September 8.1886 7.108% 0.969 7.335% 1.1883 $0.5054
December, 2008 8.0464 9.24% 1.008 9.166% 1.1883 $0.6206
March 2009 $8.8317 8.60% 0.995 8.802% 1.1883 $0.6423
June 10.9846 7.05% 0.999 7.057% 1.1883 $0.6524
September 12.3462 6.03% 0.998 6.042% 1.1883 $0.6278
December 2009 10.5662 5.74% 0.981 5.851% 1.0000 $0.6182
March 2010 10.2497 6.03% 0.992 6.079% 1.0000 $0.6231
June 10.5770 5.96% 0.996 5.984% 1.0000 $0.6329
August 2010 11.0637 5.81% 1.002 5.798% 1.0000 $0.6415
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
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.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.

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. This presents another complication in the calculation of sustainable yield.

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 5.88% shown in the MAPF Portfolio Composition: August 2010 analysis (which is in excess of the 5.69% index yield on August 31). Given such reinvestment, the sustainable yield would be $11.0637 * 0.0588 = 0.6505, down from the 0.6545 reported in May 2010 (the best comparator due to the influence of dividends earned but not yet distributed).

It is no surprise that this estimate is down, since there will be a drag on the calculation in up-markets due to presence of shorter-term issues (or, at least, presumed shorter term issues!); the question is whether the positive effect of these issues in down markets will outweight their negative effect in up-markets – all I can say is … it has in the past!

Different assumptions lead to different results from the calculation, 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.

One Response to “MAPF Performance: August 2010”

  1. […] market: with the increasing price and implied volatility of PerpetualDiscount preferred shares (see MAPF Performance: August 2010) the fund not only took a position in PerpetualPremium Preferred Shares, but also increased its […]

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