MAPF Performance: April 2011

The fund had a poor month with a return of -1.32%. While comparative index figures are not yet available, the Claymore ETF, CPD, was essentially flat on the month, with its NAV dropping $0.07 after paying a dividend of $0.069.

The fund’s poor performance is again attributable to its heavy position in DeemedRetractibles issued by insurers, which did very poorly. To illustrate this, I have uploaded two graphs comparing very similar issues: GWO.PR.I and CM.PR.I:

These two issues are both considered to be DeemedRetractibles; I consider it more prudent to assume they will be redeemed on or before 2022-1-31 than to assume otherwise. However, the market does not presently share my opinion! This is best illustrated by calculating Implied Volatility with the Straight Perpetual Implied Volatility Calculator.

Click for Big

Click for Big

The Implied Volatility for the PWF issues is 26%, while for the GWO issues it is 16%. Note that I consider a reasonable figure for Implied Volatility, in the absence of directional bias, to be in the 15-20% range; a figure outside this range implies some degree of directional bias in the market: lower means that the market believes that eventual redemption is less likely than would be predicted by random chance, a higher figure implies more likely redemption. When the calculation is performed for CM issues, a ludicrously high value is obtained, implying perceived virtual certainty of redemption – which is as it should be.

However, the market is currently pricing the PWF and GWO issues as if it is the former that has some kind of non-economic incentive to redeem, rather than the latter! I do not believe that this conclusion may be justified in any manner whatsoever.

It is in the nature of the preferred share market to behave irrationally from time to time – in the spring of 2010, I noted that the relative prices for these two issues reflected negative Implied Volatility (which cannot actually be calculated because the math blows up). It happens. Sometimes, when the market takes an irrational dislike to a particular issue or set of issues, I am able to exploit the opportunity thus provided; sometimes, as now, I’m already there and have to suffer (another example was June 2008, immortalized in my article The Swoon in June).

I am, of course, disappointed at the second consecutive month of underperformance – but have every reason to believe that this is transient.

The fund’s Net Asset Value per Unit as of the close April 29 was $10.9105.

Returns to April 29, 2011
Period MAPF Index CPD
according to
One Month -1.32% +0.36% +0.01%
Three Months -0.57% +1.79% +1.41%
One Year +23.73% +15.78% +12.91%
Two Years (annualized) +25.99% +16.15% N/A
Three Years (annualized) +23.64% +7.28% +4.73%
Four Years (annualized) +17.37% +3.90%  
Five Years (annualized) +15.15% +3.96%  
Six Years (annualized) +13.64% +3.87%  
Seven Years (annualized) +13.08% +4.14%  
Eight Years (annualized) +14.54% +4.41%  
Nine Years (annualized) +13.05% +4.58%  
Ten Years (annualized) +13.36% +4.21%  
The Index is the BMO-CM “50”
MAPF returns assume reinvestment of distributions, 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.
Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +0.00%, +1.17% and +13.87%, respectively, according to Morningstar after all fees & expenses. Three year performance is +5.89%.
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 -0.15%, +0.56% and +9.26% respectively, according to Morningstar
Figures for Manulife Preferred Income Fund (formerly AIC Preferred Income Fund) (which are after all fees and expenses) for 1-, 3- and 12-months are +0.07%, +0.81% & +9.91%, respectively
Figures for Horizons AlphaPro Preferred Share ETF are not yet available (inception date 2010-11-23)

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.

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 were a lot of strongly motivated market participants during the Panic of 2007, generating a lot of noise! Unfortunately, the conditions of the Panic may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, without worrying about the level of monthly turnover.

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 NYSE & 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% 1.2857 0.3628
September 9.1489 5.35% 0.98 5.46% 1.2857 0.3885
December, 2007 9.0070 5.53% 0.942 5.87% 1.2857 0.4112
March, 2008 8.8512 6.17% 1.047 5.89% 1.2857 0.4672
June 8.3419 6.034% 0.952 6.338% 1.2857 $0.4112
September 8.1886 7.108% 0.969 7.335% 1.2857 $0.4672
December, 2008 8.0464 9.24% 1.008 9.166% 1.2857 $0.5737
March 2009 $8.8317 8.60% 0.995 8.802% 1.2857 $0.6046
June 10.9846 7.05% 0.999 7.057% 1.2857 $0.6029
September 12.3462 6.03% 0.998 6.042% 1.2857 $0.5802
December 2009 10.5662 5.74% 0.981 5.851% 1.0819 $0.5714
March 2010 10.2497 6.03% 0.992 6.079% 1.0819 $0.5759
June 10.5770 5.96% 0.996 5.984% 1.0819 $0.5850
September 11.3901 5.43% 0.980 5.540% 1.0819 $0.5832
December 2010 10.7659 5.37% 0.993 5.408% 1.0000 $0.5822
March, 2011 11.0560 6.00% 0.994 5.964% 1.0000 $0.6594
April, 2011 10.9105 6.20% 1.003 6.219% 1.0000 $0.6785
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.
Analysis of yields changed in February 2011 to include the concept of DeemedRetractible issues. 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. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital and the January & February, 2011, editions of PrefLetter for the rationale behind this analysis. This deemed maturity has a significant effect on calculated yields.

Significant positions were held in DeemedRetractible and FixedReset issues on April 29; all of the former and most of the latter currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31. This presents another complication in the calculation of sustainable yield. The fund also holds a position in a SplitShare (BNA.PR.C) which also has its yield calculated with the expectation of a maturity.

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 5.54% shown in the MAPF Portfolio Composition: April 2011 analysis (which is slightly below the 5.58% index yield on April 29). Given such reinvestment, the sustainable yield would be $10.9105 * 0.0554 = $0.6044, a slight decline from the $11.0560 * 0.0560 = $0.6191 reported in March.

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.

3 Responses to “MAPF Performance: April 2011”

  1. broke says:

    James, I’m confused with the following sentence:.

    However, the market is currently pricing the PWF and GWO issues as if it is the former that has some kind of non-economic incentive to redeem, rather than the former!

    Should one of those formers be a latter.?

  2. jiHymas says:

    Oops! Fixed it!

    It is the GWO issues that should be presumed to have a very high likelihood of being called for non-economic reasons, since they are a regulated Insurance Holding Company. PWF’s perpetuals are unaffected by regulation. However, the market seems to be pricing in the opposite situation.

  3. […] I have uploaded two graphs comparing very similar issues: GWO.PR.I and CM.PR.I, updating the graphs shown last month: […]

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