PrefBlog

Sometimes it works … sometimes it doesn’t … sometimes it really really works!

Assiduous Readers will be only too aware that I am fond of saying that if I’m right 60% of the time, then I’m doing well and the fund will do well. Assiduous Readers will also be thoroughly fed up with my constant reiteration that financial markets represent a chaotic system, with the implication that long-term, large-scale market timing is doomed to failure, and that “selling liquidity” and making small differentiations between similar issues is the key to success.

So, while I like to think I’m correct on these small differentiations 60% of the time, it’s not 60% each and every month, or even each and every quarter.

I am very pleased to announce that Malachite Aggressive Preferred Fund had another very good month in February, to make it three in a row. The Net Asset Value Per Unit as of February 29 was $9.4527, with the result that returns are:

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 competition was outpaced: the fund outperformed the closed-end fund (DPS.UN), which returned an estimated +2.04% on the month and an estimated +3.00% on the quarter, as well as the exchange-traded fund (CPD) which returned +2.17% and +3.33% on the month and quarter. Calculation details for these two performances have been posted separately.

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

It should be noted that I do not have this calculation audited in any way, so once the audited financials are available you will not be able to see an explicit confirmation of these figures, although you will be able to derive the year end figure for yourselves. Readers should also note that the fund is indifferent to whether investment returns are in the form of capital gains or dividends – portfolio management seeks to maximize total return after tax for a notional high-marginal-rate investor based in Ontario. It should also be noted that this sustainable income figure is not targetted in any manner; it may well go down if, for instance, it is decided that quality is cheap and trades are executed to increase credit quality at the expense of yield.

For all that, though, there is a point to the calculation – it shows that in the recent past, and subject to the usual warning that historical performance is not necessarily indicative of future returns:

• Income expectations are a lot more stable than market prices, and
• the overall trend is upwards

The market was seems to have recovered from the horrors of 2007; while this did not trigger any issuance of note in February, a new issue was announced on March 3, which has knocked the market down a bit but only time will tell whether or not this is a trend reversal. Of greater interest were the taxation changes in the Federal Budget which, over the long term, are preferred unfriendly … but remember what I said above about long-range macro-forecasts! For what it’s worth, I consider preferreds to be cheap to long corporates at the present time, and long corporates to be cheap to long Canadas.

The fund did considerable trading during the month, but most of this trading was simply opportunistic switching between issues with similar characteristics. The reversal of a BNA.PR.C / BAM.PR.N switch was the high point of the month; this has been discussed elsewhere. Critics, naysayers and other unkind souls may wish to observe that a large portion of the fund’s outperformance in February was due to its holding of BNA.PR.C (which had an astonishing return) … I can only point out that this issue underperformed in December and January and that performance through the three months – while quite good and well worth taking the position – was not quite so dramatic.

This entry was posted on Tuesday, March 4th, 2008 at 1:42 pm and is filed under MAPF. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.