The fund’s amazing run of three superb months in a row came to a halt in March as the market swooned with the fund having overweighted PerpetualDiscount issues, the hardest hit sector. A fair bit of trading mitigated, but could not eliminate, the damage.
This was only one month, however, and the fund takes a long-term approach to the markets – it is recognized that not every month will deliver excess returns, or even every quarter. Trades are executed when there is a good probability of relative profit and in the past this has brought excess returns over time, albeit with considerable lumpiness in the timing of these excess returns.
| Returns to March, 2008 | ||
| Period | MAPF | Index |
| One Month | -4.56% | -2.79% |
| Three Months | +0.16% | -0.31% |
| One Year | -1.59% | -7.07% |
| Two Years (annualized) | +1.88% | -1.58% |
| Three Years (annualized) | +3.82% | +0.65% |
| Four Years (annualized) | +4.35% | +0.99% |
| Five Years (annualized) | +10.69% | +2.61% |
| Six Years (annualized) | +8.19% | +3.13% |
| Seven Years (annualized) | +9.28% | +2.86% |
| The Index is the BMO-CM “50” | ||
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 for the quarter: the fund outperformed the closed-end fund (DPS.UN), which returned an estimated -2.26% on the month and an estimated -0.79% on the quarter, as well as the exchange-traded fund (CPD) which returned -2.90% and -1.23% 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.
| Calculation of MAPF Sustainable Income Per Unit | ||||
| Month | NAVPU | Portfolio Average YTW |
Leverage Divisor |
Sustainable Income |
| June, 2007 | 9.3114 | 5.16% | 1.03 | 0.4665 |
| September | 9.1489 | 5.35% | 0.98 | 0.4995 |
| December, 2007 | 9.0070 | 5.53% | 0.942 | 0.5288 |
| March, 2008 | 8.8512 | 6.17% | 1.047 | 0.5216 |
| NAVPU is shown after quarterly distributions. | ||||
It should be noted that I do not have this calculation audited in any way, so unitholders 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 – I will be happy to provide supporting documents for the calculation to unitholders on request. 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
In the year ended March, 2008, however, the total dividend distribution of $0.525925 was very close to the theoretical figure, albeit with considerable quarterly variance.
The market finished March just a little bit above the trough of November, 2007, as several new issues (NA 6% Perps, BMO 5.80% Perps, BNS Reset Perps and TD 5.60% Perps) knocked the market down considerably. I suspect that there will be something of a pause in issuance for the nonce, as the market recovers … but I’ve been wrong on these macro-calls before and I’ll be wrong again in the future! The issuers will do what’s good for their business, without worrying too much about what’s good for the marketplace.
Long term investors will be most interest in the dividend-friendly Ontario budget, which went a long way towards countering the future effects of the dividend hostile Federal budget.
The fund did considerable trading during the month, but most of this trading was simply opportunistic switching between issues with similar characteristics.
“The market finished March just a little bit above the trough of November, 2007, as several new issues (NA 6% Perps, BMO 5.80% Perps, BNS Reset Perps and TD 5.60% Perps) knocked the market down considerably.”
This is the only reason that I tend to get frustrated with the market when these issuers create this effect. They “knock down” the market as you so candidly confirm, and, at least for the short term, everyone who’s long the market in general gets dragged down as well. Of course, this is counter-balanced by the effect of trading and buying opportunity, but in the final analysis, growth is stalled while we wait for the situation to settle down. I’m envious that when you say it, you’re making a prudent observation; when I say it, I’m whining! Oh well, at least we seem to be saying the same thing.
I have to re-iterate that I’m very impressed with the overall transparency and performance of MAPF. Considering the negative effects of the last 9 months [punctuated only briefly in the 1st quarter of this year], I think that what I’ve seen of your fund and its’ performance demonstrates strength, and definite long term potential for gain.
Having looked over the purchasing requirements, and considering the somewhat limited size of the fund at this point, it occured to me that you might want to consider ways to make units more available to the “smaller” investor. I think many pref-curious potential clients would like to take advantage of the probable troughing of MAPF’s unit price now, and jump into a position. This is probably not very easy to do given the current structure and availability of MAPF.
thank you again for the on-going dialogue, and analysis!
madequota
This is the only reason that I tend to get frustrated with the market when these issuers create this effect.
There is no profit to be made from frustration; issuers will do what they consider to be best for their companies without regard for anybody else’s frustration.
As shown on the post, the expected income per unit has remained stable-to-slightly-increasing; most unitholders will be reinvesting the proceeds in more units, which are now cheaper.
Having looked over the purchasing requirements, and considering the somewhat limited size of the fund at this point, it occured to me that you might want to consider ways to make units more available to the “smaller” investor.
A prospectus costs $50,000 and there’s no point in spending the money unless you also have an assured retail distribution channel. Selling mutual funds is an entirely different business from running money; one that I have no aptitude for and one that I do not wish to enter. My preference would be to run a fund under contract with a fundco, in the same manner as I had responsibility for three bond funds while with Greydanus, Boeckh.