MAPF Portfolio Composition: March 2013

Turnover returned to more normal levels in March, at about 7%.

There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:

  • Unaffected Straight Perpetuals
  • DeemedRetractibles explicitly subject to the rules (banks)
  • DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading. Another trend that hasn’t helped has been the migration of PerpetualDiscounts into PerpetualPremiums (due to price increases) – many of the PerpetualPremiums have negative Yields-to-Worst and those that don’t aren’t particularly thrilling; speaking very generally, PerpetualPremiums are to be avoided, not traded! This effect has caused the first of the three segments noted above to be untradeable for most practical purposes.

To make this more clear, since I’ve been asked the question recently, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to its peers, I also have to check its peer group. This cuts down on the potential for trading.

However, there have been some hopeful signs: trading picked up a little in December and remained at this elevated level in January; there was some frenzied trading on January 14, although February’s turnover was very low. The long promised OSFI Draft Definition of Capital for Insurers may clarify the status of the Insurer-issued DeemedRetractibles and make them homogeneous with Bank-issued DeemedRetractibles (as I expect) or with unregulated Straight Perpetuals (which would surprise me … but a lot of things happen that surprise me).

Sectoral distribution of the MAPF portfolio on March 28 was as follows:

MAPF Sectoral Analysis 2013-3-28
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 9.6% (-0.2) 4.54% 5.07
Interest Rearing 0% N/A N/A
PerpetualPremium 0.0% (0) N/A N/A
PerpetualDiscount 0.0% (0) N/A N/A
Fixed-Reset 29.7% (+3.9) 1.90% 1.58
Deemed-Retractible 54.7% (-2.8) 4.55% 6.61
Scraps (Various) 5.6% (-0.7) 6.74% 9.09
Cash 0.4% (-0.3) 0.00% 0.00
Total 100% 3.87% 5.08
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from February month-end. Cash is included in totals with duration and yield both equal to zero.
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, which are not exchangable into common at the option of the company. 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, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section)

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.

Credit distribution is:

MAPF Credit Analysis 2013-3-28
DBRS Rating Weighting
Pfd-1 0 (0)
Pfd-1(low) 36.6% (-18.4)
Pfd-2(high) 39.6% (+20.1)
Pfd-2 8.1% (-0.4)
Pfd-2(low) 9.6% (-0.5)
Pfd-3(high) 1.0% (0)
Pfd-3 1.5% (-0.1)
Pfd-3(low) 0.3% (0)
Pfd-4(high) 0.4% (0)
Pfd-4 1.3% (-0.3)
Pfd-4(low) 1.1% (-0.1)
Cash 0.4% (-0.3)
Totals will not add precisely due to rounding. Bracketted figures represent change from February month-end.

The increase in holdings of Pfd-2(high) issues at the expense of Pfd-1(low) is due to the downgrade of SLF by DBRS, not to any trading.

Liquidity Distribution is:

MAPF Liquidity Analysis 2013-3-28
Average Daily Trading Weighting
<$50,000 0.7% (-0.1)
$50,000 – $100,000 9.0% (-2.6)
$100,000 – $200,000 23.7% (-0.4)
$200,000 – $300,000 45.0% (-0.4)
>$300,000 21.1% (+3.8)
Cash 0.4% (-0.3)
Totals will not add precisely due to rounding. Bracketted figures represent change from February 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. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. 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) or 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) (and other funds) as of August 31, 2012, and published in the October (mainly methodology), November (most funds), and December (ZPR) 2012, PrefLetter. While direct comparisons are difficult due to the introduction of the DeemedRetractible class of preferred share (see above) it is fair to say:

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

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