MAPF Portfolio Composition: July 2008

There was a substantial amount of trading in July, as the collapse in prices of PerpetualDiscounts in a confused market brought many opportunities to the Fund. Turnover was close to 100% for the month, but a high proportion of these trades were intra-issuer (trades between the CM issues were particularly frequent) and most others were intra-sector (PerpetualDiscounts fell at different rates).

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

MAPF Sectoral Analysis 2008-7-31
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 11.6% (+10.7) 9.07% 2.84
Interest Rearing 0% N/A N/A
PerpetualPremium 0.3% (0) 5.79% 2.29
PerpetualDiscount 91.7% (-2.7) 6.70% 13.97
Scraps 0% N/A N/A
Cash -3.6% (-8.4) 0.00% 0.00
Total 100% 7.21% 12.23
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from June month-end.

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.

The increase in SplitShares is due to purchases of WFS.PR.A, discussed below.

Credit distribution is:

MAPF Credit Analysis 2008-7-31
DBRS Rating Weighting
Pfd-1 67.5% (+30.9)
Pfd-1(low) 13.2% (-27.0)
Pfd-2(high) 0% (-7.9)
Pfd-2 0.5% (+0.1)
Pfd-2(low) 22.4% (+12.1)
Cash -3.6% (-8.4)
Totals will not add precisely due to rounding. Bracketted figures represent change from June month-end.

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed.

The increase in the proportion of Pfd-2(low) issues held is due to purchases of WFS.PR.A:

Post Mortem: Purchase of WFS.PR.A Position
June 30
(Closing bid)
21.13 20.05 23.21 20.25 9.11
Trade, 7/3
July 31
closing bid
Dividends   7/9

As of month-end, the move into WFS.PR.A has not borne fruit – but given the substantial yield pick-up (over 3 points!) I consider it to be only a matter of time before the WFS.PR.A experiences a substantial price increase. As of July 24, it had asset coverage of 1.6+:1, according to Mulvihill; comparable issues (insofar as anything is comparable; as the name implies, World Financial Split has a portfolio with considerably more geographic diversification than most split share corporations) are trading to yield 5.5%-5.8%. If WFS.PR.A were to trade to yield a more reasonable (to me!) 6%, the price would be about $9.85, an increase of almost 10% from the the July month-end value. Frankly, it seems like a pretty good bet, particularly given the decrease in interest-rate risk when trading from perpetuals to a split-share maturing in just under three years!

Liquidity Distribution is:

MAPF Liquidity Analysis 2008-7-31
Average Daily Trading Weighting
<$50,000 0.6% (+0.1)
$50,000 – $100,000 22.2% (+21.5)
$100,000 – $200,000 58.7% (+11.5)
$200,000 – $300,000 11.9% (-17.1)
>$300,000 10.2% (-7.8)
Cash -3.6% (-8.4)
Totals will not add precisely due to rounding. Bracketted figures represent change from June 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. 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) and 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 CPD as of May month end; it should be noted that the underlying TXPR index has been rebalanced and I have not yet fully analyzed the changes. While the changes affect the allocation to the different sectors, I do not believe the credit or liquidity metrics will have changed much.

  • MAPF credit quality is superior
  • MAPF liquidity is comparable
  • MAPF Yield is higher
  • But … MAPF is more exposed to PerpetualDiscounts
  • MAPF is less exposed to Fixed-Resets

3 Responses to “MAPF Portfolio Composition: July 2008”

  1. newtoprefs says:

    hi, you must be a genius getting a 7.21% return, when the whole category’s down some 20%. nice going!!

    I wanted to ask you about WFS.PR.A. does this have a dividend, and isn’t a split share kinda like a warrant, with an expiry date, etc.? why do you like this so much?

    thanks, new

  2. jiHymas says:

    you must be a genius getting a 7.21% return, when the whole category’s down some 20%

    Alas, the 7.21% figure above is not return-looking-backward but is yield-looking-forward. I have just posted my July performance review … recent months have not been kind, but I am beating the index (after expenses, before fees) for periods in excess of year, so all is not lost.

    I wrote an introductory article about split-shares a while ago, you may wish to start there. As far as WFS.PR.A is concerned, I feel that the principal and income are reasonably secure over the three years left in the term of the instrument and that the yield-to-maturity of 9.5%-odd (at the indicated price of $9.00) was extremely attractive for the risks incurred. You can get more information from the promoter.

  3. […] fund, with its heavy weighting in PerpetualDiscounts (see MAPF Portfolio Composition, July 2008), was not immune to the carnage and declined 2.31% on the month, before fees but after […]

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