MAPF Portfolio Composition: August, 2008

There was a substantial amount of trading in August, as the resurgence 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 rose 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 2008-8-29
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 20.5% (+8.9) 8.21% 5.47
Interest Rearing 0% N/A N/A
PerpetualPremium 0.3% (0) 5.41% 2.25
PerpetualDiscount 73.1% (-18.6) 6.35% 13.38
Scraps 0% N/A N/A
Cash +6.0% (+9.6) 0.00% 0.00
Total 100% 6.34% 10.92
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from July month-end. Cash is included in totals with duration and yield both equal to zero.

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 BNA.PR.C net of a small sale of WFS.PR.A. Assiduous readers will recall that I consider exposure to BNA to be equivalent, for credit risk control purposes, to exposure to BAM. These readers will not be surprised, therefore, to learn that the purchase of BNA.PR.C was not only funded by a sale of BAM.PR.N, but that this trade reversed swaps undertaken last February.

Post Mortem: BNA.PR.C / BAM.PR.N Swaps
August 29
closing bid
Dividends Missed May & 1/3 of August; Total ~$0.37 Received March & June; Total ~$0.59
The August trades were executed in pieces that spanned the BNA.PR.C ex-dividend date; dividends were earned on about 2/3 of the final position

As may be seen, the February-August swap was immensely profitable: there would have been a loss of $3.02 on the BNA.PR.C had it been held, about 14.6% of the February trading price. Instead, the BAM.PR.N lost $1.63, about 8.5% of the February trading price. The outperformance of BAM.PR.N by 6.1% is massive and leaves an old bond guy like me just shaking his head.

There will be those who will shout that it would have been better to have held cash during this period and lost nothing; but that would be market timing. I cannot predict the overall direction of the market, nor have I ever met anybody who can. The way to make money is to outperform the market whether it goes up or down; in time the rewards will be tangible.

As of month-end, the trade back into BNA.PR.C has not borne fruit – but given the substantial yield pick-up (over 2 points!) I consider it to be only a matter of time before the BNA.PR.C experiences a substantial price increase.

Credit distribution is:

MAPF Credit Analysis 2008-8-29
DBRS Rating Weighting
Pfd-1 46.1% (-21.4)
Pfd-1(low) 27.9% (+14.7)
Pfd-2(high) 0% (0)
Pfd-2 0.5% (0)
Pfd-2(low) 19.4% (-3)
Cash 6.0% (+9.6)
Totals will not add precisely due to rounding. Bracketted figures represent change from July 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.

Liquidity Distribution is:

MAPF Liquidity Analysis 2008-8-29
Average Daily Trading Weighting
<$50,000 0.6% (0)
$50,000 – $100,000 33.2% (+11.0)
$100,000 – $200,000 50.1% (-8.6)
$200,000 – $300,000 10.0% (-1.9)
>$300,000 0% (-10.2)
Cash 6.0% (+9.6)
Totals will not add precisely due to rounding. Bracketted figures represent change from July 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 somewhat lower
  • MAPF Yield is higher
  • But … MAPF is more exposed to PerpetualDiscounts
  • MAPF is less exposed to Fixed-Resets

2 Responses to “MAPF Portfolio Composition: August, 2008”

  1. […] fund, with its heavy weighting in PerpetualDiscounts (see MAPF Portfolio Composition, August 2008), had a superb return as a result of both the market’s overall move and very frequent […]

  2. […] is a lazy little swap that goes back and forth from time to time; the last time was reported in August 2008. The format of the trade analysis at that time will be […]

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