Best & Worst Performers: October 2008

These are total returns, with dividends presumed to have been reinvested at the bid price on the ex-date. The list has been restricted to issues in the HIMIPref™ indices.

October, 2008
Issue Index DBRS Rating Monthly Performance Notes (“Now” means “October 30”)
BAM.PR.B Floater Pfd-2(low) -36.5385% Was also the worst performer in September – it has been hit not just by the general downdraft in BAM issues, but by expectations of continuing drops in prime. Is it any wonder it is starting to attract interest?
BAM.PR.K Floater Pfd-2(low) -34.6667% Also a poor performer in September.
BSD.PR.A InterestBearing Pfd-2(low) -33.0673% Asset coverage of 0.9+:1 as of October 24 according to Brookfield Funds. Now with a pre-tax bid-YTW of 17.21% based on a bid of 5.87 and a hardMaturity 2015-3-31 at 10.00 … though as pointed out by Assiduous Reader prefhound, use of $10.00 maturity value is, at the very least, something of a leap of faith. Brookfield Funds has announced suspension of dividends for the capital units and suspension of retraction rights.
BAM.PR.M PerpetualDiscount Pfd-2(low) -19.4846% Now with a pre-tax bid-YTW of 9.46% based on a bid of 12.81 and a limitMaturity.
BAM.PR.N PerpetualDiscount Pfd-2(low) -19.3038% Now with a pre-tax bid-YTW of 9.50% based on a bid of 12.75 and a limitMaturity.
POW.PR.B PerpetualDiscount Pfd-2(high) -0.0971% Now with a pre-tax bid-YTW of 6.57% based on a bid of 20.58 and a limitMaturity.
NA.PR.N FixedReset Pfd-1(low) +0.2053%  
ALB.PR.A SplitShare Pfd-2(low) +0.3040% Asset coverage of 1.5+:1 as of October 30 according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 8.29% based on a bid of 23.10 and a hardMaturity 2011-2-28 at 25.00.
BMO.PR.I OpRet Pfd-1 +0.4246% Called for redemption.
PWF.PR.D OpRet Pfd-1(low) +1.9405% Now with a pre-tax bid-YTW of 5.05% based on a bid of 25.16 and a softMaturity 2012-10-30 at 25.00.

Just as in August 2007, BAM issues are over-represented in the poor performers’ list … and I am just as unable to find a convincing rationale for this.

Consider, for example, BBD.PR.B. It’s a ratchet-rate issue, paying a maximum of 100% of prime on its par value, minimum 50%. On October 31, DBRS confirmed Bombardier’s preferreds at Pfd-4. Since Brookfields floaters in the index, BAM.PR.B and BAM.PR.K, both pay 70% of prime on their par value, we can assume that, given equal credit quality, BBD.PR.B should trade at 100/70 = 1.43 times the price of BAM.PR.B/K (since a reduction in BBD.PR.B’s rate will occur only if it trades significantly above par, which does not appear too likely in the near future).

BBD.PR.B is quoted at 12.00-23, implying – roughly speaking – that if it paid 70% of prime it would be trading at 8.40. Compare that to BAM.PR.B/K, at 9.90-98 and 10.78-11.66, respectively – there is not much premium being paid for the difference between Pfd-2(low) and Pfd-4!

Compare also (as Mr. Nagel did) to TRI.PR.B: it’s also rated Pfd-2(low) and also pays 70% of prime, but is less liquid … and is quoted at 18.05-00!

I will suggest that the Street is trading the BAM issues as if their credit quality is significantly worse than it actually is.

If you like floaters, you’ll probably like the Brookfield issues – but remember! While Brookfield is a good name, it is not so good a name that it may be overweighted with abandon! Investing in Brookfield is a bet on their credit quality, the same way as investing in any fixed income issue is a bet on credit quality. Recognize that occasionally you’re going to be wrong and keep your bets small in order to give the statistics a chance to work.

2 Responses to “Best & Worst Performers: October 2008”

  1. Louis says:

    What do you mean by “overweighted with abandon!” as I think I crossed the line of “obesity” with my BAM’s prefs? A percentage figure in value would be helpful to better understand what you mean by that with regards to Brookfield’s prefs.

  2. jiHymas says:

    The percentage figure will vary from investor to investor and its a figure I was very coy about in my essay on portfolio construction.

    On the one hand, you want positions large enough to be traded efficiently and have a meaningful effect on your portfolio; on the other hand, you don’t want to expose yourself to the risk of that same “meaningful effect” to work against you if you should happen to be wrong or the market doesn’t cooperate.

    The current S&P Factsheet for TXPR indicates a maximum company weighting of 4.24%, but this is obviously an error, since there are two TD issues in the top ten holdngs with a combined weight of 5.45%. It appears their table used the weight of the highest weighted single issue.

    I seem to recall that they do cap exposure to a single name at somewhere around 8%, but can’t find any source documents for this assertion.

    HIMIPref™ testing was performed with the following limits:

    • Pfd-3: 5% per name, 10% total
    • Pfd-2: 10% per name, no limit on total
    • Pfd-1: 10% per issue, no limit per name, no limit on total

    These are rules of thumb, attempting to balance fear, greed, and the realities of the marketplace. You will have to decide for yourself – coldly and rationally, unswayed by thoughts of ‘Wow look how cheap this stuff is now!’ – just where your comfort level lies.

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