MAPF Performance : May, 2019

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close May 31, 2019, was $8.1061.

Returns to May 31, 2019
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month -5.01% -3.47% -3.00% N/A
Three Months -5.92% -4.00% -3.24% N/A
One Year -17.69% -12.44% -9.88% -10.47%
Two Years (annualized) -2.27% -1.56% –1.39% N/A
Three Years (annualized) +5.31% +4.45% +4.03% +3.58%
Four Years (annualized) -0.36% +0.30% -0.21% N/A
Five Years (annualized) -0.63% -0.44% -0.79% -1.21%
Six Years (annualized) -0.10% -0.30% -0.70% N/A
Seven Years (annualized) +1.26% +0.46% +0.18% N/A
Eight Years (annualized) +1.04% +0.88% +0.56% N/A
Nine Years (annualized) +3.65% +2.61% +2.00% N/A
Ten Years (annualized) +5.18% +3.45% +2.62% +2.10%
Eleven Years (annualized) +6.99% +2.64% +1.86%  
Twelve Years (annualized) +6.63% +2.25%    
Thirteen Years (annualized) +6.52% +2.15%    
Fourteen Years (annualized) +6.42% +2.21%    
Fifteen Years (annualized) +6.67% +2.51%    
Sixteen Years (annualized) +7.53% +2.62%    
Seventeen Years (annualized) +7.47% +2.92%    
Eighteen Years (annualized) +7.95% +2.86%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees.
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -2.84%, -2.92% and -8.05%, respectively, according to Morningstar after all fees & expenses. Three year performance is +3.95%; five year is +0.18%; ten year is +3.47%
Manulife Preferred Income Class Adv has been terminated by Manulife. The performance of this fund was last reported here in March, 2018.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are -3.79%, -4.78% & -13.57%, respectively. Three year performance is +3.40%, five-year is -0.35%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -3.55%, -4.67% and -13.66% for one-, three- and twelve months, respectively. Three year performance is +2.95%; five-year is -1.12%.

Acccording to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The last time Altamira Preferred Equity Fund’s performance was reported here was April, 2014; performance under the National Bank banner was first reported here May, 2014.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is -12.56% for the past twelve months. Two year performance is -2.23%, three year is +4.25%, five year is -2.78%.
Figures for Natixis Canadian Preferred Share Class Series F (formerly NexGen Canadian Preferred Share Tax Managed Fund) are -3.22%, =3.55% and -12.23% for one-, three- and twelve-months, respectively. Three year performance is +1.71%; five-year is +0.13%
Figures for BMO Preferred Share Fund (advisor series) according to Morningstar are -3.81%, -4.89% and -14.49% for the past one-, three- and twelve-months, respectively. Three year performance is +0.37%; five-year is -2.75%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F are -11.64% for the past twelve months. The three-year figure is +4.72%; five years is -0.37%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR).

Performance for the fund was last reported here in September, 2016; the first report of unavailability was in October, 2016.

Figures for Lysander-Slater Preferred Share Dividend Fund according to Morningstar are -3.78%, -3.91% and -13.14% for the past one, three and twelve months, respectively. Three year performance is +2.80%.
Figures for the Desjardins Canadian Preferred Share Fund A Class, as reported by Morningstar are -3.49%, -4.08% and -12.72% for the past one, three and twelve months, respectively. Three year performance is +2.34%.

MAPF 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 fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

The preferred share market has suffered a sharp reverse in the past five months, leaving a lot of room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is extremely elevated (chart end-date 2019-5-10)

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Note that the Seniority Spread was 345bp on May 29. As a good practical example of the spreads between markets, consider that on March 20 the redemption of IGM.PR.B was announced; the redemption of this 5.90% Straight Perpetual was explicitly financed by the issue of 4.206% debentures, implying a Seniority Spread for this issuer of about 350bp at that time.

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2019-5-10):

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In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

It seems clear that many market players are, wittingly or not, using FixedResets to speculate on future moves in the Canada 5-Year yield. This is excellent news for those who take market action based on fundamentals and the long term characteristics of the market because nobody can consistently time the markets. The speculators will, over the long run, lose money, handing it over to more sober investors.

FixedReset (Discount) performance on the month was -5.64% vs. PerpetualDiscounts of -1.15% in May; the two classes finally decoupled in mid-November after months of moving in lockstep, but it still appears to me that yields available on FixedResets are keeping the yields of PerpetualDiscounts up, even though a consistent valuation based on an expectation of declining interest rates would greatly increase the attractiveness of PerpetualDiscounts:

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As is often the case, there is a lot of noise in the graph of One Month Performance vs. Issue Reset Spread, but the correlation for the Pfd-3 Group was reportable at 16%. It is interesting to note that the Pfd-3 Group clearly outperformed investment grade issues:

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Floaters got hammered again, returning +-5.29% for May and -33.71% for the past twelve months. Look at the long-term performance:

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Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time and still can’t get over it. Fifteen years!

It seems clear that Floaters are used, wittingly or otherwise, as a vehicle for speculation on the policy rate and Canada Prime, while FixedResets are being used as a vehicle for speculation on the five-year Canada rate. In support of this idea, I present an Implied Volatility analysis of the TRP series of FixedResets (as of May 31), which is comprised of six issues without a Minimum Rate Guarantee and two issues which do have this feature:

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The two issues with floors, TRP.PR.J (+469, minimum 5.50%) and TRP.PR.K (+385, minimum 4.90%) are $1.60 and an incredible $3.09 rich, respectively, despite the fact that their floor will not become effective unless five-year Canadas dip below 0.81% and 1.05%, respectively. For all the recent gloom, we’re still a long way from those levels!

As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. There could be a reversal, particularly if Trump’s international trade policies cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment.

Yields on preferred shares of all stripes are extremely high compared to those available from other investments of similar quality. A I told John Heinzl in an eMail interview in late November, the best advice I can offer investors remains Shut up and clip your coupons!

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen!

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
June 9.5313 6.41% 0.998 6.423% 1.0000 $0.6122
September 9.7129 6.56% 0.998 6.573% 1.0000 $0.6384
December, 2017 10.0566 6.06% 1.004 6.036% 1.0000 $0.6070
March, 2018 10.2701 6.22% 1.007 6.177% 1.0000 $0.6344
June 10.2518 6.22% 0.995 6.251% 1.0000 $0.6408
September 10.2965 6.62% 1.018 6.503% 1.0000 $0.6696
December, 2018 8.6875 7.16% 0.997 7.182% 1.0000 $0.6240
March, 2019 8.4778 7.09% 1.007 7.041% 1.0000 $0.5969
May, 2019 8.1061 7.56% 0.995 7.598% 1.0000 $0.6159
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
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 or the regulator (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or the Deemed Maturity date for insurers and insurance holding companies (see below)), in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

The Deemed Maturity date for insurers was set at 2022-1-31 at the commencement of the process in February, 2011. It was extended to 2025-1-31 in April, 2013 and to 2030-1-31 in December, 2018
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
June 1.35% 0.69%
September 1.79% 0.97%
December, 2017 1.83% 1.00%
March, 2018 2.06% 1.08%
June 1.95% 1.22%
September 2.33% 1.55%
December, 2018 1.88% 1.65%
March, 2019 1.46% 1.66%
May, 2019 1.50% 1.68%

Significant positions were held in NVCC non-compliant regulated FixedReset issues on May 31, 2019; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2030-1-31 (insurers and insurance holding companies) or on a different date (SplitShares, when present in the portfolio) This presents another complication in the calculation of sustainable yield, which also assumes that redemption proceeds will be reinvested at the same rate. It will also be noted that my analysis of likely insurance industry regulation as updated is not given much weight by the market.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

7 Responses to “MAPF Performance : May, 2019”

  1. mr_j936 says:

    I did not expect the December lows to be tested again this soon. I would have liked to see a report or an article about how well preferred share dividends held up in crises, how frequently do dividends get cut in dark times going by each grade of preferred in your experience?
    I cannot help but worry that if companies cut their dividends on preferred(which they can legally do) my savings would not be worth anything. Share some wise words to calm the agitated souls.

  2. jiHymas says:

    how well preferred share dividends held up in crises, how frequently do dividends get cut in dark times going by each grade of preferred in your experience?

    Companies will typically cut their preferred share dividends only when they are about to file for bankruptcy. The only exception to this rule I can think of is Aimia suspending its dividends (since reinstated, although the company looks really shaky) due to insufficient capital.

    Defaults can and do happen. There was Nortel and there was Quebecor World and there was Yellow Media, but it’s very, very rare. In practical terms, what that means is that you should maintain a well diversified portfolio, so that a default, while certainly not being any fun, will not cripple you.

    Split-Share issues are more prone to default; I won’t attempt to provide a comprehensive list, but FTU.PR.B is a slow-motion train-wreck. However, limiting your purchases to those issues with Asset Coverage of 1.5+:1 and being ready to pull the plug if this ratio falls below 1.2:1 will limit any losses.

    In addition, it’s generally wise to maintain good credit quality. My fund, for example, is roughly 90% investment grade and holdings of junk issues (Pfd-3(high) and lower) are tightly limited by individual name – investment-grade issues are also limited by name, but less tightly.

    Credit Risk, while always present, is generally grossly overestimated. Some people will be thrilled if you allow them to nod wisely and claim that, for instance corporate bonds yield more than governments due to credit risk. Nonsense. A far larger component of the yield premium is liquidity – see my article Credit Spreads and Default Risk.

    Consider the equation for Expected Loss:

    EL = PD * LGD

    Where EL is the expected loss
    PD is the probability of default
    LGD is the loss given default

    To a first approximation, one may consider PD to be equal for a company’s debentures and preferred shares; as stated above, companies tend to keep paying their preferred dividends until the bitter end, mainly because they fear losing access to the capital markets if they don’t.

    The difference is LGD; for preferred shares, it is generally pretty accurate to say the loss will be total, very close if not equal to 100%, while for debentures it will be … well, all over the place, but 60% is a rule of thumb often used.

    However, I want to stress that this downturn is not credit-driven. There is no credit crisis. This downturn is based on a recent decline in government yields that is being extrapolated to hell-n-gone and – I continue to believe – spreads available are ridiculously high.

  3. skeptical says:

    The biggest damage to preferreds has come from the interest rates getting progressively lower for longer than anyone imagined and lower than anyone thought.
    So far, very little damage has been due to company specific deterioration of investment grade preferreds.
    If you have investment grade preferreds, almost all of these companies sport healthy market caps and stable or increasing dividends.
    Even borderline cases such as ENB and FTS have tens of billions of market cap and these preferred instruments rank senior to common equity.
    IMHO, Bay street pulled a fast one on the Canadian investing public and sold very complicated derivative instruments(aka rate reset preferred shares) disguised as a fixed income product with low to moderate risk.
    In the old days, you had to worry about two things- is the company a good credit and a general direction of interest rates.
    Now you have to think about reset rates, GOC 5 year and a whole bunch of things because they affect your dividend payments.
    In the straight preferred worlds, unless the company’s fundamentals changed, your dividend payments would never be cut. Your principal could vary based on the long term interest rates, but now your principal and the dividend payments both change based on interest rates AND company fundamentals.
    Most leading ETFs have returned essentially close to zero over the last ten years. No wonder everyone is worried and concerned.

    Going back to dividend cuts, even during the depths of the great recession of 2008, there were very few companies that cut their dividends. If you have invested in blue chip Canadian stocks, most should be good enough to make dividend payments during periods of economic stress.
    If preferred stock dividends by blue chips are cut or eliminated, you are looking at a massive economic shock and you’ll have common equity valuations dropping by 50 to 70%. We are not getting that scenario anytime soon. If we do get there, everybody and everything will be going to XXXX.
    Just my two cents.

  4. mr_j936 says:

    Thank you guys. Looking forward for the next prefletter 🙂

  5. baffled says:

    skeptical , i agree with your comment , but you left out the 1 real possibility that will result in damage to the pref (and div stocks) and that is what the gov might do at every budget . the odds of the gov changing the div tax credit , so more is taxed is greater than a div cut from the companies

  6. stusclues says:

    “Now you have to think about reset rates, GOC 5 year and a whole bunch of things because they affect your dividend payments”

    … and other series of the same issuer, short end of the yield curve, time to reset, coiled springs and market inefficiency to name a few more. This is a wonderful time to be an alert market actor as the ability to earn significant trading income while being protected from first loss risk has perhaps never been better.

  7. skeptical says:

    Yes, I regard regulation risk as the primary risk here that would undermine long term returns. But DTC would attack at the heart of our tax integration and would cause a lot of issues and further erode investor confidence in the Canadian markets. And if they take away DTC, what motive there is to invest in the Canadian markets only? Food for thought.

    Having said that, some of the yields and issues are so tempting, that I’d take a go at that at the marginal tax rate. If we look at issues such as JNK (junk bond etf), they yield about 5.5 to 6%. And they are all junk.

    For comparison, some of Canada’s best blue chips have perpetuals yielding similar values but with much better credit quality.

    I agree. If you know what you are doing, it’s a wonderful time to trade the market. But only if you know what you are doing and can hold on to a mispriced market for a certain time.

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