Turnover declined sharply in March to 15%. Very wide spreads largely prevented optimization trading, while there were enough knowledgeable participants in the market to prevent price differences between similar issues from getting far enough out of line to overcome that hurdle.
The fund’s trading will probably be higher in the future than has been normal for the past several years, since the extreme segmentation in the marketplace that I complained about for so long is now effectively ended. Low-Reset insurance issues were considered so cheap relative to their peers that a large portion of the fund’s holdings were effectively frozen. However, this differentiating factor is no longer considered applicable.
I am no longer making any adjustments for special qualities of insurance issues but note that this policy may change again in the future – a requirement for a Principal Loss Absorbency Mechanism (PLAM), whereby any security included in Tier 1 Capital will be wiped out prior to a government bail-out, even if technical bankruptcy is avoided, remains good public policy; it is a disgrace that the IAIS has rejected this principle and even worse that OSFI argued strenuously against it. I will continue to read notifications from these two entities with great interest, but while it is within the realm of possibility that ICS 2.0 will be revised following the expiry of the current five-year testing period, I can’t say I have any great confidence in the wisdom of the bureaucrats. However, it is a positive move that the increase in the limit for preferred share issuance was increased from 10% of the capital requirement to 15%; but this increase may only be met with issues having a PLAM.
Sectoral distribution of the MAPF portfolio on March 31 was as follows:
| MAPF Sectoral Analysis 2020-3-31 | |||
| HIMI Indices Sector | Weighting | YTW | ModDur |
| Ratchet | 0% | N/A | N/A |
| FixFloat | 0% | N/A | N/A |
| Floater | 0.9% | 5.68% | 14.38 |
| OpRet | 0% | N/A | N/A |
| SplitShare | 0% | N/A | N/A |
| Interest Rearing | 0% | N/A | N/A |
| PerpetualPremium | 0% | N/A | N/A |
| PerpetualDiscount | 6.0% | 6.32% | 13.43 |
| Fixed-Reset Discount | 41.3% | 7.36% | 12.15 |
| Deemed-Retractible | 0.4% | 6.57% | 13.12 |
| FloatingReset | 8.2% | 5.04% | 15.44 |
| FixedReset Premium | 0% | N/A | N/A |
| FixedReset Bank non-NVCC | 0% | N/A | N/A |
| FixedReset Insurance non-NVCC | 28.6% | 6.52% | 12.92 |
| Scraps – Ratchet | 1.5% | 9.66% | 11.59 |
| Scraps – FixedFloater | 0.0% | N/A | N/A |
| Scraps – Floater | 0% | N/A | N/A |
| Scraps – OpRet | 0% | N/A | N/A |
| Scraps – SplitShare | 1.0% | 9.05% | 3.87 |
| Scraps – PerpPrem | 0% | N/A | N/A |
| Scraps – PerpDisc | 0% | N/A | N/A |
| Scraps – FR Discount | 12.7% | 8.12% | 11.15 |
| Scraps – DeemedRet | 0% | N/A | N/A |
| Scraps – FloatingReset | 0.0% | N/A | N/A |
| Scraps – FR Premium | 0% | N/A | N/A |
| Scraps – Bank non-NVCC | 0% | N/A | N/A |
| Scraps – Ins non-NVCC | 0% | N/A | N/A |
| Cash | -0.6% | 0.00% | 0.00 |
| Total | 100% | 7.04% | 12.60 |
| Totals and changes will not add precisely due to rounding. Cash is included in totals with duration and yield both equal to zero. | |||
| The various “Scraps” indices include issues with a DBRS rating of Pfd-3(high) or lower and issues with an Average Trading Value (calculated with HIMIPref™ methodology, which is relatively complex) of less than $25,000. The issues considered “Scraps” are subdivided into indices which reflect those of the main indices. | |||
| 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. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 in the case of banks or normally in the case of insurers and insurance holding companies, in addition to the call schedule explicitly defined. See the Deemed Retractible Review: September 2016 for the rationale behind this analysis and IAIS Says No To DeemedRetractions for the recent change in policy with respect to insurers.
Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue and by a further five years in December, 2018; the estimate was eliminated in November. However, the distinctions are being kept because it is useful to distinguish insurance issues from others. |
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| Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 0.57%, a constant 3-Month Bill rate of 0.21% and a constant Canada Prime Rate of 2.45% | |||
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 2020-3-31 | ||
| DBRS Rating | Weighting | |
| Pfd-1 | 0 | |
| Pfd-1(low) | 0 | |
| Pfd-2(high) | 27.7% | |
| Pfd-2 | 29.4% | |
| Pfd-2(low) | 28.3% | |
| Pfd-3(high) | 6.6% | |
| Pfd-3 | 5.5% | |
| Pfd-3(low) | 2.2% | |
| Pfd-4(high) | 0% | |
| Pfd-4 | 0% | |
| Pfd-4(low) | 0.8% | |
| Pfd-5(high) | 0% | |
| Pfd-5 | 0.0% | |
| Cash | -0.6% | |
| Totals will not add precisely due to rounding. | ||
| The fund holds a position in AZP.PR.B, which is rated P-4(low) by S&P and is unrated by DBRS; it is included in the Pfd-4(low) total. | ||
| The fund holds a position in BIP.PR.E and BIP.PR.F, which are rated P-2(low) by S&P and are unrated by DBRS; these are included in the Pfd-2(low) total. | ||
| A position held in EMA.PR.C is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3. | ||
| A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3. | ||
Liquidity Distribution is:
| MAPF Liquidity Analysis 2020-3-31 | |
| Average Daily Trading | Weighting |
| <$50,000 | 3.7% |
| $50,000 – $100,000 | 20.4% |
| $100,000 – $200,000 | 59.0% |
| $200,000 – $300,000 | 3.5% |
| >$300,000 | 14.0% |
| Cash | -0.6% |
| Totals will not add precisely due to rounding. | |
The distribution of Issue Reset Spreads is:
| Range | MAPF Weight |
| <100bp | 0% |
| 100-149bp | 8.8% |
| 150-199bp | 16.3% |
| 200-249bp | 8.6% |
| 250-299bp | 39.0% |
| 300-349bp | 13.8% |
| 350-399bp | 1.4% |
| 400-449bp | 1.8% |
| 450-499bp | 0.0% |
| 500-549bp | 1.2% |
| 550-599bp | 0% |
| >= 600bp | 0% |
| Undefined | 9.2% |
Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.
| Range | MAPF Weight |
| Currently Floating | 10.6% |
| 0-1 Year | 21.7% |
| 1-2 Years | 9.6% |
| 2-3 Years | 27.8% |
| 3-4 Years | 9.3% |
| 4-5 Years | 14.4% |
| 5-6 Years | 0% |
| >6 Years | 0% |
| Not Floating Rate | 6.8% |
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 directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). 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 July 31, 2017, and published in the August, 2017, PrefLetter. It is fair to say:
- MAPF credit quality is much better
- MAPF liquidity is lower
- MAPF Yield is higher
- Weightings
- MAPF is less exposed to Straight Perpetuals
- Neither portfolio is exposed to Operating Retractibles (there aren’t too many of those any more!)
- MAPF is a little more exposed to SplitShares
- MAPF is less exposed to FixFloat / Floater / Ratchet
- MAPF is higher weighted in FixedResets, with a greater emphasis on lower-spread issues
“there were enough knowledgeable participants in the market to prevent price differences between similar issues from getting far enough out of line to overcome that hurdle.”
This really surprised me. I fully expected to be very busy swapping but could make very little work.
What is an example of an Scraps FR Discount?
What is an example of an Scraps FR Discount?
Any FixedReset that is:
(i) trading at a discount to par, and
(ii) (a) rated Pfd-3(high) or lower by DBRS, or
(b) has a average Daily Trading Value of less than $25,000.
e.g., FFH.PR.C