Research: MAPF and Some Competitors

In this essay, I looked at the portfolios of MAPF and some of its (much) larger competitors to highlight the differences between them. For example, I looked at the sustainability of their dividends, given that at the time of writing a great many of the issues were trading at a premium and therefore expected to be called and replaced with lower coupon issues in the future.

But I remember this article mainly for its revelation regarding the revolving door nature of TXPR at the time:

It is in everybody’s interest that the reported index fund tracking fund [sic – I meant ‘tracking error’] be minimized: it’s good for the fund sponsors and it’s good for the organizations that calculate their indices. However, the practice of pre-announcing index changes does nothing to address the poor effects on performance that results when many index players are all attempting to take the same investment action – it serves merely to bury this frictional cost of index investing in the index itself.

There is no way to eliminate the problem – it is clear that a great many people want index funds and that therefore there will be a large pool of capital that executes trades on the market for reasons that are irrelevant either to the intrinsic value of the security, or to a (possibly informed) view on the price at which such a trade can be reversed. Any market player who does such a thing must expect to incur market impact costs.

However, Table A-2 and the related discussion make it clear that the methodology currently in use by S&P for the TXPR index has given rise to a whipsaw effect: there were many issues added to the index in the 12Q4 revision for no reason other than an increase in measured volume; and the increase in measured volume arose as a direct result of deletion in the 12Q3 revision.

This problem was eventually fixed (I think by imposing a time-out during which reinstatement of issues was not allowed) but I forget when. I’ll update this post if I can ever find the reference! Update: It didn’t take long! On November 24, 2012, S&P announced the introduction of the TXPL index and revisions to TXPR methodology, including “Issues deleted from the index are not eligible for re-inclusion until six months after the effective date of the exclusion; they may no longer be added back at the following rebalancing”

Look for the research link!

One Response to “Research: MAPF and Some Competitors”

  1. […] of the underlying indices. These articles may not be the most exciting things ever, but I found in November 2012 that the trading generated by the deletion of issues from the indices was sufficient to have the […]

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