HIMI Releases Research Into ZPR

James Hymas, president of preferred share specialist firm Hymas Investment Management Inc. (“HIMI”), stated today that his investigation of discrepancies between Bank of Montreal’s (“BMO”) regulatory and advertising material for BMO Laddered Preferred Share Index ETF (TSX: ZPR) and the actual portfolio held by the fund has led to the conclusion that BMO has not been straightforward with its investors regarding the portfolio composition of the fund.

“Like many funds, ZPR relies on a gimmick to attract customers: in this case, the fund’s advertising emphasizes the idea that the fund is ‘laddered’”, Hymas explained. “The word ‘laddered’ is even included in the name of the fund! Certainly, the index on which ZPR purports to be based is laddered – the proportion of the portfolio that will reset in each of the next five years is very close to 20% for all reset years – even when measured between the monthly index rebalancing dates. However, BMO’s own report for ZPR dated October 31, 2023, shows a range of 11.38% to 27.69%.”

Hymas also stated “Problematical laddering is not the only issue. Aggregate weights by issuer for the portfolio are wildly different from the index on the dates I sampled, as are weights by individual issue – to the extent that over 12% of the fund’s portfolio is held in issues not included in the index. This does not support the prospectus claim that ‘The investment strategy of BMO Laddered Preferred Share Index ETF is currently to invest in and hold the constituent securities of the Solactive Laddered Canadian Preferred Share Index in the same proportion as they are reflected in the Index.’”

BMO claims that the quoted sentence “cannot be read in isolation and is qualified by other statements in the prospectus”, but this is not well-supported by the evidence – a discussion is embodied in the supporting commentary linked below. Hymas remarked that he will leave it to investors to determine for themselves whether they accept BMO’s claim, noting that the ‘same proportion’ assertion is repeated on the fund’s web page without any qualifying statement; the fund’s “Factsheet” – which may be obtained from the fund’s web page – repeats the web page’s unequivocal yet false statement of strategy.

“As it stands, BMO Laddered Preferred Share Index ETF is neither laddered nor an Index fund – BMO must make immediate full and frank disclosure of their shortcomings in the management of the fund and make restitution to clients for the risks that they have borne that they had been seeking to avoid”, Hymas concluded.

Further information has been published by HIMI on a dedicated web page at https://himivest.com/ZPR/ .

11 Responses to “HIMI Releases Research Into ZPR”

  1. […] 2024-3-1: See the post HIMI Releases Research Into ZPR for more […]

  2. andyk84 says:

    Hey James

    Wanted to get your thoughts on bmo’s announcement of Limited Recourse Capital Notes from yesterday (1 billion usd at 7.7%). Seems like adjusting for tax they will pay about 6%, similar to the bmo.pr.s if it resets at a 5 year rate of 3.67%. Seems likely that Bmo will be redeeming the bmo.pr.f’s with some of this money (3.51% Reset Rate). The bmo.pr.s has had quite a bit of price movement/volume, both this morning as well as prior to yesterdays announcement. Do you have any thoughts on the likelihood of the bmo.pr.s’s getting redeemed. It appears the market is starting to price that possibility in but i’m not sure about a bank redeeming a 2.33% reset rate pref.

    Thanks for any thoughts


  3. Nestor says:

    given the price action…. someone knows.

  4. richardo says:

    I’d like thoughts on this as well. BMO.PR.F seems like a sure thing for redemption and unfortunately I have some I had hoped would reset instead of incurring capital gains tax.

    I simply don’t understand the price movement in BMO.PR.S, unless someone knows it’s also getting redeemed. It doesn’t seem like the reset yield would make it a candidate for redemption, given what just happened with BMO.PR.E

  5. IrateAR says:

    BMO raised $1B US and BMO F is $350mm CAD. They could do whatever with the money but I think there’s a certain amount of dot connecting being done.

    Credit spreads have tightened since October when BMO.PR.E was extended so the math has changed.

  6. Lateralus Capital says:

    Bmo raised 1 billion USD of new LRCN paper at 7.70. This is equivalent to 1.35 billion CAD of new AT1 capital. The size of the BMO.F and BMO.S 850mm CAD and BMO doesn’t really need the excess capital. So one could draw the conclusion that the capital was raised for the redemption of those 2 prefs. 7.70 is equivalent to 5.78 pct after tax as LRCN are interest bearing so the coupon can shield the Bank from taxes. The BMO.S will reset at around the same rate and maybe even higher. In addition, I believe that the Part 6.1 tax also adds additional cost to the Bank for having dividend paying prefs. The reason the BMO.E weee extended is that in mid October it was the wife’s in credit spreads and would have cost BMO 450 bps plus 5 year GOC to redeem. It wasn’t economical at the time and markets were terrible. Either they are raising AT1 to redeem more retail listed prefs or they see something in the quarters ahead where they need additional capital. Who knows…speculative

  7. […] that there is some doubt as to whether this fund is either "laddered" or an "index […]

  8. […] that analysis of ZPR shows some doubt as to whether this fund is either "laddered" or an "index […]

  9. […] that analysis of ZPR shows some doubt as to whether this fund is either "laddered" or an "index […]

  10. […] that analysis of ZPR shows some doubt as to whether this fund is either "laddered" or an "index […]

  11. […] that analysis of ZPR shows some doubt as to whether this fund is either "laddered" or an "index […]

Leave a Reply

You must be logged in to post a comment.