The fund performed well as the preferred share recovery now looks pretty solid. As noted in the report of Index Performance, August 2009, PerpetualDiscounts posted very strong gains over the month, while FixedResets managed to outperform their currently very low expectations.
The fund’s performance was helped by its overweighting in PerpetualDiscount issues, as shown in the post MAPF Portfolio Composition, but managed to outperform even the pure measure of PerpetualDiscount total return due to security selection and frequent trading. This has been accomplished while remaining fully invested in a portfolio with an overall composition that did not change much through the month – which is exactly what I seek to accomplish in managing the fund.
The fund’s Net Asset Value per Unit as of the close August 31 was $12.6695.
| Returns to August 31, 2009 | |||
| Period | MAPF | Index | CPD according to Claymore |
| One Month | +7.20% | +4.76% | +3.08% |
| Three Months | +21.02% | +11.18% | +8.01% |
| One Year | +58.57% | +8.45% | +5.88% |
| Two Years (annualized) | +25.09% | +1.26% | |
| Three Years (annualized) | +17.39% | +0.97% | |
| Four Years (annualized) | +14.41% | +1.63% | |
| Five Years (annualized) | +12.79% | +2.29% | |
| Six Years (annualized) | +13.65% | +2.89% | |
| Seven Years (annualized) | +14.31% | +3,38% | |
| Eight Years (annualized) | +13.39% | +3.37% | |
| The Index is the BMO-CM “50” | |||
| MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. | |||
| CPD Returns are for the NAV and are after all fees and expenses. | |||
| Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +3.6%, +10.1% and +6.0%, respectively, according to Morningstar after all fees & expenses | |||
| Figures for Jov Leon Frazer Preferred Equity Fund (which are after all fees and expenses) for 1-, 3- and 12-months are N/A, N/A & N/A, respectively, according to Morningstar and the Globe and Mail | |||
| Figures for AIC Preferred Income Fund (which are after all fees and expenses) for 1-, 3- and 12-months are +2.8%, +6.2% & N/A, respectively | |||
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.
I am very pleased with the returns, but implore Assiduous Readers not to project this level of outperformance for the indefinite future. The past year in the preferred share market has been filled with episodes of panic and euphoria, together with many new entrants who do not appear to know what they are doing; perfect conditions for a disciplined quantitative approach.
All I can say about the fund’s relative returns in the past year is … sometimes everything works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There have been a lot of strongly motivated market participants in the past year, generating a lot of noise! Things won’t always be this good … but for as long as it lasts the fund will attempt to make hay while the sun shines.
There’s plenty of room for new money left in the fund. Just don’t expect the current level of outperformance every year, OK? While I will continue to exert utmost efforts to outperform, it should be borne in mind that beating the index by 500bp represents a good year, and there will almost inevitably be periods of underperformance in the future.
The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.
| Calculation of MAPF Sustainable Income Per Unit | |||||
| Month | NAVPU | Portfolio Average YTW |
Leverage Divisor |
Securities Average YTW |
Sustainable Income |
| June, 2007 | 9.3114 | 5.16% | 1.03 | 5.01% | 0.4665 |
| September | 9.1489 | 5.35% | 0.98 | 5.46% | 0.4995 |
| December, 2007 | 9.0070 | 5.53% | 0.942 | 5.87% | 0.5288 |
| March, 2008 | 8.8512 | 6.17% | 1.047 | 5.89% | 0.5216 |
| June | 8.3419 | 6.034% | 0.952 | 6.338% | $0.5287 |
| September | 8.1886 | 7.108% | 0.969 | 7.335% | $0.6006 |
| December, 2008 | 8.0464 | 9.24% | 1.008 | 9.166% | $0.7375 |
| March 2009 | $8.8317 | 8.60% | 0.995 | 8.802% | $0.7633 |
| June | 10.9846 | 7.05% | 0.999 | 7.057% | $0.7752 |
| August 2009 | 12.6695 | 5.85% | 1.008 | 5.804% | $0.7353 |
| NAVPU is shown after quarterly distributions. “Portfolio YTW” includes cash (or margin borrowing), with an assumed interest rate of 0.00% “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. “Sustainable Income” is the resultant estimate of the fund’s dividend income per unit, before fees and expenses. |
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As discussed in the post MAPF Portfolio Composition: August 2009, the fund has positions in splitShares (almost all BNA.PR.C) and an operating retractible (YPG.PR.B), both of which have high yields that are not sustainable: at some point they will be called or mature and the funds will have to be reinvested. Therefore, both of these positions skew the calculation upwards.. Since the yield on these positions is higher than that of the perpetuals despite the fact that the term is limited, the sustainability of the calculated “sustainable yield” is suspect, as discussed in August, 2008.
Significant positions were also held in Fixed-Reset issues on August 31; all of which currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity. It is the increase in exposure to the lower-yielding Fixed-Reset class that accounts for the apparent stall in the increase of sustainable income per unit in the past seven months. In December 2008, FixedReset exposure was zero; it is now 17.4%. Exposure to the extraordinarily high-yielding SplitShare class has also been reduced since December due to credit concerns.
However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 5.71% shown in the August 31 Portfolio Composition analysis (which is slightly in excess of the 5.66% index yield on August 31). Given such reinvestment, the sustainable yield would be 12.6695 * 0.0571 = 0.7234, a slight decrease from the $0.7256 derived by a similar calculation last month.
The decrease may be attributed to the slight portfolio shift into FixedResets, which did not have such extraordinarily good performance as the PerpetualDiscounts and also yield less going forward.
Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in
- the very good performance against the index
- the long term increases in sustainable income per unit
As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.
Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.
[…] * CPD does not directly report its two-year returns. The figure shown is the square root of product of the current one-year return and the similar figure reported for August 2009. […]