MAPF Performance: September 2009

The fund’s long monthly winning streak against the index ground to a halt in September, as the fund underperformed – albeit by a very small amount. As noted in the post Index Performance: September 2009, PerpetualDiscounts eased off after their long run-up; the fund is overweighted in this sector (see MAPF Portfolio Composition: September 2009 and some very nice tactical trades were not enough to overcome the overall market move … this time!

The fund’s Net Asset Value per Unit as of the close September was $12.3462 after a dividend distribution of $0.183304.

Returns to September 30, 2009
Period MAPF Index CPD
according to
One Month -1.10% -1.00% -0.57%
Three Months +14.06% +8.34% +5.94%
One Year +61.88% +10.21% +8.41%
Two Years (annualized) +24.84% +1.44%  
Three Years (annualized) +16.39% +0.27%  
Four Years (annualized) +13.69% +1.20%  
Five Years (annualized) +12.34% +1.99%  
Six Years (annualized) +12.86% +2.49%  
Seven Years (annualized) +15.40% +3,15%  
Eight Years (annualized) +12.66% +3.17%  
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 -0.7%, +7.2% and +8.5%, 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 -1.0%, +4.3% & 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 over the recent past, 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.

September’s results were impacted by the overweighting in PerpetualDiscounts, as noted earlier, and by the fact that holdings within this sector were overweighted in insurers. If we look at the change in yields in the sector for the major issuers, we find:

Yield Range Changes
September 2009
Issuer Bid-YTW
BMO 5.39-58% 5.49-78% +15bp
BNS 5.50-56% 5.46-62% +1bp
CM 5.65-84% 5.76-82% +4bp
GWO 5.62-65% 5.85-93% +25bp
MFC 5.66-76% 5.87-95% +20bp
POW 5.85-97% 5.84-04% +3bp
PWF 5.70-89% 5.77-90% +4bp
RY 5.43-52% 5.47-64% +8bp
SLF 5.64-72% 5.89-02% +28bp
TD 5.41-66% 5.52-72% +8bp

The fund held substantial positions in MFC and SLF PerpetualDiscounts on 8/31, with a lesser holding in GWO. During the month, the position in GWO was increased. The loss due to the decline in SLF issues was mitigated by trading opportunities arising from its disorderly nature:

Trading in SLF Issues
September 2009
(Simplified Extract)
20.80 21.27 19.75 19.70 19.69
9/29 Sold
20.30 20.35 18.63 18.65 18.87

Trades such as the above helped mitigate the overall market moves; over time, it is trades such as the above (and those shown in this month’s composition report) that have allowed the fund to outperform its index while remaining fully invested.

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
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
September 2009 12.3462 6.03% 0.998 6.042% $0.7460
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.

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 September 30; 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 16.8%. 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 5.91% shown in the September 30 Portfolio Composition analysis (which is in excess of the 5.77% index yield on September 30). Given such reinvestment, the sustainable yield would be 12.3462 * 0.0591 = 0.7297, an increase from the $0.7234 derived by a similar calculation last month.

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.

One Response to “MAPF Performance: September 2009”

  1. […] * 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 September 2009. […]

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