MAPF Performance: June, 2007

Malachite Aggressive Preferred Fund has been valued for June, 2007, month-end. The unit value is $9.3114, after a dividend distribution of $0.066279. Returns over various periods are:

MAPF Returns to June 29, 2007
One Month +0.56%
Three Months -1.59%
One Year +5.25%
Two Years (annualized) +4.90%
Three Years (annualized) +6.51%
Four Years (annualized) +9.82%
Five Years (annualized) +9.28%
Six Years (annualized) +10.28%

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.

Well, that’s the worst quarter for the fund since 2Q04. So why am I happy? Let’s have a look at how the Claymore ETF did on the month – regular readers of this blog will be familiar with this fund, which is a useful passive benchmark.

CPD Return, June 2007
Date NAV Distribution Return for period
May 31, 2007 $19.44    
June 26 $18.97 $0.198800 -1.40%
June 29, 2007 $18.97   0.00%
Time-Weighted, June -1.40%

Diversified Preferred Share Trust, DPS.UN on the Toronto exchange, has the anti-social practice of not publishing month-end NAV numbers, but we’ll do what we can: 

DPS.UN NAV Return, June-ish 2007
Date NAV Distribution Return for period
May 30, 2007 $22.55    
June 27 $21.95 $0.30 -1.33%
Time-Weighted, June-ish -1.33%
CPD had an NAV of $19.48 on May 30 and $19.01 on June 27. The pre-June stub period return for CPD was therefore -0.21%, and the end-June stub-period return was also -0.21%. We may infer that CPD’s NAV return for the May 30-June 27 period was almost identical to its calendar month return of -1.40%, after all fees & expenses and thus that CPD marginally underperformed DPS.UN on an NAV-to-NAV basis.

So Malachite, after expenses but before fees, beat the passive alternative (after expenses & fees) by nearly two percent in a single month.

It is, of course, unpleasant to lose money. A sensible investor will expect such things to happen occasionally and will not attempt to time the market, but will make an overall asset allocation based on reasonable medium term expectations of returns. The asset allocation should be reviewed on a regular basis, of course, to ensure that changes in expectations and investment needs are reflected in the portfolio, but a rationally active investor will attempt to outperform within each relatively homogeneous asset class without market timing. From this perspective, an outperformance of nearly 2% in a bad month is just as good as the same outperformance in a good one.

While June 29 BMO-NB50 index numbers are not yet available, I expect to see a return of roughly -5.25% on the quarter … which makes the MAPF return (after expenses, before fees) of -1.59% look pretty good! If the fund can outperform at the rate of about 3.6% per quarter forever … well, I’d be very happy, but I’m not going to bet on it! I’m happy when I can earn my fees by delivering net out-performance within the asset class to unitholders. 

Trading during the month was frantic, as I predicted last month. Shares with a book value in excess of 90% of the total book value at the end of May were sold and replaced with new purchases. This incurred commission expenses of about 0.50% , so those who have been hoodwinked into the belief that the Trading Expense Ratio is an important number will certainly not wish to invest in the fund! I suspect that the BCE/Teachers deal and the proposed redemption of the BCE Preferreds at a very high price relative to current market will lead to continued turmoil in the market and lots more trading in July … but we will see!

The noted BCE/Teachers deal may be expected to boost the market price of BCE preferreds considerably when markets re-open on July 3 – and MAPF doesn’t hold any! Such is life … as I’ve noted before, in the absence of good information about a deal (and remember, preferred shareholders haven’t actually seen any Teachers’ money yet) BCE preferreds are just a crapshoot on credit … and MAPF doesn’t play craps! The underlying philosophy of the fund continues to be that investment-grade preferred shares are bundles of cash-flows trading at fluctuating prices and that money can be made by weighing these bundles of cash-flows to determine value based on reliable public information and trading to exploit inefficiencies – not by taking a wild guess and hoping to strike the jackpot.

If the BCE Prefs move to within “arbitrage difference” of the offering prices disclosed in the BCE press release, I expect DPS.UN & CPD to outperform MAPF over the next month. However, if something should happen to the deal … like, maybe, Telus moving in, or some private equity guys coming along with a credible hostile bid, negatively affecting perceptions of the BCE prefs’ quality … maybe they won’t. But you will not see MAPF making bets like that! Once credit gets called into question, I start getting very nervous! At worst, I do not anticipate that MAPF underperformance due to BCE will exceed the outperformance in the second quarter that is largely due to not holding in on the downside. Note that BCE prefs represent about 7-10% of the value of the passive funds.

The distribution of dividend income for the quarter was small, which is most gratifying. Given that the fund now has a realized capital loss on the year to date, it is tax-efficient to emphasize capital gains (or reduced capital losses!) over receipt of dividend income and some trading took advantage of this … particularly since it seemed that RBC had a client pursuing an aggressive dividend capture strategy! I don’t have a lot of control over the capital gain/dividend split, but HIMIPref™ does account for the difference in taxation and potential trades are nudged a little.

Portfolio characteristics as of the end of June are discussed in another post.

6 Responses to “MAPF Performance: June, 2007”

  1. […] PrefBlog Canadian Preferred Shares – Data and Discussion « MAPF Performance: June, 2007 […]

  2. […] I find this transaction fascinating, and not just because the plan to acquire the prefs will almost certainly cause MAPF to underperform in July. Why is it being done as a plan of arrangement, which gives the preferred shareholders a right to vote, which I presume is the trigger for the offer? […]

  3. […] Index performance and extreme issue performance have been the subject of prior posts, as has the the performance and composition of Malachite Aggressive Preferred Fund. […]

  4. […] I’m very happy with the results. The NAV for the Claymore ETF (CPD on the TSX) is not yet available, but as of July 30, they were up only 5bp-and-a-hair on the month, so it looks like I earned my fees. Note that last month I expressed concern that I would underperform this month, since the BCE/Teachers deal was announced subsequent to month-end and was expected to boost returns of the BCE Prefs considerably. Well, returns of BCE Prefs were outrageous this month, I didn’t hold any, CPD did … but I outperformed anyway. Sometimes it works! […]

  5. […] Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for June-ish″>June-ish> and July-ish″>July-ish> to derive: […]

  6. […] Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for June-ish and July-ish to derive: […]

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