TXPR Rebalancing Effect on Market

Yesterday I posted regarding the remarkable performance of POW.PR.C in the past two days and new commenter to_be_frank suggested that it might be due to the TXPR rebalancing.

So, I thought I’d have a look at the index changes in systematic manner:

TXPR Revision 2010/1
Additions
Ticker HIMIPref™
SubIndex
Total
Return
12/31 – 1/19
Index
Return
12/31 – 1/19
ACO.PR.A OpRet +1.04% -1.12%
CZP.PR.B Scraps
(FixedReset)
-1.79% +0.24%
DC.PR.A Scraps
(OpRet)
+10.32% -1.12%
DC.PR.B Scraps
(FixedReset)
+3.78% +0.24%
DW.PR.A Scraps
(OpRet)
+4.31% -1.12%
FFH.PR.C Scraps
(FixedReset)
+5.29% +0.24%
GWO.PR.J FixedReset +2.31% +0.24%
IAG.PR.E Perpetual-Premium +0.92% +0.03%
IGM.PR.B Perpetual-Discount +2.06% +1.56%
NA.PR.O FixedReset +2.45% +0.24%
POW.PR.C Perpetual-Discount +6.37% +1.56%
TCL.PR.D Scraps
(FixedReset)
+1.09% +0.24%
TRP.PR.A FixedReset +3.02% +0.24%
YPG.PR.C Scraps
(FixedReset)
+1.46% +0.24%

TXPR Revision 2010/1
Deletions
Ticker HIMIPref™
SubIndex
Total
Return
12/31 – 1/19
Index
Return
12/31 – 1/19
CL.PR.B Perpetual-Premium -3.79% +0.03%
ENB.PR.A Perpetual-Premium -2.82% +0.03%
NA.PR.N FixedReset -1.37% +0.24%
TCA.PR.X Perpetual-Discount -2.28% +1.56%
W.PR.J Perpetual-Discount -3.04% +1.56%

So, for the year to date, all but one of the adds have outperformed their benchmark (note that lower quality issues are not included in their benchmark) and all of the deletions have underperformed.

This is a very interesting result: it is a reversal of the previously established pattern in which adds would outperform pre-rebalancing and underperform post-rebalancing (although I used a different methodology in the publication; I can’t use the prior method as a template until the current post-rebalancing period ends at the end of February).

While I must bow to the data, of course, I must say I am surprised and will not yet accept the hypothesis (that POW.PR.C et al. owe their relative performance to TXPR) as proven. The trading in POW.PR.C continues to be haywire today, with bazillions of small trades lifting the offer. This method is virtually guaranteed to be an expensive way to rebalance: normally an institutional buyer or seller would take a more gradual approach, adjusting an iceberg order by a nickel or so per day until the whole thing gets filled.

But there are more things in heaven and earth than are dreamt of in my philosophy! I’ve said it before – I’ll say it again: I find it quite challenging enough to determine what’s rich and what’s cheap … figuring out why is quite beyond me.

I just hope it actually is CPD doing the buying, though … these distortions will cost it money and make it easier to beat!

However, it must be borne in mind that while CPD is rapidly achieving gorilla status ($378-million AUM) this does not necessarily mean huge market impact. CPD’s holdings of POW.PR.C were 0.25% of assets on January 19, or a little less than $1-million, about 40,000 shares. It will be most interesting to check this tomorrow and compare with the day’s trading!

7 Responses to “TXPR Rebalancing Effect on Market”

  1. prefhound says:

    Hey, great, index trackers as new sources of potential income for readers made savvy by Prefblog.

    btw, James you must be read more than you think. The characteristics of many POW.PR.C sell orders today looked more like shorts than sales by actual investors.

  2. jiHymas says:

    Hey, great, index trackers as new sources of potential income for readers made savvy by Prefblog. … btw, James you must be read more than you think.

    I want a commission!

  3. to_be_frank says:

    jiHymas Says:
    I want a commission!

    … Me too!

  4. […] buying 20,900 shares on the TMX (against total volume of 34,297) at an average price of 25.555. If CPD is behind the buying, this will almost certainly hurt […]

  5. […] of 0.25% … so we may conclude that CPD is the culprit behind the stupid dumb trading in the TXPR Rebalancing Issues … Assiduous Reader to_be_frank wins a kewpie doll for first spotting the […]

  6. […] are illustrated yet again! Of course, one reason they are priced so high appears to be buying by CPD and other indexers in response to the issue’s addition to TXPR in the January […]

  7. […] spread (assuming credit equivalency) of +276bp. ENB.PR.A was last mentioned on PrefBlog in the post TXPR Rebalancing Effect on Market (it was removed from TXPR in January). ENB.PR.A is tracked by HIMIPref™ and is a member of […]

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