PrefBlog

There was a good level of trading in December, most of it intra-sector.

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed.
Liquidity Distribution is:

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available on the fund’s web page. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission) and those who subscribe for $150,000+. Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

The fund’s performance and the performance of the indices has already been discussed.

Update: Some doubting Thomases, unconvinced of the abject failure of the Efficient Market Hypothesis in characterizing the Canadian preferred share market, might object that outperformance this month is due simply to long duration in an up-month.

I attach a graph and an associated Regression Report plotting total return against Modified Duration (YTW) of issues in the HIMIPref™ Universe that are in the top three rating classes (by DBRS). It may be seen that although Specific Risk increases with MD-YTW, there does not appear to be any Systemic Risk associated with term … at least, not this month!

As a further illustration, I attach an evaluation of the December performances of the individual issues in the PerpetualDiscount index, sorted by performance and by issuer.

While classes will very often show a normal qualitative relationship amongst themselves, variance is generally very high compared to the average (in other words, there’s a lot of noise around each signal).

You know, sometimes everything works. 

Malachite Aggressive Preferred Fund has been valued for December, 2007, month-end. The unit value is $9.0070, after giving effect to a dividend distribution of $0.173192. Returns over various periods are:

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.

The December returns reflect outperformance against CPD (which returned +1.14% on the month) and DPS.UN (estimated at +1.93%).

The quarterly performance includes October’s poor performance, which I have attributed to a move into perpetualDiscount issues that proved to be somewhat early. The move has now been amply rewarded, as volatility in December provided the setting for several profitable trades. The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

It was something of an interesting month, as early strength crumbled in the face of tax-loss selling; after the December 24 deadline for 2007 settlement passed the market rocketted upwards. Actually, many issues started to bounce back on the 24th – it was December 21 that the selling peaked.

One issuer that appeared to be particularly hard hit by tax loss selling was the Canadian Imperial Bank of Commerce (CM), which announced on December 19 that:

Following Standard and Poor’s announcement today that it had reduced the credit rating of ACA Financial Guaranty Corp. from “A” to “CCC”, CIBC confirmed that ACA is a hedge counterparty to CIBC in respect of approximately U.S. $3.5 billion of its U.S. subprime real estate exposure.
    It is not known whether ACA will continue as a viable counterparty to CIBC. Although CIBC believes it is premature to predict the outcome, CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the First Quarter ending January 31, 2008.

Well, I’m not going to say this news is meaningless to preferred shareholders. Credit Ratings Agencies are annoyed; due, I think, both the loss itself and the revelation that so many eggs were placed in the ACA basket. But. But! The loss will be borne by the common shareholders. That’s what common shareholders are good for, taking the first loss. While this is indeed meaningful to preferred shareholders, the market grossly over-reacted, and MAPF was able to scoop up a good position in two of CM’s perpetual issues – some of which was unwound prior to month end with both a chunky capital gain and a dividend.

There were many other trades, but the CM is the easiest to explain!

I consider 2007 to have been a very successful year for the fund. Although the fund lost 1.63% on the year, it outperformed the benchmark quite handsomely – for those who are seeking a long-term investment in preferred shares due to the various qualities of this asset class, outperformance in a down year is just as good as the same outperformance in an up year.

And down years are rare. Subscribers to Canadian Moneysaver will have seen my exposition of just how bad 2007 was for preferred shareholders (and my attempts to explain why) … cheapskates who don’t subscribe will just have to wait until I republish it after the black-out period is over.

Update, 2008-01-08: The main returns pages have been updated to reflect the BMO-CM 50 index returns: Monthly, Quarterly, Annually to Dec. 31 and Annualized to Dec. 31.