Diversified Preferred Share Trust (Symbol-DPS.UN)

[foreverjung]

About a year ago I purchased some CPD as an initial position in preferred shares (about 7.5% of portfolio). About a month ago I swapped into DPS.UN for tax loss selling reasons.
Over that period I'm down close to 25% ( excluding dividends ) and question my original decision to get into preferreds. It's clear to me that I can no longer consider them to be part of my fixed income allocation - too volatile. If considered equities , why not bank common shares with comparable yields and growth potential.
In the New Year I'm considering selling DPS.UN and allocating half of the proceeds to financial dividend payers and half to fixed income- XSb or GIC. At this point this seems simpler and more transparent than quasi equity/FI preferreds.
I'd appreciate any thoughts, suggestions or even remonstratives about buying products you're not fully familiar with.
Thanks

[northbeach]

About a year ago I purchased some CPD as an initial position in preferred shares (about 7.5% of portfolio). About a month ago I swapped into DPS.UN for tax loss selling reasons.
Over that period I'm down close to 25% ( excluding dividends ) and question my original decision to get into preferreds. It's clear to me that I can no longer consider them to be part of my fixed income allocation - too volatile. If considered equities , why not bank common shares with comparable yields and growth potential.
In the New Year I'm considering selling DPS.UN and allocating half of the proceeds to financial dividend payers and half to fixed income- XSb or GIC. At this point this seems simpler and more transparent than quasi equity/FI preferreds.
I'd appreciate any thoughts, suggestions or even remonstratives about buying products you're not fully familiar with.
Thanks

Net asset value is considerably higher than market price:

http://www.sentryselect.com/English/Pro ... fault.aspx

So perhaps wait till Market price approaches NAV. You may be able to sell at NAV once per year. Check to see the provisions for redemption, which I believe will be coming up soon.

I read an article but did not save it regarding close end trusts. They all seem to be trading at significant to huge discounts to NAV.

I had been in preferreds briefly in the past and lost some money.

The recent stock market has surprised me so many times. Don't feel bad that you might have messed up selling CPD to buy DPS. Everyone is getting burned one way or another in this market.

It goes to show that the financial markets are so complex and therefore impossible to predict accurately. Perhaps the market is irrational rather than efficient.

[like_to_retire]

Over that period I'm down close to 25% ( excluding dividends ) and question my original decision to get into preferreds.

Was your original decision for the tax advantaged income? Is it not still paying you the same yield you signed up for?

I'm down close to 25%

Yeah, the last month hasn't been kind to DPS compared to CPD. Remember that CPD is an ETF where the NAV is a better anchor to the market price.

It's clear to me that I can no longer consider them to be part of my fixed income allocation - too volatile.

Their volatility to market conditions have sure surprised me (and a lot of other people). I don't respond well to volatility and may adjust my equity allocation down to compensate for this new news. It's not that the preferreds have changed their fixed income payouts, it's just my risk tolerance that can't stomach it. I'll wait for the bear to be a bull before I do that though. It could be a long wait.

If considered equities , why not bank common shares with comparable yields and growth potential.

There's a higher risk that the dividend will be cut and that growth may not be there.

In the New Year I'm considering selling DPS.UN and allocating half of the proceeds to financial dividend payers and half to fixed income- XSb or GIC.

Buy high, sell low......

ltr

[Gus]

The recent stock market has surprised me so many times. Don't feel bad that you might have messed up selling CPD to buy DPS. Everyone is getting burned one way or another in this market.

Yesterday CPD fell by 4.5% while DPS rose by 5.2%. That's almost a 10% variance between two investments that hold diversified baskets of preferreds. It's nuts. Similar wild relative swings are to be seen among individual preferreds. Joe Retail is making some bad panic trades. Arbitragers must be making out like bandits.

According to Hymas, discount perpetuals now have a dividend yield of 8.22%, an interest-equivalent rate of 11.51%. We are getting junk-bond-level yields for investments in mostly sound businesses, among which some (the big banks) are effectively guaranteed against failure by the government. It's nuts. It can't go on like this; for the world to start making sense again, things soon have to get a whole lot better -- or a whole lot worse.

[Norbert Schlenker]

FWIW, DPS.UN is now trading at a ~2-4% premium to NAV. Holders may wish to consider their options.

[Norbert Schlenker]

FYI, some truly bizarre tax reporting from DPS for 2008.

Trying to get a handle on how DPS would break out their 2008 distributions between dividends and return of capital, I contacted them in late February for some indication.

An approximation, e.g. "We expect about 3/4 will be eligible Canadian dividends, similar to 2007's breakdown", would be most helpful.

Unfortunately we do not have the tax breakdown for the 2008 prepared at this time. I would expect the information to be posted early next month, but if you require it before hand I would recommend using last year's breakdown as a guide.

Nothing was posted at their website through the end of March but, late in the month, I wondered if I might find some information elsewhere on their site. So I consulted the management report of fund performance for 2008. All previous years' breakdowns were there and matched, to within rounding error, what was eventually reported in the tax information letters. I assumed 2008 would be no different.

The MRFP shows the $1.20 distribution in 2008 was $0.77 in eligible dividends and $0.43 in return of capital. Tax returns were prepared assuming something similar would be reported. It wouldn't be a big deal except that I'm a trustee and am obligated to distribute T3 slips to the trust's beneficiaries before the end of March every year. So off go the T3s to beneficiaries, plus the T3 return to Ottawa, assuming that the MRFP was reasonably accurate.

Magically, the 2008 tax letter appeared at Sentry's website on 2 April 2009 (even though it's dated 27 March 2009). BMOIL also sent T3s which arrived on 3 April 2009, which makes me think Sentry knew and published this information - to select parties - some time ago.

To my considerable surprise, the breakdown given in this letter and on the T3s is nothing like what was in the MRFP. It's not a typo as far as I can tell. They haven't just switched one for the other because the percentages don't match. I've followed up with them because I'm really pissed about filing an incorrect T3 return with Ottawa and sending T3s to beneficiaries that now have to be amended. This is especially so given the timing of the arrival of BMOIL's T3s and the appearance of the letter on the website.

Jeez, am I mad. The MRFP is a regulatory document and it's false. FALSE.

[Gus]

Magically, the 2008 tax letter appeared at Sentry's website on 2 April 2009 (even though it's dated 27 March 2009). BMOIL also sent T3s which arrived on 3 April 2009, which makes me think Sentry knew and published this information - to select parties - some time ago.

Can anyone explain why the DPS.UN reporting is so slow? The business is relatively simple and predictable: holding and managing a basket of preferred shares, managing inflows and outflows of dividend payments, paying their staff etc. You would think that they would be able to make a very good estimate of the year's finances and the distribution breakdown in the last two months of 2008. The dividend payments they receive are very reliable, the number of units outstanding must be stable after the October redemption, the tax code won't change in that period, the distributions from the fund are fixed. What material information do they not have in January 2009 that requires a three-month wait before they release the T3s? Why can't they make accurate forecasts in December?

[Gus]

I finally got rid of the last of my DPS.UN on Oct 30 through the annual redemption facility. I got a price of $19.27 per unit, which is close enough to the reported NAV on Oct 28 of $19.32 and well above the trading range of $18.30 to $18.50 on October 30th.

I had become tired of not understanding the black box methodology of DPS and the uncertainty around the nature of the returns. (see Norbert's comments above). The recent edition of Prefletter that analyzed the performance of CPD and DPS also influenced me, despite James Hymas's best efforts not to diss the competition unfairly.

The proceeds are partly going into MAPF and the rest into big bank discount perpetuals (the latter being the only class of preferreds that I feel competent to invest in as a DIY).

MAPF is the only actively managed investment fund that I own: I am convinced that there's money to be made in the inefficient preferreds market -- and I am also convinced that owning this fund is the only way I'll ever make such money. MAPF also has the benefit, for me, as acting as a kind of Gravol should turbulence break out again in the preferreds market; I'm hoping that it will reduce any feelings of motion sickness by consoling me that I'll be profiting from other peoples' ill-considered trades.

[kcowan]

...
MAPF is the only actively managed investment fund that I own: I am convinced that there's money to be made in the inefficient preferreds market -- and I am also convinced that owning this fund is the only way I'll ever make such money. MAPF also has the benefit, for me, as acting as a kind of Gravol should turbulence break out again in the preferreds market; I'm hoping that it will reduce any feelings of motion sickness by consoling me that I'll be profiting from other peoples' ill-considered trades.

I also took a position in MAPF last week. It has had a great run but hopefully will do as you say and at least stay ahead of the other funds.

[Beaver]

Pardon my ignorance, but does anyone know how this trust will be affected by the tax? Should I be selling it and moving everything into CPD? Thanks in advance for your advice!

[Arby]

Pardon my ignorance, but does anyone know how this trust will be affected by the tax? Should I be selling it and moving everything into CPD? Thanks in advance for your advice!

By "the tax", I assume you're referring to the Income Trust tax which will take effect in 2011. This tax applies only to flow-through entities, such as Income Trusts and Limited Partnerships. DPS is not a flow through entity or an income trust, rather it is a closed end investment trust, therefore the Income Trust tax is not relevant for DPS.

[Beaver]

Thank you Arby, your post clears that up in my mostly uninformed mind. Notwithstanding all the cautions expressed above, I'll let my position in DPS.UN stand for the time being. Most of my preferred holdings are in CPD and individual preferreds anyway. Fortunately, I bought in February!!