I am pleased to report that Malachite Aggressive Preferred Fund had its twenty-fifth birthday at the end of March, 2026 (given that it commenced operations on March 31, 2001 and assuming my math’s right) and I thought it might be interesting to investigate a question that I’ve pondered for some time.
Namely: I know the fund’s done well against preferreds. But given outperformance on top of the liquidity premium for preferreds, how well has it done against equities?
Now, we know that preferred shares are part of the Fixed Income asset class (although not a member of the “Bond” sub-class!) and therefore there should be some kind of equity premium – additional expected return for owning equities as opposed to owning the ‘safer’, ‘less risky’ Fixed Income class … although not a lot of people really seem to think through just what ‘risk’ means. So, considering only this first supposition, it would appear that long-term investors should be heavily biased towards equities as they are expected to have better returns. The 2026 Projection Assumption Guidelines for Canada, prepared by the Institute of Financial Planning and the FP Canada Standards Council can be downloaded here; it indicates an equity premium of 3.1%, gross of fees, with a 10-year projection window.
On the other hand, though, there are two points of historical data that work against these expectations:
- The Liquidity Premium : See, for example, the discussion in Research: Market Timing (PrefLetter Version)
- Outperformance : This is a bit of a hair-raising thing to discuss because it cannot, strictly speaking, be considered reproducible. There are lots of managers in all asset classes who will shoot the lights out in one year and then, with varying degrees of speed, give it back in subsequent years because they’re just cowboys with no special insight into anything. So any discussion of outperformance has to be heavily weighted down that it is only a historical thing. On the other hand, there does exist one class of market participant who generally do outperform their benchmark, not every year, but most years … enough that they can form huge corporations and be parts of banks. These participants are market-makers, or to express the idea more generally and with a longer expected holding period, liquidity providers. They make oceans of money buying at a dime and selling at a quarter, on a steady basis. This is often forgotten when pompous idiots state flatly that nobody can outperform the market consistently. People can and people do. There is a gigantic, highly profitable industry built around this simple fact. You can get a record of the fund’s historical performance vs. a relevant index by clicking Malachite Aggressive Preferred Fund – Annualized Performance to First Quarter
So anyway, looking at the long-term results of the fund and considering these results against equities, there are three things to consider: the equity premium, the liquidity premium and the outperformance … which could quite possibly become underperformance in the future, who can tell? And, of course, each of these things is varying all the time. So what does the past twenty-five years have to tell us? I decided to look into it.
I will start off by noting explicitly that an equity index is not a good benchmark for preferred shares. These are two separate asset classes with their own set of risks and nobody can say which of these myriad risks will come into play in the future.
Annualized results are shown on the page Malachite Aggressive Preferred Fund – Annualized Performance to First Quarter Vs. S&P/TSX Composite Index. If we run our fingers down the ’10 year’ column and look at how the fund (pre-fees, post expenses) compares to Canadian equities (index values, so no fees, no expenses) we see we have 10-year data commencing with 2011Q1 and ending with 2026Q1 (inclusive) … sixteen data points.
The results were gratifying. The fund outperformed during the first eight 10-year periods, to 2018Q1 and has underperformed in the subsequent eight periods (2019Q1 to 2026Q1). The full twenty-five year period is also nice, with the fund edging the index with a +9.02% annualized return vs. +8.93%. Hip, hip, hurray!
Congratulations James. It is heartening to see your diligent, intelligent, long-term approach to portfolio construction and management resulting in definitive outperformance. We celebrate far too many of the cowboys.
Have you ever considered launching MAPF as a publicly-traded closed-end fund? The erratic discount would make it an amazing component of long-term, tightly-managed, equal-weight portfolio. What happens to MAPF if/when James Hymas decides to hang it up?
Have you ever considered launching MAPF as a publicly-traded closed-end fund?
Many times! But I always come back to the experience of a buddy about thirty years ago. He ran a small shop representing small asset managers to huge investors (pension funds and the like) – essentially acting as an outsourced sales department.
He decided one day that ETFs were a pretty big deal – and this was the ’90s, remember. He didn’t invent the concept but he knew a good thing when he saw one. So he found a little corner of the market where he thought there was an opening for a fund, found a manager with some credibility in managing the field and found a Canadian brokerage house that would serve as lead distributor.
He put together a prospectus, which cost a million bucks. A million bucks! And this was in the ’90s, when a million bucks was something worth having. And then he went to market. And nothing happened. His lead distributor turned out not to be all that interested and didn’t push their guys to sell, sell, sell! So the product failed, never made it to market and he had just spent a million bucks for nothing.
Like him, I may think I have good ideas. But what I don’t have is access to proper distribution channels. I am not going to spend a huge amount of money setting up a public vehicle unless I have a whole lot more assurance than I currently do that it’s going to work. That’s another part of the business, a part in which I have no expertise, no experience and no interest.
I spent a lot of time in the aughts trying to talk to people in the fund distribution business about setting up a preferred share fund, but there was no interest. One problem is that I’m a small shop; another problem is that I have a high profile. Distributors have no taste for ‘star managers’; not since the Mersch & Hirsch debacles of the ’90s.
What happens to MAPF if/when James Hymas decides to hang it up?
That will be up to the new management. The fund could liquidate and close down; it could be merged with another fund; it could continue as an independent entity, hopefully one with a bit more sales power behind it.