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.
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.
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.
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!