PrefBlog

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!

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close June 30, 2026, was $10.8873 after a distribution of $0.132923.

Fund returns were adversely affected by TRP.PR.B (-2.21% following last month’s outperformance), ENB.PR.Y (-0.79% following last month’s underperformance) and CU.PR.K (+0.30%) but benefitted from good performance by SLF.PR.D (+1.79% following last month’s underperformance), BN.PR.B (+2.44%) and PWF.PF.A (+3.08%); small holdings are not considered for individual mention here.

FixedResets continue to yield more than PerpetualDiscounts; on June 30, I reported median YTWs of 5.81% and 5.67%, respectively, for these two indices; compare with mean Current Yields of 5.63% and 5.59%, respectively.

So at the time of initial writing (2026-07-05) only three of the comparator funds have published returns to June month-end. I will, as usual, have to attempt to fill in the blanks prior to publishing the July PrefLetter. Remember, readers, if you want customer service, you have to go to a big firm like Hymas Investment Management Inc. – if you go to some tiny outfit like Royal Bank, you’ll find that they simply do not have the resources to publish returns promptly after each applicable month-end. They have published their prices and distributions, most of them: updating the performance numbers to reflect these data would be trivial programming work – if they cared to do it.

The five-year Canada yield was virtually unchanged over the month, with the five-year Canada yield (“GOC-5”) moving from 3.12% at May month-end to 3.01% at June month-end and 3-month bills moving from 2.30% to 2.27% over the month.

The Seniority Spread (between long-term corporate bonds and interest-equivalent PerpetualDiscounts) was 250bp on 2026-6-30 widening slightly (and perhaps spuriously) from245bp on 2026-05-27 (chart end-date 2026-06-12)

The situation with FixedResets is interesting, with the spread between GOC-5 and the interest-adjusted FixedReset (Discount) rate widening significantly (despite recent narrowing) from its 2021-11-10 low of 344bp to a level of 454bp (as of 2026-07-01 – data faked for compatibility with BoC data)… (chart end-date 2026-06-12):

…while at the same time the interest-equivalent spread between FixedReset (Discounts) and PerpetualDiscounts has narrowed to -19bp (as of 2026-07-01 – data faked for compatibility with BoC data) from its 2021-7-28 level of +170bp (chart end-date 2026-06-12):

There are correlations between the Issue Reset Spread and 1-month performance for discounted FixedResets for both the Pfd-2 Group (30%) and for the Pfd-3 Group (32%) issues. The latter correlation is confirmed when the BPO issues are removed from the analysis; this results in a correlation of 20%.

There is no correlation for the Pfd-2 group but a very suspicious one (24%) for the Pfd-3 group between the Issue Reset Spread and 3-month performance for discounted FixedResets. The Pfd-3 group correlation declines to 15% when the BPO issues are removed and the slope of the regression reverses.

There is no correlation for the Pfd-2 Group but a very suspicious one (16%) for the Pfd-3 Group that vanishes when the BPO issues (high returns, short term) are removed for Term-to-Reset vs. 1-Month returns

… but the three-month returns vs. Term to Reset show no correlation for either the Pfd-2 Group or the Pfd-3 Group.

It should be noted that to some extent a dependence (of performance on term-to-reset) can be justified as the nearer-term issues will receive the benefit (adverse effects) of higher (lower) projected dividend rates sooner as a result of higher GOC-5 yields and therefore, perhaps, for longer. Equations for the relationship between correlation slope and change in GOC-5 were derived in the August 2022 PrefLetter.

Upward-sloping correlations of Performance vs. Term are to be expected when GOC-5 declines.

I keep talking about ‘Sustainable Income’ when discussing the fund’s income projections. This is because Sustainable Income is the average yield-to-worst (YTW) of the portfolio when the YTW is calculated to perpetuity (or to redemption, of course, if the yield to redemption is lower), including resets at the current GOC-5 rate. The sharp increase in GOC-5 in the past few years caused the difference between YTW and Current Yield to skyrocket, but these two values have become much closer. We have to wait for the reset date of the MAPF portfolio securities before we see a change in actual cash receipts – and, of course, there is no guarantee whatsoever that the rate used for estimation purposes now will be used for the actual calculation in the future (chart prepared as of 2026-05-08).

The decline in estimated sustainable dividend over the quarter reflects mainly a reduction of term (Modified Duration – YTW declined from 11.72 to 11.01). In addition, the GOC-5 Yield declined from 3.13% to 3.01%.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Turnover picked up a little to 11% in June; there was sector allocation from discounted issues to premiums.

Sectoral distribution of the MAPF portfolio on June 30, 2026, was:

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:

Liquidity Distribution is:

The distribution of Issue Reset Spreads is:

Distribution of Floating Rate Start Dates is shown in the table below. This is the date of the next adjustment to the dividend rate, if the issue is currently paying a fixed rate for a limited time; which in practice is successive terms of 5 years. Issues that adjust quarterly are considered “Currently Floating”.

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 the fund’s web page. The fund may be purchased directly from Hymas Investment Management. A “unit trust” is like a regular mutual fund, but are not sold with a prospectus This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.