Middlefield Canadian Income 12 May 2022

Middlefield Canadian Income (MCT) offers exposure to the high dividend and growth potential in Canadian equities. Canada is a net energy exporter and its market has a high weighting to energy stocks, as well as to companies producing some key hard and soft commodities that are currently in high demand. The market is heavily weighted to financials, which benefit from a rising interest rate environment, and MCT has a structural overweight to REITs, which offer decent inflation protection. As a result, the market and MCT’s portfolio have significant value tilts which complement the growth-heavy S&P 500 while also offering economic exposure to the US through the importance of the US’s revenues for Canadian companies. MCT’s manager Dean Orrico points out that Canada also has some belated reopening beta to offer thanks to being behind the US and UK as regards its vaccination programme and lifting of restrictions, adding to the sense that Canada is in a sweet spot.

Thanks to these tailwinds, MCT has been the best-performing North American trust over the last 12 months, generating an NAV total return of 32.7% (as we discuss under Performance). MCT currently yields 3.8%, having historically yielded more than the global equity income space, with Dean and co-manager Rob Lauzon highlighting the compelling case for the future growth in underlying revenue generation and dividends (see Dividend). The managers aim to generate a high and growing dividend, and will often use a falling yield as a valuation signal.

Despite this strong performance and the portfolio’s positive exposure to an inflationary environment, MCT trades on a wide Discount compared to its peers, which is currently 11.4%.

Canada offers compelling advantages in the current inflationary environment, and MCT’s income strategy and key sectoral biases mean it is well positioned for this. The portfolio has a strong value and cyclical bias, and its positioning in financials and energy in particular makes it well positioned to capitalise on both inflation and rising interest rates. In this regard Canada has a lot in common with the Latin American region, through offering greater political stability, better corporate governance and a more mature set of companies and sectors. We therefore think it could be the safer bet for investors who believe that the current inflationary environment is more than a short-term blip, and that it offers an intriguing way to keep exposure to North America while moderating the significant growth bias in the S&P 500. We think that MCT’s double-digit discount reflects the fact that investors have not caught on to this yet, and that it may offer an attractive long-term entry point as well as allowing investors to ‘lock in’ a higher share price yield.

For income investors Canada is unlikely to be a major exposure, meaning MCT offers geographical diversification. The high exposure to REITs and the strength of the Canadian real estate market are other differentiating factors, while the depth of opportunities across energy producers and midstream pipelines is hard to find elsewhere.