Middlefield Canadian Income 22 October 2024
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Middlefield Canadian Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Middlefield Canadian Income Trust (MCT) provides investors with exposure to Canadian equities, with the aim of delivering a high income. Like the UK, Canada has a strong dividend culture, distinguishing it from its southern neighbour. This is reflected in MCT’s yield of c. 4.6%, the highest yield in the AIC North America sector. MCT is primarily exposed to three sectors: real estate, energy and financials, which have been long-term convictions of the manager.
Canada began cutting interest rates in June, being the first G7 country to do so. This, along with later US interest rate cuts, has given a boost to Canadian REITs, which have delivered strong returns over the past three months. REITs make up more than 20% of MCT, the largest overweight versus the Canadian market, and this means MCT has performed well in recent months (see Performance).
With interest rates projected to decline further, manager Dean Orrico is confident that Canadian REITs still have significant upside potential. Moreover, several REITs in the portfolio still trade at a discount to NAV, leaving room for further price appreciation if valuations re-rate.
As a result, Dean’s confidence about the portfolio’s outlook is further expressed through the current gearing level of 18.5%. Historically, gearing has dropped below 10% when the managing team felt cautious about the market. MCT trades on a c. 11% Discount at the time of writing.
We think the recent rate cuts in Canada and the USA could bolster MCT’s performance, particularly given its large overweight in the real estate sector, which is sensitive to interest rates. Historically, the trust has outperformed during recovery phases and recent performance has been encouraging.
But while rate cuts could provide a tailwind for MCT, we would argue that it offers more than just a play on interest rates, providing exposure to areas of structural growth such as Canadian real estate and global demand for LNG.
There is also a ‘double discount’ element present in the portfolio, adding potential for outperformance. In a recent meeting the manager, Dean Orrico, said that many REITs held in the portfolio are trading at wide discounts, while MCT itself is currently trading at a c. 11% discount. He also believes that Canadian banks are trading below their long-term average.
We note that the board recently bought back shares, which is a rare move for MCT, while the manager also purchased shares to demonstrate confidence in the value of MCT’s holdings. We believe these initiatives reflects a high level of conviction and commitment to the strategy.
Overall, we think that MCT could be an attractive proposition for dividend seekers looking to diversify their sources of income through exposure to the equity market of a G7 economy with strong transparency and sound governance. MCT currently offers the highest dividend yield in the AIC North America sector, at c. 4.6%.
Bull
- Rate cuts could be supportive of MCT’s REITs overweight
- Highest dividend yield in the AIC North America sector
- Wide discount adds potential for outperformance
Bear
- High sector concentration exposes to sector-specific risks
- Exposure to fossil fuels might not suit all investors
- Single-country funds expose investors to currency risk and political risk