I have always enjoyed investigating adventurous investment ideas. So, when I say that income-oriented investors seeking to build a diversified portfolio of funds should be searching worldwide for new ideas and sources of dividend income, I’m sure you’d expect me to highlight locations that are suitably exotic. Not Canada.
As in boring Canada. Cold Canada. The colony that got away with all that mineral wealth and spare land. My father spent many prosperous years there in the 1950s, but never showed any great desire to go back – “bloody cold” was the only comment I recall him making.
But on my last visit to downtown Toronto I think I can safely say that he wouldn’t remotely have recognised it. Toronto is now in the running to overtake London as a city of the world: a teeming metropolis full of people from every corner of the globe.
Teeming Toronto aside, Canada deserves more recognition by investors and not just for the usual reasons, such as its safe banking sector or its rampant housing market. Canada boasts a robustness and reliability that I think is hugely appealing, although thrill seekers will also find plenty to admire: local stock exchanges offer a range of small caps with racy investment themes (notably in the energy and cannabis sectors).
An overlooked Canadian trust
This brings me to a London-listed fund that I think nicely sums up the core appeal of Canada – it’s dull yet dependable. The Middlefield Canadian Income Trust (LSE: MCT) has been on the London Stock Exchange for over a decade, but its market cap is still only a fraction over £100m.
Clearly its managers have had a hard time getting UK investors excited about its mandate. The trust’s cautious focus on dividend payouts and quality business franchises may appeal to some, but for most investors Canada’s bigger brother to the south tends to grab all the limelight. The US typifies the attraction of growth stocks, whereas Canadian stocks seem a bit parochial.
But I think Middlefield deserves a second hearing for adventurous types keen to build a portfolio of diversified income-producing equities through funds. In terms of net asset value (NAV) it has fairly consistently beaten its benchmark, the S&P/TSX Composite High Dividend index, although in share-price terms it has lagged recently.
The fund’s discount to NAV is now a rather toppy 15%, which strikes me as a bit harsh given its performance. Then again, Middlefield’s portfolio isn’t piled high with cutting-edge US technology stocks.
Peer under the bonnet
Nevertheless, a contrarian investor poking around in the trust’s portfolio may find some cause for concern. The first point is that the fund is actually 25% invested in US equities, but not any old stocks – big, well-known, globe-spanning stocks such as JP Morgan Chase, which is its biggest holding. Then there is telecoms giant AT&T, the very definition of boring. Next up the fund also has a fairly chunky investment in real-estate funds and assets. That sparks all those old worries about overpriced Canadian property prices. Furthermore, there is a big allocation to pipeline companies such as Pembina and Gibson. For those of us worried about the long march towards decarbonisation, that raises all sorts of red flags. So you can see why there have been some concerns and why marketing this small fund has been a bit of a slog.
A different perspective
But each of these worries can also be seen as a potential strength. The US assets it is buying are high-quality large caps that are sensibly valued. Those Canadian real-estate assets are also probably a safe, defensive bet, especially in a country experiencing huge waves of immigration that are pushing up property prices.
Canada has plenty of land, but no one seems to want to build on the 99.99% outside the city limits of Toronto, Montreal and Vancouver. Meanwhile, pipeline businesses are in the most cash-focused, non-volatile part of the hydrocarbon complex and might have some long-term value even if we extensively decarbonise (although I have my doubts on this score on a 20- to 30-year timeframe).
A juicy yield
Equity income-oriented investors need some diversification in their dividend payouts and I think Canada fits the bill perfectly. By buying into Middlefield you get an actively managed portfolio of relatively boring, cash-rich businesses churning out a dividend yield around 5%, while the fund is also trading well below its NAV.
Even if we are in the late stage in the equity cycle, Middlefield’s collection of defensive assets should provide some downside protection alongside that dividend. And remember that Canada is widely deemed a safe haven in a volatile world. Governments of both the centre left and right are sensible and tend to mind their own business. They abide by the rule of law and refrain from indulging in monomaniacal twitter storms. Canada will be a port in the comi