Split Share Primer

M-Asset

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What are Split Shares?

Split share funds (“Splits”) are unique investment corporations that provide opportunities for both conservative and more aggressive investors. They typically invest in an pool of dividend paying companies and divvy up or “split” the dividends paid by underlying stocks from the potential capital appreciation from that same pool of securities. Splits reallocate, these two benefits (dividends and capital appreciation) between the two separate exchange vehicles: a Preferred Share and a Class A share.

 

How Do Splits Work?

The Preferred Share:

Preferred shares are generally more appropriate for conservative investors seeking stability and a regular source of tax-efficient income. Preferred shares receive fixed, cumulative, quarterly distributions and have a priority claim on the fund’s assets ahead of Class A shares. Preferred shares have a favourable fee structure as most of the corporation’s expenses are borne by Class A shares. The preferred shares, however, do not benefit from the growth in the underlying portfolio of stocks.

The Class A Share: 

Class A shares are typically designed for less risk averse investors seeking enhanced capital gains. All of the capital appreciation in the underlying portfolio of stocks accrues to Class A shares. This provides embedded leverage and does not have additional costs associated with utilizing traditional leverage by borrowing at prevailing interest rates. Class A shares also receive a targeted monthly distribution generated from capital gains and excess dividend income after preferred share distributions have been paid.

Portfolio of dividend paying stocks

Preferred Share

  • Issued at a $10 Share Price
  • Annual Dividend of $0.50 Set by Middlefield
  • Paid Quarterly
  • 5% Distribution Yield at Issue
Class A Share

  • Issued at a $15 Share Price
  • Annual Dividend of $1.50 Set by Middlefield
  • Paid Monthly
  • 10% Distribution Yield at Issue

The dividends and capital appreciation earned in the pool of dividend paying stock are split between the
two distinct share classes.

Scenario Analysis

Portfolio of Dividend Stocks
Original Value = $25 Per Share
Preferred Shareholders
Original Value = $10 Per Share
Class A Shareholders
Original Value = $15 Per Share
  • The portfolio of dividend paying stocks generate $1.25 per share in dividends AND
  • No capital appreciation over 1-Year
  • Shareholders receive $0.50 annually per share distribution (paid quarterly)
  • NAV per share stays at $10
  • Total 1-Year Return of 5.0%
  • Shareholders receive $1.50 annually per share distribution (paid monthly)
  • NAV per share decreases to $14.25 due to the distribution
  • Total 1-Year return of 5.0% ($1.50 distribution – $0.75 change in NAV due to distribution shortfall)
  • The portfolio of dividend paying stocks generate $1.25 per share in dividends AND
  • Appreciate 10% over 1-Year
  • Shareholders receive $0.50 annually per share distribution (paid quarterly)
  • NAV per share stays at $10
  • Total 1-Year Return of 5.0%
  • Shareholders receive $1.50 annually per share distribution (paid monthly)
  • Class A shares receive the entire 10% appreciation of the portfolio of dividend paying stocks and the portion of dividend revenue that remains after preferred shareholders are paid their $0.50 per share ($0.75 per share remains)
  • NAV per share increases to $16.75
  • Total 1-Year return of 21.7% ($1.50 distribution -$0.75 change in NAV due to distribution shortfall + $2.50 change in NAV due to market appreciation)
  • The portfolio of dividend paying stocks generate $2.00 per share in dividends AND
  • Appreciate 15% over 1-Year
  • Shareholders receive $0.50 annually per share distribution (paid quarterly)
  • NAV per share stays at $101-Year Return of 5.0%
  • Shareholders receive $1.50 annually per share distribution (paid monthly)
  • Class A shares are allocatedthe entire 15% appreciationof the portfolio of dividendpaying stocks and theportion of dividend revenuethat remains after preferredshareholders are paid their$0.50 per share ($1.50 pershare remains)
  • NAV per share increases to $18.75
  • Total 1-Year return of 35.0% ($1.50 distribution +$3.75 change in NAV due tomarket appreciation)

Scenarios are presented gross of fees and fund expenses.

Who should buy Preferred Shares?

Preferred Shares are typically well-suited for long-term investors seeking a stable stream of dividend
income generated by high-quality, large-cap companies. These shares are more conservative and have a steady distribution due to their fixed, cumulative quarterly payments.

What Splits Does Middlefield Manage?

Middlefield manages actively managed Split Share strategies currently focused on the energy and real estate sectors. Buying a Class A or Preferred share of a Middlefield Split Share is an efficient way to invest in a sector or group of stocks using a unique investment vehicle run by a private and independent asset manager. Middlefield manages over half-a-billion dollars in split share assets which trade on the TSX and can be purchased in the same manner as any other stock trading on the exchange.

Fund TSX Ticker Preferred Share TSX Ticker Class A Share Investment Focus
Middlefield E Split ENS.PR.A ENS Energy (Enbridge)
Real Estate Split RS.PR.A RS Real Estate
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Have Questions?

Whether you have specific investment inquiries or general questions about Middlefield, our team would be glad to help.

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Disclaimer

This material has been prepared for informational purposes only without regard to any particular user’s investment objectives or financial situation. This communication constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described herein is suitable or appropriate for you. Investment decisions should be made with guidance from a qualified professional. The opinions contained in this report are solely those of Middlefield Limited (“ML”) and are subject to change without notice. ML makes every effort to ensure that the information has been derived from sources believed to reliable, but we cannot represent that they are complete or accurate. However, ML assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. ML is under no obligation to update the information contained herein. This document is not to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund and ETF investments. Please read the prospectus and publicly filed documents before investing. Mutual funds and ETFs are not guaranteed, their values
change frequently, and past performance may not be repeated. You will usually pay brokerage fees to your dealer if you purchase or sell shares of an investment fund on the Toronto Stock Exchange or alternative Canadian trading platform (an “exchange”). If the shares are purchased or sold on an exchange, investors may pay more than the current net asset value when buying shares of the investment fund and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in the public filings available at www.sedar.com. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this press release may be viewed as forward-looking statements. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, intentions, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects”, “is expected”, “anticipates”, “plans”, “estimates” or “intends” (or negative or grammatical variations thereof), or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward-looking statements including as a result of changes in the general economic and political environment, changes in applicable legislation, and the performance of each fund. There are no assurances the funds can fulfill such forward-looking statements and the funds do not undertake any obligation to update such statements. Such forward-looking statements are only predictions; actual events or results may differ materially as a result of risks facing one or more of the funds, many of which are beyond the control of the funds.

 

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