Markets continued to rally in April, supported by better-than-expected Q1 earnings. The Fund’s NAV generated a total return of 1.9%, beating the TSX Composite and benchmark returns of 0.8% and 1.8%, respectively. The British Pound appreciated 2.2% relative to the Canadian dollar, weighing on returns to U.K. investors.
Cyclical and value sectors represent the majority of the Fund’s portfolio. Despite technology and growth stocks outperforming in recent months, we believe the longer-term outlook for the Fund’s core investments remains attractive. We have entered a period of higher inflation and higher interest rates which bodes well for companies that can continue to grow their earnings and dividends. The current setup has similarities to the early 2000s – the aftermath of the dotcom bubble when inflation was elevated, rates were rising and the TSX Composite outperformed the S&P 500 in eight out of ten years.
Canada’s growing tech sector is making it an increasingly attractive country for investment as the Toronto-Waterloo corridor has grown to become the second largest tech hub in North America, trailing only Silicon Valley. The country’s world-class universities, such as the University of Waterloo and the University of Toronto, continue to attract foreign students from around the world and serve as a breeding-ground for top tech talent. Many large U.S. tech companies, including Microsoft, Google and Apple, have opened large offices in Toronto to capitalize on the growth. Although MCT does not own any technology companies directly, its holdings are benefiting from the spillover effects of tech’s rise. These include attracting skilled workers, foreign direct investment, and growing consumer demand.
We expect interest rates to remain near current levels over the next several quarters with the Bank of Canada neither hiking nor cutting short-term borrowing rates. The Bank of Canada expects Canadian inflation to reach c. 3% by mid-2023 and return to its 2% target by 2024. Lower interest rate volatility should support Canadian equities, particularly in sectors that have been impacted by the rising rate environment.
Real estate continues to be a large overweight exposure and is a sector where we have strong conviction. Unlike US REITs, where fears of credit losses and loan defaults are elevated, debt and liquidity levels remain very healthy. In Canada, commercial real estate (CRE) lending is dominated by well capitalized large banks, life insurance companies and pension funds which compares to the US where loans from regional banks and commercial mortgage-backed securities are more common. After a muted 2022, debt issuance by real estate companies accelerated in Canada during the first quarter with unsecured debentures issued totalling CAD$1.4 billion. In addition, we believe the main concerns with CRE relate to the office market and the Fund is not invested in any office REITs. Having said that, office properties in Canada are largely concentrated in well capitalized pension funds, life insurance companies and global private equity firms. These owners are very disciplined in their leasing discussions due to their long term investment horizons. As a result, Canada is not likely to experience the level of distress in the office sector currently occurring in the US. It is important to note that other property types, including our core exposures to industrial, multi family and grocery-anchored retail continue to be on very solid footing with Q1 2023 results either meeting or exceeding estimates.
Disclaimer
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. You will usually pay brokerage fees to your dealer if you purchase or sell units/shares of investment funds on the Toronto Stock Exchange or other alternative Canadian trading system (an “Exchange”). If the units/shares are purchased or sold on an Exchange, investors may pay more than the current net asset value when buying and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units or 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 these documents. Mutual funds and investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this disclosure are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may”, “will”, “should”, “could”, “expect”, “anticipate”, “intend”, “plan”, “believe”, or “estimate”, or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what Middlefield Funds and the portfolio manager believe to be reasonable assumptions, neither Middlefield Funds nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.
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.
