Middlefield Canadian Income (MCP) manager Dean Orrico says shareholders will be ‘hard-pressed’ to find fault with its proposed ETF rollover.
The Saba-targeted trust announced last week that investors will be offered a cash exit at close to net asset value (NAV) or the option to receive shares in a newly created exchange-traded fund (ETF).
The actively managed ETF will follow the same strategy as the trust, targeting high quality, dividend-paying Canadian and US large caps.
The change follows pressure from US activist fund Saba Capital and, if approved, will be a first-of-its-kind transition from investment trust to active ETF.
Talking to Citywire, Orrico said the announcement was the result of ‘several conversations with shareholders’ and lots of discussions with the board about the potential options over the past 60 days.
‘As a result of all that work, we concluded with the board that this rollover into an ETF really did tick all the boxes for investors’, he said.
Buy list challenge
Last month, Capital Gearing manager Peter Spiller told Citywire he expects to see an increasing number of struggling trusts steer ‘halfway towards an active ETF’. To eliminate persistent discounts, he said, more boards would opt for zero-discount policies (ZDP), managed through share buybacks.
According to Orrico, this wasn’t an option for MCP. With a market cap of £128m, the trust’s small size was at odds with the ‘increasing desire’ among big investors – institutions and wealth managers – ‘for larger market cap and more liquid trusts.’
‘To get on their buy lists, my understanding these days is there’s a minimum market cap of £500m. When we thought about our size and limited liquidity, going through buybacks and potentially even buying Saba shares would just exacerbate the problem because it would result in an even smaller trust with less liquidity’, he explained.
MCP is not the only trust facing this problem, analysts shared concerns about Bellevue Healthcare last month, as the launch of its ZDP risk sub-scale status. For these smaller trusts, Orrico said shareholders would be ‘hard-pressed to find disadvantages’ with the decision to restructure into an ETF.
Although, he did acknowledge that trusts that invest in unlisted or less liquid assets would not be able to do this kind of transition.
‘We’re still giving the same investment strategy, exposure and income. We’re still going to be listed. But we’re also solving this issue of trading at a discount to NAV’, he said.
‘And if you were concerned about liquidity in the existing closed-ended vehicle, you’re also solving that problem. There will always be a buyer or seller for your shares as an ETF’.
The trust will draw on Middlefield’s experience managing ‘a family of active ETFs in Canada’, several of which were similarly converted from closed-ended structures.
A ‘steady hand’ for Canada
Shares in the trust fell almost 11% in the week that followed the Trump Administration’s tariff announcement.
Fortunately one-year figures still look strong with a share price gain of 19.6% versus a 6.2% fall by the average trust in the AIC’s North America sector. MCP currently trades at a 4% discount and yields 4.6%.
Orrico said uncertainty in Canadian markets since 2 April hasn’t been helped by the country being ‘effectively leaderless’ after the resignation of prime minister Justin Trudeau in January.
He added that the subsequent election of Mark Carney marks ‘a major step’ in the right direction. Orrico views the ex-Bank of England governor as a ‘steady hand’.
