Results Analysis: Middlefield Canadian Income

MCT saw positive share prices returns in 2022 despite a tough marco environment...

  • Article
  • Results Analysis: Middlefield Canadian Income
  • Middlefield Canadian Income (MCT) has released its results for the year ending 31/12/2022. The trust saw NAV total returns of -2.9% and share price total returns of 5.4% during the period, both in sterling terms. The S&P/TSX High Dividend Index, MCT’s benchmark, increased by 5.3% during the period, also in sterling terms.
  • NAV underperformance was due to the managers’ underweight position in energy, which enjoyed a strong year due to the price shock caused by the war in Ukraine. Interest rate hikes also hurt the trust’s overweight position to real estate.
  • Share price performance during the period meant that MCT’s discount narrowed from 13.9% to 7.5%. However, since the period end, the trust’s discount has widened again to 11.1%, as at 14/04/2023.
  • The trust’s long-term track record remains strong. Since launch in July 2006, MCT has delivered annualised NAV total returns of 7.3%, compared to 6.8% for the benchmark.
  • Gearing facilities were used prudently throughout the year, with a range of 14.6% to 19.1%. The average level of gearing was 17.0% for the period.
  • Dividends for the period totalled 5.1p per share, with a strong dividend coverage ratio of 1.16. This strong coverage, as well as the prospect of higher income earnings from the underlying portfolio, meant the board approved a 0.1p increase to the dividend target for 2023.
  • MCT Chairman Michael Phair said: “We remain confident in the investment manager’s ability to execute on its actively managed investment strategy. The fund’s unique Canadian equity-income focus offers an attractive investment proposition for UK investors in the current environment. Given our positive outlook on the Canadian economy, together with the fund’s increased marketing efforts and shareholder engagement, we believe the fund’s shares represent a compelling investment opportunity.”

Kepler View

Middlefield Canadian Income (MCT) remains one of the only closed-ended funds available to investors in the UK that provides dedicated exposure to Canadian equities. The trust is designed for income investors, with the managers aiming to pay a quarterly dividend.

Canada has long offered an attractive alternative source of income for dividend investors. One attraction has been its proximity to the US. Canadian companies generate a sizeable proportion of their revenues in the world’s largest economy. However, equity valuations have typically been lower and there is a stronger dividend culture. For instance, on 12/04/2023, the MSCI Canada Index had a forward P/E ratio of 12.6, compared to 18.4 for the MSCI US Index. And at the end of March, the Canadian index had a TTM dividend yield of 3.2%. The US index’s equivalent yield was 1.6%.

Some of the macroeconomic turmoil we’ve seen over the past 18 months has also worked in Canadian companies’ favour. Like the UK, financials make a hefty proportion of the Canadian equities market, with a 35.3% weighting in the MSCI Canada Index at the end of March. Rising rates may prove beneficial here, with the Royal Bank of Canada and National Bank of Canada both reporting higher earnings in March.

Arguably of greater significance today are Canada’s energy exports. As we noted in our latest research on MCT, Canada is energy independent and now supplies over half of US oil and gas imports. The country is also a stable democracy, making it a more reliable partner for buyers. As a result, Canada has remained more immune from the price pressures the war in Ukraine has created in the hydrocarbons markets, and has arguably gained from them.

This goes some way in explaining MCT’s performance last year. Higher revenues and an improved dividend cover ratio were in part the result of energy companies having greater earnings and thus paying higher dividends – a trend that’s likely to continue in 2023. However, MCT has also long been overweight to Canadian real estate and was underweight energy in 2022. Canadian REIT valuations were hit by interest rate hikes, which crimped performance.

MCT manager Dean Orrico has not changed course and added to several REIT holdings, some of which were trading at discounts in excess of 40%. There was good reason for this. Whereas energy markets are erratic and may only provide short-term gains, the long-term outlook for Canadian real estate remains strong. This is largely due to supply and demand dynamics. Canada has embarked on a drastic plan to grow its economy through immigration and c. 2m people are expected to move to the country from 2021 – 2025, a huge increase for a country with a population of 38m. Even prior to this, the country was facing a huge housing shortage and the Canada Mortgage and Housing Corporation estimates Canada will need an additional 5m housing units to be built by 2030.

It is hard to see how these dynamics will dissipate in the near term. We’re also seeing signs that these are supporting valuations. For example, Summit Industrial Income REIT was acquired at a nearly 20% premium to NAV at the end of 2022. Industrials in major cities are also reporting <2% vacancy rates, with similar dynamics playing out in multi-family and apartment rentals.

The fact that Dean substantially upped his stake in MCT last year, purchasing 70,000 shares in October alone, is a sign of his and the managers’ confidence in this strategy. This is not a guarantee of success but clearly they see reason to be optimistic about Canadian REITs and the wider MCT portfolio, and we think it is worth a closer look for investors seeking diversification in an income-oriented portfolio.




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.

  • Article
  • Results Analysis: Middlefield Canadian Income
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