When scouring for opportunities in solid markets, Canada may not be the first place you’d think of examining. You may be missing out as, according to the OECD (Organisation for Economic Co-operation and Development), Canada tops the G7 nations in terms of real GDP growth predictions for 2017 at 3.2%.

The International Monetary Fund forecasts 3% for 2017 although sees this growth easing to 2.1% in 2018. The latter is slightly below the 2.3% forecast for the US although much high than the UK (1.5%), the Euro Area (1.9%), Brazil (1.5%) and Russia (1.6%), among others.

Canada is currently tightening its monetary policy with the Bank of Canada having raised interest rates twice this year. Higher interest rates are good for banks and Canada has some large players including Royal Bank of Canada and Bank of Montreal.

There are two investment trusts available on the London Stock Exchange providing access to this often overlooked market: Canadian General Investments (CGI) and Middlefield Canadian Income (MCT). There are also a plethora of passive products such as exchange-traded funds that track various indices linked to Canadian stocks and shares.

For example, HSBC MSCI Canada UCITS ETF (HCAD) tracks the performance of some of Canada’s largest listed companies. It has delivered 6.65% annualised returns over the past five years, according to Morningstar.

While Canada may not instantly spring to mind when thinking of stock markets, the Toronto Stock Exchange (TSX) is the ninth largest in the world by market cap at around $2.3tr. The exchange is home to Canada’s ‘big five’ banks and numerous commodities producers.

Its largest energy companies include Cameco, Canadian Natural Resources, EnCana, Husky Energy, Imperial Oil and Nexen.

A closer look at middlefield

Investment trust Middlefield Canadian Income invests in both the US and Canada although it can also invest up to 10% of its portfolio outside of these countries.

Its weightings towards the US and Canada can change dramatically over time. In November 2016, the trust had a Canadian equity weighting of 67%, today it is in excess of 80%.

Of its top 10 holdings, just two are US-based, being financial services firm Blackstone and investment bank JP Morgan Chase. The former company has a healthy dividend yield of 7.2% and makes up for 5% of the investment trust’s net asset value. It is one of the largest private equity buyout firms in the world.

In terms of past performance, Middlefield has certainly delivered the goods. It has achieved 8.4% annualised total return over the past decade versus 6.5% from its benchmark.

The trust currently yields around 5%; it targets companies with sustainable dividends as well as decent growth potential.

Two-thirds of the trust’s equity holdings have increased their dividends over the last three years compared to 51% of the underlying index, claims Middlefield.

Energy company Parkland Fuel is the trust’s top holding, so it has exposure to the cyclical nature of the commodity market. Dean Orrico, chief investment officer of Middlefield, is bullish on commodity prices, believing that a recovery is well underway.

However he says that ‘it’s very clear that the TSX is more than just commodities’. He adds: ‘Canada has been through one the worst recessions in decades but has done well so the economy is much more diverse than just commodities.’

One way Middlefield likes to play the energy market is through the pipeline sector.

The trust has holdings in companies such as Pembina Pipeline and TransCanada Pipeline. The latter recently enjoyed success when the Keystone Delta pipeline, previously denied by former
US president Barack Obama
was given the go-ahead
by Donald Trump.

How the underlying holdings differ

Investment trust Canadian General Investments invests primarily in Canadian equities but also holds US stocks as well. Another similarity to Middlefield is that it has a major US company in its top 10 holdings, being Amazon.

There are major differences between the two investment trusts in terms of the sectors they favour. Canadian General has a 19.2% weighting to materials stocks whereas Middlefield only has 5.1% invested in the sector.

Middlefield’s main sector is real estate whereas that only accounts for 2.6% of Canadian General’s portfolio.

We note that Canadian General has significantly underperformed Middlefield and its benchmark when looking at the 10-year data. It has generated 3.5% annualised total return over this period versus 6.36% from the benchmark. Middlefield has achieved 8.33% annualised return over the same period.

Yet it’s a completely different story over the past year: Canadian General is by up 22.4% total return versus a mere 0.1% from Middlefield. (DS)

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