Middlefield Canadian Income (MCT)

22/09/2022

Results analysis from Kepler Trust Intelligence

Middlefield Canadian Income (MCT) has reported its half year results for the period ending 30/06/2022. In an extremely challenging period for markets globally, the trust delivered NAV total returns of 3.4% and share price total returns of 2.5%. The trust's benchmark, the S&P/TSX High Dividend Index, delivered total returns of 7.3% during the same period. However, the trust outperformed the S&P/TSX Composite Index, which declined by 1.5% over the reporting period.

Part of the underperformance relative to the benchmark was due to MCT's underweight position in energy. Whereas the benchmark had a weighting of 32% to the sector, the trust's average exposure was 27% in the reporting period. Energy companies in the benchmark delivered returns of 36% in the first half of the year.

Chairman of the board Michael Phair said: "Canada is a secure net exporter of oil and natural gas and should benefit from Europe's growing focus on energy independence over the coming years. Its rate of inflation remains below that of the United States and Europe, supporting the purchasing power of Canadian consumers. Cyclical sectors such as energy, financials and real estate also serve as effective hedges against inflation for U.K. investors. We are optimistic [MCT's managers] will continue to perform well in the current inflationary environment and build upon its longstanding track record."

Kepler View

Middlefield Canadian Income (MCT) is one of the only closed-ended funds on the market today offering investors dedicated exposure to Canadian equities. The trust managers seek to deliver a quarterly dividend to shareholders, with the portfolio typically overweight to real estate investment trusts (REITs) as the managers seek to achieve this.

Canada has emerged as an attractive investment proposition since the start of the year. The country is a net exporter of energy and its stock market has large weightings to the sector, as well as to financials and utilities, all of which look capable of either managing or benefitting from inflationary pressures. Moreover, valuations in the Canadian stock market remain lower than their US peers. Given that many Canadian companies make a substantial portion of their revenues in the US, they arguably offer a means of accessing the US economy at lower valuations than US-listed peers.

It may be that investors are starting to recognise these potential benefits as MCT's discount has narrowed since the end of June. The shares are up 10.6% on a total return basis, while the NAV has risen by 6.1% over the same period. Nonetheless, the trust continues to trade at a steep discount of close to 14%. Moving forward, the trust's exposure to energy companies and financials may support its income objective, as commodity prices remain high and banks benefit from higher interest rates. But it's plausible that the REIT holdings may drive returns for shareholders as well. Assuming that performance in the sector is strong and investors start to be more optimistic, then we may see a narrowing of REIT discounts that could provide an uplift to the MCT portfolio. In our view the value in MCT's portfolio coupled with the share price discount make the shares look attractive.

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