A little known investment trust that buys companies in the commodity-heavy Canadian stock market has moved from a small premium to trade on a 13pc discount over the past six months.
Demand for Middlefield Canadian Income has fallen thanks to the double blow of a plunging oil price and a weak Canadian dollar, which makes the income it pays less valuable to UK investors.
Recoveries in oil and the Canadian currency, therefore, could trigger a sharp reversal in its fortunes.
The yield on Middlefield Canadian Income, at 7pc, up from 5.2pc a year ago, looks attractive but the big question is whether this is sustainable.
According to Stephen Peters, analyst at Charles Stanley, it is - for now at least.
Mr Peters met the management team three months ago and said the board is fully committed to retaining the dividend, despite performance of the assets in holds suffering in recent years. It has paid out 1.25p per share every quarter since 2009. Previously, since launch in 2006, it had paid 1.75p per share.
“The trust does not have dividend reserves, and the dividend payment for the first half of last year was not covered, but the last thing the board will do is cut the dividend. I would never say never, but at this moment in time I think it will be paid. It is a great trust, offering investors an alternative income stream.”
The sharp fall in the oil price, which has seen the “Brent crude” benchmark fall from $116 a barrel in June 2014 to trade at around $30 this week, has proved an Achillies heel for the trust because Canada is one of the world’s largest producers of oil.
Its economy has naturally suffered and the Canadian dollar has depreciated in value against other global currencies, most notably the US dollar against which it hit a 12-year low last week.
The British pound has also strengthened sharply against the Canadian dollar. Sterling was one of the strongest currency performers last year, helping the pound gain around 13pc versus the Canadian dollar.
Mr Peters said the decision not to hedge is the main factor why the fund has lost money over the past couple of years in share price terms, down 27pc over one year and 26pc over three.
He said: “This fund is unloved at the moment, but since it launched in 2006 the net asset value (NAV) of the trust has consistently beaten its benchmark,”
“The currency is obviously a problem, but less so for long term investors as currency moves tend to even out. A yield of 7pc and a discount much higher than usual (13pc versus 9pc one year average) has got to be worth considering.”
Canada’s stock market, the Toronto Stock Exchange index, is resource heavy, with energy business making up around a quarter of the index.
Middlefield Canadian Income only holds 7pc, but in the event of an oil price recovery the overall portfolio stands to benefit. The Canadian dollar, in theory, should strengthen in line with the Canadian economy, which last month pulled itself out of recession.
The trust looks for high-yielding stocks and currently favours financial firms, which account for just under a quarter of the fund. A third of its assets are in US shares, with Microsoft and Reynolds American two of the biggest holdings.
• Investment tips every week by email – sign up
• Put an investing question to our experts: moneyexpert@telegraph.co.uk
0 nhận xét:
Post a Comment