Over the last few months, I’ve been focusing my attention on boring funds. The equity bulls haven’t yet been reined in, but my hunch is that we are in for a more volatile ride and a small move to a more defensive position might make sense. That brings me to the capital of boring, Canada – apologies to all Canadian readers, but I hope you take it as a back-handed compliment.
Canada has just been beset by election mania, for the second time in two years. Yet despite the increasingly frenzied electioneering, the result was never on course to make much difference to investors. This makes it very different to Germany, where the swing leftwards at the weekend may have huge consequences.
A no-change election
The election ultimately saw Justin Trudeau’s Liberals return to power in another minority government. However, it’s worth noting that overlaps between the parties’ policies seemed more common than jarring differences.
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Take climate change and the energy sector. Both the Liberals and the Conservatives backed federal carbon taxes and supported long-term incentives for electrification and clean fuels as part of the energy transition, but also supported expansion of a major pipeline to increase crude oil exports. Or consider real estate. House prices may be overvalued, but all major parties support high levels of immigration, which should in turn help drive them even higher. None have a problem with the current immigration target of 1.2 million people by the end of 2023.
There are bigger differences in areas such as finance: the Liberals plan to increase taxes (by 3%) for banks and insurers making over C$1bn (£583m) in net profits. But overall there was little proposed that would have resulted in major changes for investors –and that reinforces one central truth: Canada is a real safe haven.
A safer fund at a big discount
This brings me to a fund called Middlefield Canadian Income (LSE: MCT), which invests in largely (though not exclusively) Canadian stocks. Over 50% of the portfolio is in real estate businesses and financials. It has a strong income focus with the dividend yield of 4.7%. Crucially you’re buying into these equity assets at a double discount. The discount to net asset value (NAV) is 13.3%, which is high, by historic standards, and a bit peculiar as Canadian equities have rallied strongly. Yet Canadian equities also remain cheap compared to their neighbours across the border, because the US market is dominated by fast-growth tech businesses while Canadian equities look more old-world.
Sectors such as energy, real estate and financials are key – and these should still have significant upside, having lagged their US counterparts because the US vaccine roll-out started earlier than in Canada, argues Dean Orrico, the manager of the fund. He is in a good position to make that assessment: in the past, the trust has heavily invested in equally boring stocks in the US market. Total US exposure – especially to big banks – hit 36% in the portfolio in May 2020, but that has now been dialled back to around 8%.
I think that switch looks sensible. Canadian banks “are consistent dividend growers and possess high capital levels and low pay-out ratios, and trade at attractive valuations to US peers”, say fund analysts at Investec. They also see opportunities in industrial real estate investment trusts, where “e-commerce activity has increased as a result of the pandemic and continues to drive demand for industrial properties, with low availability rates in Vancouver, Toronto and Montreal”.
Middlefield Canadian will never seem terrifically exciting compared to a growth machine like Scottish Mortgage. However, for income-hungry, defensive equity investors, I think Canada looks a safer bet for riding through any imminent market volatility.
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