Canadian General Investments: should you buy?

Investors often forget that North America is not just the United States. Above it lies Canada, with an eighth of the population but a larger land mass. Much of it is virtually uninhabitable, but it means that Canada is rich in natural resources while having a population around the size of California. In investment terms, Canada is no laggard. Canadian General Investments (LSE: CGI), a £757 million investment trust listed in London as well as Toronto, can boast a return of 192% over the last 10 years and 85% over five (11.4% and 13.1% per annum). These figures are respectively a little behind and comfortably ahead of the MSCI All Country World index. Over 25 years, it is one of the best-performing funds in the investment trust sector.

The trust’s performance is also well ahead of that of the Toronto Stock Exchange; it was helped by being able to invest a quarter of its capital in the US. It was established in 1930 with control passing in the 1950s to the Morgan family, which owns 52% of the shares and is active in its management. The family controls its management company, Morgan Meighen. Greg Eckel is the lead fund manager. CGI’s focus on a medium- to long-term timescale is encouraged by the Canadian tax system. Realised profits are subject to corporation tax unless distributed as dividends, so CGI has an incentive to cut its losers to generate tax losses and run its winners; 58% of the portfolio value is made up of unrealised gains and annual portfolio turnover averages just 10%.

Canadian General Investments: a profitable investment

Realised profits are distributed by way of a dividend, whose upward path is smoothed. At the current price, the shares yield 2.5%. The shares are trading at a discount to net asset value (NAV) of 40%, close to the top of the five-year range and almost double the low, but buybacks to reduce the discount and bolster NAV are discouraged by the tax rules. Nvidia was the largest holding on 30 April 2024, worth 7.1% of the portfolio, and has been held since 2016. Since then “we have taken profits each year, totalling over C$120 million (£69 million), but I am happy to continue to have a position”, says Eckel. Other large investments include TFI International, a Canadian transport and logistics firm, Canadian Pacific, WSP Global (a consulting outfit) and Descartes Systems (technology solutions for logistics). Apple and Amazon are also in the top 10 holdings at 3.1% and 2.7% of the portfolio.

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Around 14% of the portfolio is in energy (including Precision Drilling and Canadian Natural Resources) and 11% in materials, including gold mining (Franco-Nevada) and uranium mining (Cameco and NexGen). There is a high exposure to technology (21% of the portfolio versus 9% in the Toronto index), but little to financials (13% vs. 31%). A debt facility of C$175 million enables a ratio of debt to net assets of 12%, at the low end of the historic range thanks to an interest rate of 5.9%. Eckel is cautious in the short term. “After a terrific run in the market, we are likely to see a pause, with the economy slowing due to high interest rates.” Inflation, excluding mortgage costs, has fallen from 8% to below 2%, so interest rates are likely to fall. GDP growth, just 1.1% in 2023, is likely to pick up next year.

With federal debt barely 40% of GDP, the lowest marginal effective tax rate in the G7 and foreign investment flowing in, the long-term outlook is favourable. The market trades on a multiple of under 15 times trailing earnings, much less than the US, but this is partly explained by the low ratings of banks (30% of the market) and commodities companies (another 30%). The CGI portfolio “is more expensive, due to the US holdings and the low exposure to telecommunications and utilities”. Canada will do well in another bull run for raw materials, as Eckel notes. “ The nuclear renaissance is already helping, as is interconnectivity with the US. The combination of an excessive discount to net assets and good long-term prospects makes CGI a trust to lock away.

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