The resignation of Canadian prime minister Justin Trudeau on the back of corruption allegations does not appear likely, says Dean Orrico, manager of the £111 million Middlefield Canadian Income (MCT) trust.
Trudeau and his aides have been accused of putting pressure on justice and attorney general Jody Wilson-Raybould, to stop pursuing a legal case against engineering company SNC-Lavalin (SNC.TO).
Wilson-Raybould resigned over the issue and was followed by a second cabinet minister, Treasury Board president Jane Philpott.
Orrico said the allegations were a ‘major issue’ for Trudeau’s Liberal government, though it did not appear likely that Trudeau would also step down.
‘Having said that, the story is still evolving and only time will tell,’ he said. ‘However, it seems that the likelihood of his winning another majority in the October federal election has lessened since the scandal broke.
‘Between now and election day, it will be up to the Conservative Party to persuade the Canadian public that they are both capable and better positioned than the Liberals to lead.
‘Generally speaking, there is a strong view among the business community that the Liberals have not been business friendly since coming to power in 2015 and done little to address major Canadian issues such as facilitating the building of new pipelines to transport growing Canadian oil production.’
Pipelines, which transport oil and gas, is one’s of Canada’s largest industries but regulatory and environmental constraints have prevented any new tunnels being built for the last four years.
This has been a challenge for oil companies as production has increased but capacity for transport has been limited.
Middlefield has just 5% exposure to direct oil producers, while pipelines are its second largest sectoral weighting, at 17.4%, benefitting from being at full capacity. Though this is underweight the 22% held in the S&P/TSX Composite High Dividend index.
Enbridge (ENB.TO) is the trust’s top holding at 5.6%, as it is the only company close to building a new pipeline. It experienced delays on the build of its Line 3 pipeline, which is a reconstruction of a tunnel which runs from Alberta in Canada to various US states such as Michigan and Illinois.
It has taken Enbridge three years to win approvals on both a federal and provincial level. Enbridge recently pushed back the date of construction on the pipeline from the end of this year to the fourth quarter in 2019.
Despite an initial drop in the share price, Orrico said the stock had since recovered with the announcement seen as providing greater certainty given approvals were now in place.
‘They really are in the driver's seat because there is such a shortage of pipeline capacity and growing oil production so they can basically dictate the terms,’ he said.
Orrico said he bought into Enbridge at around CAD $40 a share, now up to between $47-48. It yields 6.5%, with management having pledged to increase the dividend by 10% this year and again in 2020.
Toronto’s tech talent ‘nexus’
Toronto has become a ‘nexus’ of talent for the technology sector, meaning the take-up of office space in Canada’s biggest city is at its height, driving returns for real estate investment trusts (Reits), said Orrico.
Amazon (AMZN.O), Microsoft (MSFT.O) and Oracle (ORCL.N) have all gradually taken up ‘hundreds of thousands’ of square feet of office space.
In fact, the city has created more technology jobs than the home of Silicon Valley, San Francisco – or indeed, any other US city – in the last five years, according to the Financial Times.
As a result just 2% of Toronto’s office space remains vacant, its lowest level in four years.
It is for this reason real estate and Reits make up the largest exposure in Middlefield’s portfolio, at 19.1%, overweight index exposure of 9.6%. Brookfield Property Partners (BPY.O) represents a 3.8% holding while First Capital Realty (FCR.TO) is a 3.2% position.
In addition to office and residential real estate, Orrico and his co-manager Rob Lauzon have exposure to the industrial Reits in Middlefield. Toronto is the second largest industrial real estate market in North America.
Middlefield has a 3.6% exposure to Granite Real Estate Trust (GRT-UN.TO), which has seen its share price go from around $50 to $62 in the last year and has still produced more than a 4% yield.
Currently real estate in Canada trades at about 9% discount to net asset value.
Middlefield has a total yield of 5.6%, with an annual dividend of 5.1p. Its dividend cover for the trust last year was in the mid-80% and while the trust does not currently have revenue reserves, these sat at 5-10% at the end of 2017.
‘We’re comfortable that the total return of these investments is going to be strong, so even though we're not 100% covered, we're comfortable that over time, capital appreciation and just important, every company in our portfolio pays a dividend and more importantly they have history of growing dividends,’ said Orrico.
Over three years, Middlefield has delivered share price total returns practically in line with the benchmark, at 15% versus 15.1%, respectively. Its net asset value has come in slightly below, however, at 12.6% likely due to its yield. It currently trades on a discount of 13%, according to Numis data.