For the six months ended June 30, 2016, Middlefield Canadian Income generated a total return of 20.8%. Dividends of 1.25 pence per share were paid on a quarterly basis during the period in the months of January and April.
For the six months ended 30 June 2016, the S&P/TSX Composite Index returned 9.8%, outperforming all developed markets, including the S&P 500 and DJIA which returned 3.8% and 4.3%, respectively, over the same period. In Canadian dollars, the outperformance was even more pronounced.
They got approval to increase their weighting to non-Canadian investments last year and, at the end of 015, 32% of the portfolio was invested in US securities. Over the first six months of the year, as commodity prices formed a bottom, they slowly reduced the Fund’s U.S. exposure to approximately 21%. They believe the sentiment towards
Canadian equities will continue to increase as a result of the economic recovery underway in Canada and the instability, both economic and political, being experienced in other developed markets such as the U.K. and Europe.
Despite the S&P 500 trading near record levels, only the utilities and consumer staples sectors reached new highs in the first half of the year, further evidence that investors remain defensively positioned. With interest rates at historic lows, they have seen investor rotation into higher yielding securities such as REITs and telecommunication companies. Similarly, given the rally in oil and gold prices since the start of the year, energy and materials stocks have also been amongst the strongest performers. Financials, on the other hand, have lagged as a flattening yield curve has impacted lending margins and the potential for higher loan losses has heightened investor concerns regarding capital ratios.
Year to date, the biggest contributor to Middlefield Canadian’s performance has been their allocation to real estate and consumer staples. They believe, as large users of financial leverage and due to their perceived interest rate sensitivity, REITs will continue to benefit from historically low rates. Also, as of September 1st, real estate will finally have its own GICS category, requiring portfolio managers to increase their allocation to the sector. Their best performing real estate holdings include Canadian Apartment Properties REIT, Chartwell Retirement Residences and Pure Industrial REIT whose share prices are up by approximately 20% on average to the end of June 2016. The consumer staples sector has been very steady despite the broader market volatility. While consumer spending has not met expectations, it is now trending higher along with evidence of growth in wages. Their position in Kraft Heinz continues to perform well as the company is seeing the benefits of ongoing cost rationalization and innovation initiatives following the completion of last year’s merger. Other key contributors to the Fund’s performance include
Johnson & Johnson, Cargojet, Pembina Pipelines and Northland Power.
Financial stocks, especially in the United States, have been challenging investments in 2016. However, in light of their growth profiles and attractive valuations, we remain committed to the sector through selective investments in large, market dominant issuers such as J.P. Morgan and Capital One Financial. As U.S. consumer spending increases, loan growth and credit card balances will follow suit, driving greater earnings and eventual multiple expansion. Although Canadian banks trade at a premium to their U.S. counterparts, they have emerged from the
slowdown in the Canadian economy in excellent shape and are poised to grow earnings as economic activity picks up over the next several quarters. Moreover, given their exceptionally strong balance sheets and attractive dividend yields, they have increased the weighting to Canadian financials over the past few months.
The sharp recovery in oil prices and energy equities has been well documented. After touching a 14-year low of $26 per barrel in early February, oil prices rallied by approximately 85% to the end of June. Given the heightened volatility and broader global macro concerns early in the year, they maintained a conservative underweight position in energy equities, which ultimately was a drag on performance. Significant fundamental shifts have taken place that will set the stage for a more balanced energy market in the latter half of 2016 and beyond. As a result, they expect oil prices to trade in the $40 to $60 per barrel range over the foreseeable future. However, due to ongoing fluctuations in the U.S. dollar and geopolitical factors impacting supply, the Fund’s energy weighting is focused on high quality, large, income oriented issuers.
2016 also witnessed a reversal in the British Pound (GBP)/Canadian dollar (CAD) cross currency rate. Concerns about Brexit, higher oil prices and a recovery in Canadian economic activity all conspired to push CAD higher. Post the referendum, GBP/CAD fell below 1.70, reflecting a 15.6% drop since December 2015. A stronger Canadian dollar benefits the performance of the Fund. The Fund also benefits from a stronger U.S. dollar through its exposure to U.S. denominated securities, albeit to a lesser extent.
MCT : Middlefield Canadian Income rebuilds Canadian exposure