Fund manager Dean Orrico believes we are in a commodities supercycle that should sustain outperformance for his £124m Middlefield Canadian Income (MCT ) trust over the next five years. 

He cited a forecast by Jeff Currie, global head of commodities at investment bank at Goldman Sachs, who predicted a 12-year boom across the energy, metals, mining and agriculture sectors, almost two years ago.

Following a 10-year period of strong growth stock performance as interest rates lowered, Orrico now believes the 40-year bull market in bonds has come to an end and a period of deglobalisation has begun, during which commodity prices will remain relatively strong.

‘A major factor driving the last commodity supercycle, which lasted 10-12 years, was the increase in China’s economic activity after it joined the World Trade Organisation in 2001. Will China have the same or even greater demand going forward as it looks like we’re in the early stages of deglobalisation?’ Orrico (pictured below) told Citywire.

Orrico believes the supercycle will be only be half as long as Currie forecast, because it is more difficult to foresee the supply and demand imbalance in many commodities beyond five years, especially with factors such as inflation, interest rates, economic activity, improvements in renewables and battery storage coming into play.

To align the 4%-yielding portfolio with rising commodity prices, Orrico and co-manager Rob Lauzon have trimmed financials and added to Canadian energy exposure through the Toronto-listed iShares S&P/TSX Capped Energy Index ETF. The exchange traded fund has returned nearly 43% this year.

Oil producer Canadian Natural Resources, Orrico’s top holding at 5.2% of the portfolio, has jumped 50% over the last 12 months, helping the fund’s net asset value (NAV) to rise 15.9% in the first five months of the year. That eclipsed the 6% rise in its S&P/TSX Composite High Dividend index benchmark.

The company, Canada’s largest oil producer, has been returning the profits from such high oil prices to investors, raising dividends by 28% in 2021 and 38% in 2022. 

The oil and gas companies in the portfolio, which include Suncor Energy and Topaz Energy, have an average free cash flow yield between 10% and 25%, leading Orrico to estimate they will all be debt free by the first quarter of next year.

‘I have never seen this in 25 years of running income portfolios. Over the last two years, the compound annual growth rate (CAGR) on their dividends has been 22%. That’s really unheard of,’ Orrico said.

He is bullish about Canada, which ‘has some wind at its back’. After a minor role in the 10-year growth market on account of its small technology sector, its thriving energy, metals and mining businesses, as well as the world’s ‘most stable financial system’, have come into their own.

Middlefield’s portfolio is split between 15% in oil pipelines, 15% in energy, including renewables, and 25% in both financials and real estate. Canada accounts for 95.9% of the portfolio, with the remainder in the US. Top holdings include Canadian Natural Resources, TD Bank and the Bank of Nova Scotia, which make up 13.9% of the portfolio.

Results released in April showed the closed-end fund outperformed for the fourth consecutive year, with a 38.8% growth  in the portfolio beating the 27.4% rise in the benchmark.

The 25% real estate weighting provides a hedge against inflation, which stands at 6.5% in Canada currently.

Calling property the ‘single best equity income vehicle in the market’, Orrico is convinced by the strength of Canadian real estate investment trust (Reits) which have shown they can deliver good returns regardless of high or low inflation.

‘We have some data that shows that over the past 20 years, during periods where we’ve got low inflation, Canadian Reits have done about 6%-7% annualised return. When you’ve had high inflation over that period, they’ve done 25%. In each situation they’ve outperformed,’ Orrico said. However, RioCan Reit, a top-10 holding at 3.5% of assets, is down 11.7% this year.

Middlefield’s shares have retreated 7.5% in the past month but remain 4% up this year which looks good against the halving in Baillie Gifford US Growth (USA ) and the 23% slides in US smaller companies trusts from JPMorgan (JUSC ) and Brown Advisory (BASC ).

Over five years, the shares have generated a total return of 56.8%, including dividends, which again stands up well to the performance of US-focused rivals. The shares trade 13.5% below net asset value, in line with their one-year average discount.

With gearing, or borrowing, at 17%, where it has been since late 2020, Orrico is optimistic that he can continue that longer run of performance.