Big Broadcast: Middlefield – Warren Buffett is buying Canada, shouldn’t you?

Middlefield Canadian Income fund managers Dean Orrico and Rob Lauzon describe how Canada offers plenty of large, good value income stocks that are growing their dividends.

Don’t worry if you missed this week’s virtual event with Middlefield Canadian Income (MCT ) fund managers Dean Orrico and Rob Lauzon, you can watch the whole programme here!

In the one-hour broadcast, Orrico and Lauzon explain why Canada is an attractive market now with plenty of large, good value income stocks that are growing their dividends. While it has lagged the US growth market, that could be about to change as inflation falls and interest rates come off their peak but do not return to the near zero levels of recent years.

Warren Buffett’s announcement that he is looking at an investment in Canada, having sold some of his stake in Apple, has also helped to endorse the opportunity and strengthen the argument that investors should consider diversifying from the US.

Can’t watch now? Read the transcript! 

Gavin Lumsden:

Hello, welcome to ‘Why Dividend Rich Canada is About to Deliver’, a one-hour programme brought to you by Citywire and Middlefield Canadian Income investment trust. My name is Gavin Lumsden and with me in the studio are the managers of Middlefield Canadian Income, Dean Orrico and Rob Lauzon. Welcome to Citywire.

This is a great time to be talking about Canada. Just this month, Warran Buffett, the legendary US value investor revealed he was looking at an investment north of the border. This comes at a point when investors are looking at ways to diversify from global markets that have been dominated by US technology giants. Dean and Rob will shortly give a presentation on Canada and their investment trust, which last year, won a Citywire performance award in the North America equity sector. I’m then going to ask them a few questions and after that, it’s over to you for Q&A in the last section of the show.

That’s enough from me. Dean, Rob, are you ready to begin?

Dean Orrico:

Thanks, Gavin. Really appreciate you having us on today. We’re really here to give an overview of why we think Canada really is right for foreign investment. We think it represents an excellent diversifier for UK investors. As you’ll see in the presentation, we have a very similar market to what you have here in the UK in terms of size, but there are some real distinctions. 1) We are a neighbour to the world’s largest economy. Arguably the most resilient economy, in the US. About 70% to 80% of our exports go there. Secondly, we’ve got an abundance of natural resources.

We’re the fifth largest energy player in the world. Oil, natural gas, electricity and I think that really does create a very attractive environment for investors because I think we’re, today, in a very different environment from where we were a few years ago, with respect to the view on fossil fuels and the need for fossil fuels for this energy evolution over the next two to three decades. So, I think that’s some of the advantage investors have in this particular product. So as the slide suggests, this is a product that’s really focused on dividends.

Every company in our portfolio has initiated a dividend and in fact, is doing a really good job in growing their dividends and we’re passing that on to investors by way of higher distributions that we pay out on a quarter basis. Middlefield is an equity income investor. We don’t try to be all things to all people. About 2.5 billion in AUM [assets under management] and we have various strategies. Whether they’re diversified like this one is that we’re providing to UK investors or we’ve got dedicated real estate funds. Dedicated healthcare funds and infrastructure. So, my colleague, Rob, and I, are the co-managers of this fund.

Rob’s the lead manager for a very similar strategy in Canada that we’ve been running for 20-plus years that really is a very similar fund to what we’re providing here through Middlefield Canadian Income. So, this is right up our alley in terms of what we’re doing and we think we finally now have a tailwind versus a headwind because we’re in an environment now, where interest rates and inflation, although they’re coming down, will likely be higher than what you saw in the last four or five years.

Dividend focused

We are an active manager. So, we are not shy about deviating from a benchmark and as you’ll see in this presentation, we’ve got specific weightings in things like pipelines, energy producers and real estate, that are higher than our benchmark. We think that is really well-founded in the value that we’re seeing in those types of securities. As I alluded, we’re focused on companies that pay a dividend and when you go through our portfolio, you’ll see that virtually every company has the track record of growing their dividends over time. If you look at this over the long-term, companies that grow dividends actually have done a better job at generating better total returns over long periods and that’s clearly where we’re focused here on this fund.

So that’s why we call it as ‘dividends done differently’. We focus on companies that actually grow their dividends. We run a portfolio that I would describe as being a high conviction strategy. What does that mean? It’s not high concentration. High conviction being 30 to 40 companies in our portfolio, Middlefield Canadian Income is exactly that. Average weighting per company of about 3% and we run various types of risk metrics to ensure that we’re not making too big a bet on any one issuer. So here typically, companies would be no more than 5% or 6% of the portfolio. We’d start actually trimming those names once they get much above that.

At the lower end, you have to have enough conviction in a company to make it at least 1% of a portfolio. We know these management teams intimately. In fact, we just did a lunch here in London a couple of hours ago with the CEO of Enbridge, which has been one of our largest and longest standing holdings. This is a $100 billion market-cap energy pipeline gas distribution business throughout North America. We know these companies very well by virtue of knowing their management team so well. So that’s how we can really, we think, do a good job being a high conviction manager by knowing these companies the way we do.

So, Middlefield Canadian Income, just by way of a bit of background, it’s a North American focused fund that is really trying to deliver high levels and growing levels of income to investors. We’re different from our North American peers because we are the most Canadian focused. We always have to have a minimum 60% focused on Canadian companies. There have been times through the life of this fund, which was launched in 2006, where we’ve actually been 30%, 35% US. Today, we’re less than 10% US because of our conviction and what we think is this turning point on Canadian equities and the types of exposure that we have in this portfolio.

We have generated good performance since inception, just shy of 7% per annum. More challenged performance shorter-term because of the nature of energy and real estate in particular, which has been out of favour. Again, we think we’re at an inflection point, where that’s starting to turn. In terms of dividends to investors, we are paying 5.3 pence per annum. Pay that on a quarterly basis. We’ve actually grown that dividend in each of the last two years. We’re running a covered dividend on 2024. So, the board will decide later this year whether it’s warranted to increase the dividend again. That’s clearly what we’re managing to, as the manager of the fund.

Just a bit of background on myself and my partner, Rob. I joined Middlefield in 1996 as chief executive officer. Today I oversee the business, but I’m also actively involved in managing this portfolio. I was involved in the launch in 2006. Rob, our chief investment officer, is also involved in managing this fund alongside me. He also manages a number of our diversified and infrastructure strategies for our Canadian clients.

So why Canada? We get this question quite a bit because in fairness, Canada really has been a laggard versus the US market over the last decade or so. Clearly, we know UK investors are under-exposed to Canadian equities. When they think of North America, as I mentioned earlier, they really think of the US. They don’t really think of Canada. We think Canada’s got a number of attributes that people want to get exposure to. We’re a major resource country. Top five energy producer globally. We’re the largest net exporter of electricity in the world and we’ve got a growing population.

The total population of Canada is about 40 million people and in each of the last three years, we’ve brought in about 500,000 new permanent residents. Immigration. New permanent residents. So basically, more than 1% a year growth in population, just from permanent residents and we’ve actually got a pretty good points-based immigration programme. So, you’re more likely to get permanent residency in Canada if you’ve got a certain type of education. If you of a certain working age. As a result, about 60% come in under the economic class. There are people who actually contribute to the economy right away. That growth in population really is designed to fill the shortage of labour that we have in our country.

It also results in greater demand for Canadian products and services, as well as property. So overall we think that’s been a net benefit. Government is now taking some measures to control the amount of non-permanent residents coming into Canada.


Typically, international students and temporary foreign workers, which we think is probably warranted, given the demand on our infrastructure and housing. So overall, we think it’s become a more measured amount of immigration going forward.

Canada offers good value

In terms of the backdrop for Canadian equities, as you can see on the screen here, the Toronto Stock Exchange today, trades at about 15 times forward earnings and compare that to the S&P 500 at about 21 times. We don’t have a publicly listed tech sector. We’ve actually got a lot of tech workers and a lot of tech businesses in Canada, but they’re not listed on the Toronto stock exchange. So, we know the tech sector really is driving the S&P multiple higher. So, let’s exclude that from the S&P to make it a bit more analogous to Canada. The S&P still trades at about 18-and-a-half times forward earnings ex-tech. So, compare that to the 15 times in Canada, we’re a full three to four turns lower. Just shows you the value proposition.

When we think about Canada, we’ve all experienced this inflation over the past couple of years. Canada took its medicine early. We started raising rates more aggressively and earlier than the US or the UK and Europe. In fact, you’re now starting to see rates come off in Canada. So, we just printed a CPI [consumer prices index] in Canada yesterday at 2.7% versus 2.9% the month earlier. When you exclude the more volatile food and energy, it’s sub-2%. So, it’s basically locking in at least a 25-basis point cut this summer. Either in June or July and now it’s becoming more likely that it’ll happen in June. So as early as next month. Again, you’re not really seeing that anywhere else. The US is maybe September and based on your CPI here in the UK, that’s less likely now as well, relative to where it was a couple of days ago.

So, we think that’s going to unlock a lot of cash that’s sitting on the sidelines that we think has been sitting in relatively risk free 5% or 6% savings accounts, that was otherwise in the market. We think that now comes into some of the companies that we own. Interest sensitive utilities, interest sensitive real estate and even some of the higher yielding pipelines in our portfolio. So, we think this is a net positive, especially when you take that with the type of valuation you’re getting in the market. You’re not only getting good yields, but we think real upside and rerating potential over time.

So, we talk about earnings and again, it’s one thing to say low valuations, but the other side of the coin is that, are they reflective of lower earnings? In Canada we’re actually seeing an earnings pickup. So, as we show on this slide, we’re seeing EPS [earnings per share] growth expectations of about 15%, 20% just over the next two years. So, the companies that we own, whether they be energy, whether they be our financials, whether they be real estate, which Rob’s going to talk about in more detail, the earnings profile is actually really accelerating here. You’re getting that with relatively low valuations. I think this whole interest rate yield phenomena rolling over, is now going to become a catalyst for a rerating in these types of securities.

This is a really interesting slide because it shows the periods where Canada has outperformed global equities. It typically is during a period where inflation is actually higher than it was during that 2010, 2020 time period. It’s also been more successful to be investing in Canadian equities when commodities were on the upswing. Again, I think that’s exactly what’s happening here as well. I think the view on energy in particular, fossil fuels, has changed. The market was all focused on renewables and I think that really turned 180 degrees when Russia went into Ukraine and people realised and investors realised that we couldn’t rely on cheap gas from Russia anymore. That we needed to find other, more secure, stable sources of fossil fuels and natural gas, in particular.

We think Canada, given that we’re a major supplier of gas, a 300-year reserve life of natural gas, that this is really going to become much more in favour and Rob will talk about this in more detail in a few minutes. So, when we think about why is Canada about to outperform? We’re thinking about the inflation rate. We’re now seeing inflation coming down, but you’re not seeing inflation going back to zero. Correspondingly, interest rates coming down, but you’re not going to see interest rates go back to zero any time soon. So, I think that really sets itself up well for what we do in Canada and what we produce in Canada and what we own in this portfolio.

So, the catalyst that we’re seeing here for investors and why they want to own Middlefield Canadian Income. 1) Valuations. 2) Fundamentals. Rob will talk about that in more detail. 3) Some of the more economic tailwinds. Specifically, this reduction in inflation and interest rates that are going to be higher for longer, but not as high as they were over the last 18 months or so. Where we’re focused in our portfolios in energy, where we’ve got 32%-34% between producers. Turn it over to Rob.

Rob Lauzon:

Energy, real estate and financials

Let me focus on the three cornerstones of our portfolio currently, which is energy, real estate, and financials. To Dean’s point, valuation is attractive in all three categories. On Canadian energy, the slide that’s in front of you, on the right-hand side you see a chart with three lines. The blue is valuation, the grey is debt and the red is profitability. So, if I didn’t have the word ‘energy’ on it and I said this is a sector we’d like to invest in. Debt’s low, valuation’s low. Return on equity is high. Any investor is going to say, yes, give me some allocation to that. Over the last five years and even a decade, there’s been a bit of a grey cloud over energy. Really, all funds flow moved towards clean energy. Renewables, wind and solar.

The pendulum has now swung back, as Dean mentioned. Some of the geopolitical events has caused it, but we’re taking a more realistic approach to when I plug my iPhone in or whether I have an electric car, I want it to work and I want it to work now. So, I need realistic base load, always on power and that gets you back to fossil fuels. Natural gas being the cleanest way to power and yes, definitely displacing coal worldwide is going to be a great thing for climate. Canada and this portfolio in particular, has multiple ways to invest in natural gas. Not only the gas producers that take natural gas out of the ground, are going to be benefiting from higher gas prices and longevity on their business, but the gas pipelines which move that molecule around North America, we own in the portfolio.

They then liquify it, put it on a ship and either send it to Europe and the UK from the Gulf of Mexico or early 2025, so we’re less than a year away, that Canada’s finally going to have its first L&G facility, moving liquified natural gas from Alberta, Canada and British Columbia, Canada, to Malaysia, Japan, Korea, to help power their needs. So, the nice thing about how we run this fund, MCT, is we want income and growth. Energy provides both of those. So, the energy companies that we’ve been investing in, have been consciously paying down their debt, allocating more returns to shareholders. Growing their dividend. Doing share buybacks and what really generates money for these companies is obviously, the commodity price. $75 to $80 is Goldilocks for these companies. Where $120 oil, people change their habits and you might have demand destruction.

$30 oil. The Saudis don’t want it there. Nor is anyone profitable. So, we’re really in the sweet spot where companies can be profitable. It’s not jamming the consumer too much and it’s business as usual. Then on the natural gas side, that’s where we’re really excited in this portfolio because again, we’re owning the producers, we’re owning the gas pipelines and the gas distribution companies that actually bring it to your house, the hospital, the school where you can plug in and run datacentres. You can run your iPhones. You can light your stove and it’s always on. So, we’re quite excited about our exposure to energy in this portfolio. We’re getting diversification within energy and we’re getting exactly what this portfolio wants. Make sure of growth to grow the NAV [net asset value] of the portfolio, as well as dividends.

Second, Canadian real estate. Now, globally real estate long-term, has been a great place to invest. It’s an inflation hedge. Typically, there’s less supply than a growing population and demand. So real estate prices generally, people’s homes have generally gone up over time.


When you look at the sector, the publicly traded Reits [real estate investment trusts], quite an attractive asset class over time, except for the last two years they’ve been underperformers. Low and behold, we’ve had one of the biggest rate increase cycles we’ve seen almost from-, well, we had negative rates over here and in Europe and the UK and basically, in the States we’ve gone from 1% rates to 5% rates over 18 months. So that vicious cycle of rate increases has put all bond proxy equities in real estate, which have embedded leverage into them, into the category of fund outflows.

Worrying about levels of debt. On top of that, the pandemic, people working from home, two categories went into the crosshairs of investors of we don’t know what the future’s going to be, which is office and shopping malls. Now, our portfolio, in Canada there is no publicly traded shopping malls generally. The pension funds own them all. So, we don’t invest in them. In general, the office, we’ve moved to the sidelines during the pandemic and have not been back to the office category. There’re five areas in real estate that the fundamentals have been great, all throughout this cloudy period. Where companies keep putting out solid numbers and some of them bumping their dividends, but the market has really not cared.

So, we are overweight real estate in this portfolio. Our benchmark is 6% real estate exposure and as Dean mentioned, we’re agnostic on benchmarks. We want to go where the puck’s going and we think real estate is about to inflect, given is got great fundamentals. Rates are coming down in Canada, which should bring fund flows back into the sector. So, we’re over 20% allocated to Reits in this portfolio. We’re making a cognisant effort here that we think that’s going to help drive performance in latter 2025. 2024, 2025 and 2026, the next two and a half years. As you can see, there’s five subcategories here that should benefit from this rotation out of cashable deposit-based instruments that earning that high rate of interest right now in Canada.

Again, as Dean mentioned, bank accounts you can get 4%, 5%, 6% by just putting in deposits. Once that Bank of Canada rate starts coming down, we think the path will be from 5% down to 3.5% by the end of 2025. So that’s going to affect savers and they’re going to be switching that back to where they were with that cash three years ago, into real estate, for example. So industrial Reits are the ones you would see buy an airport. Warehousing. FedEx terminals. Amazon. The great thing about Canada and where we invest, is most of our population is really in five major cities very close to the US border. When you look at where the major population centres are, they’re really islands.

Montreal is on an island. Toronto, if anyone’s visited, on the south is Lake Ontario. On the north is the largest green belt in the developed world, where you can’t develop any type of real estate. So, you’re landlocked. So, there’s limited supply. So as population grows, as urbanisation and onshoring, more manufacturing comes to North America, you’ve got to do that business somewhere and if there’s very little new builds, landlords can charge more rent for industrial properties. For logistics and warehousing. Same with multifamily. We love the apartments in Canada. Immigration has brought a couple million people into Canada over the last few years. Everyone needs that necessity of a roof over their head.

So, we own the apartment Reits. There are rent controls in Canada. You’re allowed to raise rates on your rent on a yearly basis, with inflation, but raising rate 3%, but if you’ve been in a lease for four or five years, you’re still much below market value. So as much as the headlines, people complain about the rent costs going up, there’s a good cohort of renters in Canada getting very good value on the money that they’re spending on their rent. If they were to leave, whether it’s marriage, whether it’s moving away for a different university somewhere else, the landlord’s able to go to market with that rent. Again, there could be a 20% uplift if they’re getting $1,800 a month and they should be getting $2,100. That’s an uplift. That’s some natural progression on revenue for the REITs that we own in the multifamily.

So, both industrial and multifamily have that trend as new tenants actually pay more than the old tenant. So, it’s a good thing, we like to see some turnover in those portfolios. We like retail. We’re not all-in on shopping malls, as I mentioned, but we like necessity-based retail. If you’ve got an openair centre that you’ve got the grocery store that everyone’s going to once a week. You’ve got the Boots or the pharmacy that you go to. They’re paying their rents and the Reits. The landlords are getting inflation protection on those rents. So again, demand is higher than supply for necessity-based retail and the groceries. So that’s another area that these Reits are trading at a 20% discount to NAV. That’s appropriate if you’re in a recession or you’ve got a lot of headwinds on your business.

All of these Reit subsectors are putting up good fundamentals and there’s no reason that they should be not trading closer to NAV, except for the narrative and the interest rates. So once that starts to come off the boil over the next 18 months, you’ve got a natural movement towards net asset values of these companies. We also own datacentres from time-to-time in this portfolio. Specialised Reits. Even on the healthcare side, similar to apartments, retirement homes are getting occupancy back to pre-pandemic levels. So, there’s earnings growth that we’re seeing with the aging population in Canada, for our retirement homes. So, a real overweight, consciously by us, on real estate and I think investors are going to see the fruition as our thesis plays out over the next couple of years.

Finally, on financials. Really, Canada offers stable banks and life insurance companies. Why we really like them currently. Yes, they’re always-, they’re highly regulated so they might not grow as quick as other financials around the world. What you find is, you typically don’t have problems in Canadian financials. Great Financial Crisis, we didn’t have dividend cuts. We didn’t have any bankruptcies. The regional bank crisis in the United States a couple of years ago. We were unscathed there. We haven’t cut dividends since World War II for our banks and they’re attractively valued. They’re trading about 10% or 15% below where they typically trade.

Again, we’re on an inflection point on earnings in Canada, where the banks, which also own wealth management business, equity capital markets business. Debt businesses and that’s alongside their normal lending business, as rates come down, stock markets are near all-time highs. There’s going to be more IPOs. There’s going to be more M&A that they’re earning fees on and when rates start to come down in Canada, there’s going to be less competition for deposits. So finally, you’re going to have a yield curve for the banks, that helps them make a lot of money where their interest margins will go up. Where you’ll have an upward sloping yield curve where they’re finally paying less on deposits than they are on mortgages and they’ll be able to earn a pretty interesting margin expansion there.

So, we like the financials as a cornerstone of this portfolio. The life insurance companies are becoming more profitable. With their Canadian life cos and banks, we’re getting some indirect diversification. Some of our favourite banks are the Royal Bank, Bank of Montreal. Have done acquisitions in the United States. Manulife is big in Japan, Hong Kong. So, they’re doing business in other areas of the world to give us some inherent diversification, even though we’re still collecting their growing Canadian dividend.

So finally, just in summary for your viewers. We are sitting in front of you now, with probably the best entry point into Canadian dividend income that we’ve seen. It’s really because we think we are months or weeks away from the first G7 nation to start cutting interest rates. Once they start to cut, the cycle will begin. We’re not going back, as we mentioned, to where we were where global rates were negative or zero, but probably halfway back down to the old normal when 20 years ago and 25 years ago when Dean and I entered Middlefield, the ten-year bond was 3.5%. Overnight rates were 2.5%, 3%. That’s the old normal and our companies, many of which we still own from 20 years ago, were growing their dividend, growing their business.

So, we’re going back to the old normal environment. So, we’ve got a positive economic outlook for Canada, with rates coming down. Solid company fundamentals. Dean and I were talking on the plane over and discussing, we don’t have any problems in our portfolio.


There’s not one company [marker 30:00] that we’re on a view we’ve got three things to worry about, three things that I really like. We are really excited about every company we have in the portfolio. The valuations are cheaper than we’ve seen in the past. We’ve got a good entry point and again, most of the companies we’ve talked to, they’ve all been on earnings calls recently. Intend to continue what’s been in their DNA and our DNA, of growing their dividend and that’s what we do for our investors here in MCT.

Is provide income first and foremost. 5% dividend yield is approximately what we’re yielding now in the market and hopefully over time, we can continue to grow that dividend and pass on capital appreciation within the NAV of the portfolio as well. So, with that, hopefully the story, Gavin.

Is Buffett a big endorsement?

Gavin Lumsden:

Rob, Dean, great overview. Thanks very much. I’m going to ask the guys a few questions as I said, but do send in some of your own questions so we can get round to them shortly. Thank you. Dean, let’s got back to Warren Buffett. He’s got Berkshire Hathaway, his company. He’s got $180 billion cash pile I was reading and he’s looking at putting some of it in Canada. How much of an endorsement of what you’re talking about is represented in that report?

Dean Orrico:

I think it’s not surprising, to be honest. When you think about Berkshire Hathaway and the types of investments it’s made over time, it’s a value investor and as we’ve just shown on the slides, I think you’re seeing exceptional value in Canada. Warren made it clear in his commentary at the AGM a few weeks ago, that they understand the Canadian market. They recognise it’s a good place to do business. So, when you think about some of the things Canada does very well, whether it’s energy infrastructure. I mentioned Enbridge earlier.

That’s an ideal type of opportunity for a company like Berkshire Hathaway because it’s undervalued. It’s well capitalised. It’s well run. So, when you see Berkshire basically selling some positions like Apple and recycling it to other areas, we think Canada’s a natural place. It’s probably not a coincidence that the next CEO of Berkshire Hathaway, a fellow by the name of Greg Able is Canadian. Actually, from Alberta. So, he understands the energy business very well. So, I wouldn’t be surprised, although time will tell-.

Gavin Lumsden:

They already own an energy business in Canada. Berkshire Hathaway Canadian Energy.

Dean Orrico:

That’s correct. So, they’ve already got some exposure, but they’re clearly looking at furthering that exposure, just given the type of opportunity you’re seeing in the Canadian market today.

Gavin Lumsden:

You think there could be more smart money to follow. It’s the smart thing to do. I’m really struck, actually, by the comparisons between the Canadian market you’re describing, and the UK. We’re slightly old-model, old-world. Lots of financials and banks and energy companies. Have you suffered the same kinds of outflows investors investing globally, shying away from the domestic market? Has that been a trend in Canada?

Dean Orrico:

Our pension funds over the last 20 years, have clearly started to look at infrastructure investments outside of Canada because that’s where the opportunities are. So, they’re looking to get outside of just normal Canadian public equities and move outside of Canada. So that’s certainly been a pattern. Again, when you think about what’s been happening in the US market with technology and growth, again, another reason to actually look outside of Canada. I think that tide is starting to turn the other way. So, you’re seeing some comments out of Berkshire Hathaway.

Just in the past few months you’ve seen Blackstone make a major investment. Bart, one of our Canadian residential Reits, an area that we really like at $4 billion. It announced that acquisition. Paid a 30% premium to the previous day’s trading price. TPG, another major private equity player just put a billion and a half dollars in Canadian industrial properties in and around the GTA. So short answer is yes, you’re starting to see the smart money come into the market. As we’d like to say, they’re not waiting for the all clear. They realise that rates are moving in the right direction. Valuations are there, so they’re starting to take action.

Growth versus value

Gavin Lumsden:

You’re sounding pretty confident the style headwinds that have been running against your more cyclical and value style portfolio should recede with interest rates coming down. Are interest rate cuts also good for growth investors are well?

Dean Orrico:

They are. So clearly, when you think about growth stocks, they’re typically long duration equities. When rates come down that makes those more valuable. I think it’s important to take a step back and say there’s money that’s moved onto the sidelines. So, Rob showed a chart there, that showed all this cash sitting on the sidelines. In the US there’s $6 trillion in money market funds. I think investors who’ve been looking for growth stocks, they’ve been buying growth stocks.

You’ve seen what’s been happening in the NVidias of the world. Investors who were looking for income, ie, equity income, they’ve basically been sitting in 5% cash savings accounts. That’s the money we think comes back into the market. It’s already been in growth stocks and I think that’s what migrates into the types of names that we own in this portfolio.

Gavin Lumsden:

I was intrigued. Obviously, it’s an equity income portfolio, but does the portfolio have any direct or indirect artificial intelligence plays? In your annual report you cited that one upside for cheap utilities was a higher demand for electricity from AI and decarbonisation.

Rob Lauzon:

We’ve got two directs and a handful of indirect. So, the directs would be Brookfield Infrastructure Partners. It’s a diversified publicly traded entity that has direct investment in datacentres. So, their growth is definitely building out more datacentres driven by the AI demand. Earlier this year, we did add a position in Alphabet, in Google. 1) We surmised that they were close to following Meta’s lead in initiating a dividend, which they did last month. So that’s important for the fund and obviously, it’s a small dividend, but it’s going to be a growing dividend. Google basically is the internet. They are the infrastructure of the internet.

With that, they have developed such a large database from us, you can follow me, listen to me, watch me, but with all of that data, with all of their engineers they’re able to create quite a valuable AI platform, which they’re just starting to rollout. We remember a few weeks ago or a month ago, when they started rolling it out, there were some hiccups. That pullback in the stock was what got us into it. Indirect ways is really the gas distribution because powering datacentres, you need them to be always on. If you did a simple Google search, you’re suing X amount of power. If you do that same search through ChatGPT using AI and using the datacentres, you’re using ten times the amount of power.

So, the pull in the demand for power because of AI is going to grow. There’s lots of debate whether it’s 1% or 3% a year of increased power demand and the grid’s pretty big in the United States. How do you get baseload power?  Well, it’s hard to build more nuclear. Takes 12 years to build a new nuclear plant, but you can bring on gas, new gas in two to three years and there’s lot of current gas out there providing grid. So, as we mentioned, we own gas producers, we own the gas pipelines that will be moving around more volume and the gas utilities in Enbridge and AltaGas, which actually connect to the datacentres, the schools, the hospitals, the homes.

Then we own a renewable company that builds out the wind and solar because these datacentres and AI like to have a mixture of baseload, so they’re always on. Then also, 10% or 15% of the power, when it’s sunny, when it’s windy, powered by zero emissions. So, it’s the way we’ve got some exposure to it and there’s been a lot of hype on that sector in the last two months or so and we’re starting to see some of these stocks reflect a bit higher valuation because of the growth potential.

More about pipelines

Gavin Lumsden:

You’ve mentioned Enbridge. You’ve mentioned pipelines a couple of times. That’s really a sector that we don’t have in the UK. Would you like to say a bit more about how do those businesses work, how do they get paid?

Rob Lauzon:

Yes, they’re really a utility. They’re really like a railroad or a tolling agreement. They don’t want to take the risk of deciding where to put something in the ground or pull-out gas or oil. Try to market it. What they will do is, they’ll go and contract with the highest investment grade producers of the commodity. Get a contract and hopefully, a ten-year contract to then move that product to the end-consumer. An integrated pipeline will actually have, as AltaGas and Enbridge have, is the end distributions. Some of the pipelines then sell to a refinery, for example. So essentially, you’re trying to create exposure to energy, to volumes, without the price risk and without the volatility.

So, it’s really like moving goods along a line, like a railroad. You’re moving hydrocarbons, but you’re insulating the volatility and locking in a 10% rate of return. So, you’re not going to double your money every year in these, but if you put them in a drawer and forget about them, every seven years you should be able to double your money because they have ROEs of about 10% a year and they all pay high levels of dividends back to shareholders.


Dean Orrico:

At a high level.  What is Enbridge?  As Rob described it, it basically is moving hydrocarbons throughout North America. So, it represents 25% of the moving of liquids or oil from Canada to the US. 25% of the US oil production is actually moving through Enbridge’s pipelines. 20% of natural gas consumed in the US is moving through Enbridge’s pipelines. It actually provides natural gas to about four million Canadian homes and soon to be three million US homes. We also talked about L&G. About 15% of the natural gas that’s going into the L&G facilities on the Gulf of Mexico is actually moving through Enbridge pipelines.  So, it’s an integral infrastructure play that we really can’t live without. Its assets are really irreplaceable. That’s why we love the business.

What benchmark do you use?

Gavin Lumsden:

Impressive. Can I ask you a couple of technical questions about the trust? Just for the benefit of people who might be doing some more research afterwards. Can you clarify what benchmark you use to measure your performance because there appears to have been a change over the years and your factsheet refers to the TSX Composite and, also, the benchmark.

Dean Orrico:

We have the broader TSX Composite in Canada, which really is representative of the whole market. Then there’s also a more nuanced high dividend index in Canada that really represents the top 75 yielding stocks in the Canadian market. So, we really look at both of those as our benchmark, generally speaking. In fact, we were involved with S&P, to actually create that high dividend index. It’s market cap weighted. So, as we mentioned, when you think about the high dividend index in Canada, because the banks are so large, they’re a disproportionate share of that index.  Whereas Reits, which we really like in this market, are only 5% or 6% of that index.

Do you hedge the currency?

Gavin Lumsden:

In terms of currency, the fund used to be hedged up to 2011. Long time ago now. Can you comment on what that change was about and give some historical context on the pound versus the Canadian Dollar?

Dean Orrico:

You’re right, when we launched the fund in 2006, we actually had a structure that embedded a currency hedge in it and that structure was unwound for tax reasons in 2011, 2012. After which, we actually went unhedged. On an ongoing basis, Rob and I meet with our investors at least twice a year, some of our key investors and we ask them, do you prefer to have it hedged or unhedged?  They actually on balance, prefer an unhedged exposure. They say, if we’re going to buy your fund, we want exposure to Canada, we want exposure to the currency.

To the second part of your question, when you look at how has CAD done versus GDP, we’re effectively right in the long-term range, at about 1.7, 1.72 times. So, we’re really quite there. So, at the end of the day, we’re finding very few investors who are preferring a hedge. Obviously, we’ll respond to the needs of investors, but right now they’re saying, we prefer it unhedged.

Does high gearing mean you’re confident?

Gavin Lumsden:

Can you explain your approach to gearing, the borrowing that investment companies like yourselves can use to enhance the amount you’re investing in the stock market? It was cut to 13.5% at the end of last year from an average of 19.5%. then it’s back up again, I think, at 21.5%. Seems quite punchy. Is that an expression of your confidence?

Rob Lauzon:

Yes. That’s really a good way of putting it. You can look at our gearing and the amount of it, based on our bullishness in the market. We’ll toggle from zero, 5% gearing to typically, 20% at the high end. As you noted, we’re close to 20% currently, which shows how bullish we are on our stocks in the portfolio. We want pretty much maximum exposure to what we see coming here for the fund. Another tailwind we’ll get is, we borrow short. Typically, 30-day paper. So, every 30 days it rolls over. So as rates start to come down in June, hopefully, July maybe we’ll get one more.

So, three times this year our borrowing costs are going to come down and we’re not locking in that rate because we think it’s coming down. So that’s going to be a small tailwind on our income statement, provide free of cash for potential distributions, invest back into the market. So, two tailwinds. 1) We like the general market. We’re okay being levered up right now and we actually find it from an income, cash-in, cash-out should finally provide a tailwind on the fund.

Are Canadian Reits receiving bids?

Gavin Lumsden:

Time to turn to some questions from the viewers. Prospect of falling interest rates should help those real estate investment trusts. You’ve touched on this a bit already, but Tim Vernon is interested to know a bit more about the M&A, the bids that might be going on in that sector in Canada because as you pointed out, ‘In the UK, a number of Reits are considering or entering wind down. Given Middlefield’s holding in property, could you talk about corporate activities for the Canadian Reits?”

Dean Orrico:

In the last six months we’ve now started to see some takeover activity and some significant investments in our Canadian Reits and if you really go back over the last five years, it’s been bittersweet because Blackstone, which has deep pockets, one of the world’s largest private investors of real estate, has actually taken out at least three of our REITs over that time period. Then in January of this year, they just acquired Tricon Residential, which is a multifamily REIT, as well as single family homes in the US, but domiciled in Canada, with a lot of Canadian assets.

That acquisition was about $3.5 billion and as I alluded earlier, the price paid by Blackstone was almost a 30% premium to the previous day’s trading price. Just about a month before that, TPG, a large private equity player made about a billion three investment into industrial properties in the greater Toronto market. I think this is relevant, Gavin, because when we look at NAVs and we say they’re trading at a 15% or 20% discount to NAV, I think the question a good investor should be asking is, is that NAV real?  Is it right or is the market telling you something?

What we’ve seen through these private market transactions and there’ve been others that have been a little smaller than the Blackstone and TPG deals, in fact it’s validating the NAVs being reported by the Reits that we own. So, I think that’s not only healthy from a NAV perspective, it’s also healthy from a perspective of recycling capital. M&A activity is always healthy because it validates prices, it validates valuations. It also provides more capital to go into the market. For example, we were a big investor in Tricon Residential. It allowed us to recycle capital into other names that we like, specifically in the multifamily space.

Is your dividend covered?

Gavin Lumsden:

Andrew Moffat wants to ask about your income generation proposition. You offer a 5% yield, but he’s asked, ‘Please tell us about your debt profile and the coupons and what are your dividend reserves? To what degree is the dividend covered by revenues?’

Dean Orrico:

We don’t have any dividend reserves. Over the last few years, we’re been running a cover dividend. In fact, that’s resulted in the board deciding to actually bump the dividend. So, we bumped it by 0.1 pence in January of 2023. We bumped it by another 0.1 pence to a total of 5.3 pence per annum in January of 2024. We’re running a cover dividend again this year. We’ll probably add somewhere in that 105% to 112% dividend coverage. That’s in the face of higher interest rates. So, we’ve got some gearing in the portfolio, as Rob discussed. So, we’re even able to have a cover dividend in the face of higher interest rates.

So, if this plays out the way we think it will, that rates are starting to come down, that’s going to provide even more dividend coverage over time. So, I think the board will certainly take that into consideration when it reviews what to do with the dividend at the end of this year.

Do you hold illiquid assets?

Gavin Lumsden:

You’re a large company investor, public equities. Justin Clark’s asking if you have significant exposure to illiquid assets. So, I guess that could be either smaller companies or unquoted companies?

Dean Orrico:

Yes, I’ll make a couple of comments. Rob can add here. At Middlefield we’re definitely a high conviction manager, but we’re focused on quality. What usually goes hand-in-hand with quality is liquidity. So, we’ve got various risk tools that we implement across all of our strategies, including MCT. One of which is determining how quickly can we liquidate a security in the portfolio if, for whatever reason, there’s an impairment and we decide we want to tell it?  We do this on a weekly basis. The most recent measure says that if we represented 30% of the average daily trading volume of a particular stock, it would take us a maximum of two days to liquidate the most illiquid position of the portfolio. Most of them can be done certainly within an hour.

What’s happening in Canada’s politics?

Gavin Lumsden:

So, the answer is no, not many illiquids. We haven’t talked about politics yet. Interesting to hear that you’ve got this skilled worker immigration going on and it’s positive for real estates, but is there any political impact? Any downside in terms of populism or nationalism?

Dean Orrico:

In my view, don’t get me going on this, but we’re really not seeing any populism or nationalism in Canada. We’re quite different than the US in that we’re a very multicultural [marker 50:00] society. Canada was basically built on immigrants. So, from that perspective, very similar to the US, but the US is certainly more of a melting pot. Whereas we actually encourage this multiculturalism. From that perspective, there’s really been no issues. Having said that, when you’re talking about 500,000 new permanent residents in any year and then on top of that, you’re seeing non-permanent residents come in as well.

Temporary foreign workers or international students, that’s actually creating a bit of a challenge to our infrastructure, to our healthcare services. So, what the Federal government has done more recently is actually, they’re bringing that non-permanent resident quota down. They’re keeping the 500,000 in permanent residents. So, the question is, what impact is that going to have on our portfolio? So, people think the apartment Reits may be impacted by that. There might be less demand. Let me square that for people. We’ve got a shortage of housing in Canada.

The last estimate by the Federal government was that we need to build somewhere between three and four million new homes between now and 2030, just to bring supply in balance with demand, i.e., to restore affordability. The reality is, we produce at most, 250,000 home a year. This year we’ll produce closer to 200,000 homes. So, the thought of restoring affordability, bringing supply and demand into balance over the next six years is not going to happen. So even though we’re going to see a reduction in non-permanent residents, the reality is the apartment REITs continue to be really well positioned.

Gavin Lumsden:

Sticking with politics, Canada’s got an election next year. What’s going on and how are you preparing for it?

Rob Lauzon:

It looks like the polls right now, the current government’s been in power for almost nine years. Sometimes longevity is what gets you out of power. People want change and we’ve seen that with other regimes across the world. I think because of what’s happened on inflation the last couple of years, consumers, voters are just looking for change and maybe some more probusiness policy. So right now, the Conservatives have a 20% lead, 20-point lead in the polls. So very good chance we have a change. We’ve had Liberal governments. We’ve had Conservative governments the last 20-something years I’ve been managing money and stocks have done well with both parties.

We suspect pro-business policies, especially for our natural resource side of the economy and getting those products, whether it’s fertiliser, whether it’s uranium, whether it’s natural gas, whether it’s oil, electricity, export it to earn proper taxation, proper revenues for the good of the country. So, where it stands now, it looks like a change of government, but a lot can happen in the next 16 months or so. The next election’s probably not until the fall of 2025. It’s some way off. 

What about the US election?

Gavin Lumsden:

Closer to hand of course, is the US presidential election. So how are you viewing the Biden versus Trump rerun?

Dean Orrico:

It is interesting and I think at this point we’re probably too early to say in terms of which was it’s going to go. It is a binary decision, at least as we sit here today. Assuming both of these guys survive until the election. You know, clearly when Trump was President in 2016 to 2020, I think you can look back on that period and say that there were probably a lot of good policy measures put in place and the war started during that period. The other side of it with Trump is that clearly, he’s a very unpredictable person. Then with respect to Biden, the reality is Canada’s continued to operate fairly well over time.

One could argue that Biden is less business friendly, but the reality is, our oil and gas out of Canada, out commodities coming out of Canada have flowed into the US market on an unimpeded basis during the Biden administration. So, on balance, I think we’re pretty indifferent. Is it possible that if Trump wins could he open up some tariffs with Canada or whatever the case may be?  The reality is, we already went through a pretty painful renegotiation of our free trade agreement between the US, Canada, and Mexico during the first Trump administration. So hopefully that’s now behind us and settled, so we don’t have to revisit that.

Big infrastructure projects

Gavin Lumsden:

Could we talk a bit more about the two major infrastructure projects that you flagged up in your annual report? The Trans Mountain pipeline and L&G Canada.

Rob Lauzon:

So Trans Mountain pipeline, there’s an expansion that just finished. Very high-cost overruns to get it finished. Delays of many years. In fact, the government actually had to buy it and control and that’s why it caused a lot of cost overruns. The point is, it’s now finished and sometime in the next few weeks we’re going to get our first oil onto ships from the expansion part of this pipeline over to refineries in Asia. Essentially, Canada produces about four million barrels of oil a day. The current pipeline is about 300,000 barrels a day. The expansion portion’s about 600,000.

So, the total size of this pipeline now is about 900,000 barrels a day. So almost 25% of our overall production. It’s going west from where we produce oil in Alberta, to the west coast of Canada. So, the main implication is 1) higher revenues for the country because they make royalties on oil sold. 2) It should narrow the differential that Canadian producers receive for their oil versus global markets. That’s all transportation costs and the further you’re away from the burn tip and end-user, the lower price you’re going to get.

So, in Texas, TWI pricing let’s say is $80, over the years our differential, our discount has been $15 to $20. So, our producers have typically got, in that environment, $60 to $65 US for their barrels. The discount is now $10. So, the discount has tightened because we’re not sending all of our oil down to Texas anymore and the Gulf of Mexico. We’ve got a new outlet. So, more egress, more places to send our oil. We’ve got more competition for it. So pricing is actually higher for our oil producers and that’s a good thing.

On the natural gas side, same thing. We will access global markets. We’re going to access global pricing with our natural gas. Currently we’re landlocked to North America. Furthest from the burn tip so we’re getting the worst prices in North America for our bast natural gas. That’s about to change. L&G Canada is going to be shipping two-billion-cubic feet a day off the west coast of Canada again, to Asia, starting in about eight months. That should get us global pricing so, that should double the price that we’re currently getting for our producers.

So again, very strong for the Canadian economy, for revenue, but also for the producers and some of the infrastructure because they get paid on every molecule that flows by. So, there’s going to be more oil and gas moving around Canada. So great for our pipelines and great for our producers of those two commodities.

What is the cost of investing in your trust?

Gavin Lumsden:

Sounds like it will be worth the wait. One last question from the audience. ‘What is the cost of investing in your trust?’ I’m going to add another one on. You mentioned discounts. What do you do about controlling the discount on your own share price?

Dean Orrico:

So, the cost is about 1.25%, 1.3% or so. Our management fee is 70 basis points and then there’s some additional costs above that. Clearly, as we grow the size of the fund, that cost comes down because there’s a significant fixed cost component to that. In terms of controlling the discount, the board is always reviewing the need for a buyback. We’re a smaller trust. So as a result, when you start buying back stock, it could in fact exacerbate the problem because it actually shrinks the size. Even though it’s accretive because you’re buying back at a discount.

So really, in response to some of those needs, I’ve been personally buying more stock. I do have skin in the game and in fact, even in the last 12 months I’ve bought an additional 120,000 shares. The investment management Middlefield Ltd, has bought an additional 60 or 70,000 shares as well. So, we do see it as great value and we’re putting out money to work.

Gavin Lumsden:

The shares are at about 13% below the net asset value. So that’s a good buying opportunity.

Dean Orrico:

It really is.         

Gavin Lumsden:

Let’s leave it there, gentlemen. Thanks very much for your time, it’s been very interesting. In the meantime, that’s it for today. Thank you for watching and sending your questions in. Please do fill in the feedback when the session ends. Thank you for taking part and until next time-, look out for further programmes from us, but until next time goodbye and happy investing.

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