Middlefield investors approve historic switch to ETF

The Saba-driven conversion will set a precedent for other troubled trusts considering the active ETF route.

Over half of Middlefield Canadian Income (MCT ) shares will be converted into an active exchange-traded fund (ETF) version of the trust in a first for the industry, with the remainder returned in cash.

A total of 52.7% of votes were cast in favour of MCT becoming the first closed-ended trust to convert into an ETF, and other boards considering a switch to the mutual market will no doubt be watching with interest.

The change was proposed after mounting pressure from activist shareholder Saba Capital, which owns a 29% stake in the trust.

MCT made an ‘irrevocable’ agreement with the US hedge fund owned by Boaz Weinstein that it would vote all its shares in favour of taking the cash exit, according to chair Michael Phair.

The new active ETF – valued at around £79.4m compared to the current size of £150m – is expected to launch on HANetf’s platform on 23 October following the approval of shareholders at an extraordinary general meeting tomorrow.

It will continue to be managed by Dean Orrico and Rob Lauzon at Middlefield but may not be an exact like-for-like version of the existing portfolio.

Phair said: ‘The investment policy of the ETF sub-fund will differ in some respects from the investment policy of the fund and may include the use of financial derivative instruments (FDI).

‘The use of FDIs by the ETF sub-fund will be subject to significantly higher maximum limits on leverage than the maximum gearing limits imposed by the fund.’

MCT’s new structure comes with a number of benefits – namely the removal of its discount, which regularly sat at double-digits in recent years after a bout of underperformance. Shares rose 120.2% over the past five years, lagging the S&P/TSX Composite High Dividend benchmark index’s return of 161.2% over the period.

There is also the added advantage of lower fees, which will be reduced from 1.3% to 0.9% under the new ETF model.

However, David Batchelor, senior fund analyst at QuotedData, questioned where these cost savings will come from. He expects much of the reduced fee will be a result of scrapping the board, meaning investors will ‘clearly have less protection’, which is ‘particularly relevant with such a novel development’.

Batchelor queried whether MCT’s conversion to an ETF was the best route out of the many alternative options at hand, but said its outcome will be a ‘good indication of whether the active ETF route is a potential one for other trusts to address their long-term discount problem’.

‘There are alternative routes that could have been taken, chiefly that the board of MCT could have instigated a robust discount control mechanism,’ he added.

‘However, clearly that boat has sailed, and we will therefore be left with a very interesting test case, which will be watched closely by investors and other funds which may be contemplating something similar.’