Compass - September 2021
As the summer of sport continues, what are Japan’s prospects on the eve of the Olympics?
By Annabel Brodie-Smith
I hope you have had a lovely summer. Our staycation was made much more exciting by two new additions to the family. Sherlock, the boisterous and bouncy puppy, rescued from Hungary and Moriarty, the eight-week-old silver tabby kitten. They are keeping me very busy and my step count has gone through the roof!
It’s back to school for the boys and my youngest son, Fabian is now at secondary school – very grown up. And it’s back to school for us! Yes I am writing this from the office (sadly no pets allowed). It’s day three back in the City. It’s been quite a shock to the system (up at 6am, season ticket, heels) but it’s lovely to see my colleagues again. We are now hybrid working – three days a week in the office and two from home.
We also have a new Chief Executive joining the AIC on Monday, Richard Stone. Previously Richard worked at the Share Centre platform and is sure to bring a fresh perspective to the industry. That means we’re saying goodbye to Ian Sayers and we wish him all the best for the future.
This summer has been dominated by US private equity takeovers of UK listed companies. With the bid for Morrisons now going to an auction and Ultra Electronics making headlines, we thought it would be interesting to find out investment company managers’ views on private equity’s activity in the UK markets.
Is it an opportunity or a threat and what can investors do to benefit from this trend? The views of James Henderson, Co-Portfolio Manager of Lowland Investment Company, Henderson Opportunities Trust and Law Debenture make interesting reading: “if sound companies are taken over at low valuations it is detrimental to long-term returns from the quoted sector so, in my view, it’s important the current owners of these companies don't allow this happen.”
On a more sombre topic, I’m sure you are aware that tomorrow is the 20th anniversary of the horrific September 11 terrorist attacks. In his piece, Ian Cowie focuses on the geopolitical and economic context of these tragic events. He also examines the 42 investment companies which have become ‘ten baggers’ since September 11, 2001, growing an investment of £1,000 at the time to more than £10,000 today.
The key investment themes of technology, Asia and smaller and medium-sized companies come though clearly in the 42 best-performing investment companies. The top performer, Scottish Mortgage combines all three of these themes with a current value of £28,786 on £1,000 invested at the time of 9/11. It’s an uncertain and unpredictable world (the financial crisis, the pandemic…) but Ian believes: “the evidence of the past provides investment companies’ shareholders with some grounds for cautious optimism.”
The AIC’s Flexible Investment sector includes well-known investment companies like Capital Gearing, Ruffer, Personal Assets and RIT Capital Partners as well as many others. This month investment journalist, Faith Glasgow delves into the sector explaining its purpose and analysing the diverse smorgasbord of companies. There’s some insightful comments from Andrew McHattie, the publisher of Investment Trust Newsletter.
Finally, with the Canadian election approaching on 20 September, we’ve looked at the opportunities Canada presents for investors and how the election might affect their holdings. There’s a lot more investment companies with a high allocation to Canada than you’d think.
Wishing you all the best for September – let’s hope the Indian summer returns soon!
Communications Director, AIC
Bidding for British bargains
Do private equity bids in the UK present investors with an opportunity or a threat?
In H1 2021 private equity struck the highest number of UK deals in five years. With bids for Morrisons and Ultra Electronics making headlines, there is little sign of private equity’s appetite for UK companies abating.
Private equity firms buying listed companies give shareholders the chance of receiving a premium price today, but this can also remove the opportunity to benefit from longer-term growth. Is private equity’s activity in UK markets an opportunity or a threat for investors and what can they do to benefit from this trend?
“Tomorrow’s value today"
Ed Wielechowski, Manager of Odyssean Investment Trust, said: “Company mergers and corporate takeovers are part of the normal business of stock markets. In some cases, companies can be taken over for a price which materially exceeds the value which the public markets will ever ascribe to a business due to a highly motivated buyer. Sometimes companies are acquired for less than their intrinsic value; each case has its own merits. Sometimes when a business needs to go through a period of restructuring or re-organisation, it can be more easily and quickly executed away from the gaze of public market investors, and quoted shareholders can be given some of tomorrow’s value today in return for not taking on the risk of the restructuring.
“However, if any private equity backed takeover is merely to gear a business up using debt which is currently very easy and cheap to borrow, then it is a long-term threat to quoted markets. Overall, there is little to fear provided that there are enough IPOs of a sufficient quality to counterbalance any takeovers, that existing shareholders achieve a premium to fair value and that key industries and expertise remain in the UK.”
Jonathan Winton, Co-Manager of Fidelity Special Values, said: “We are not against bids by private equity groups and other corporate acquirers if they recognise the true value of individual businesses and pay a fair price. They are typically more willing to take a longer-term view than market participants who can at times be overly pre-occupied by near-term uncertainty. We’re equally happy to take a public stance and vote against a bid if we think the offer undervalues the business (as we recently did with Spire Healthcare). We don’t see this trend as a threat, as the UK market is a large market. We are never short of new investment ideas and have had no issues putting to work the cash released from recent bids.”
Ian Lance, Portfolio Manager of Temple Bar Investment Trust, said: “It is an opportunity. The trend amongst large institutional investors has been to ‘go global’ irrespective of valuations and hence they have been selling one of the cheapest markets in the world, the UK, to buy one of the most expensive, the US. As private equity are interested in absolute returns, this provides them with lots of cheap targets and hence value investors in the UK are likely to see an increasing number of their stocks bid for.”
James Henderson, Co-Portfolio Manager of Lowland Investment Company, Henderson Opportunities Trust and Law Debenture, said: “A number of UK stocks have been on the receiving end of bids this year, particularly from US companies including private equity, and this is a reminder of the value in the UK equity market. The valuation of corporate earnings totally outstrips the long-term cost of debt, and the gap is so large it has to change. This will most likely occur when the cost of long-term debt goes up and the valuation of corporate earnings also goes higher. However, if sound companies are taken over at low valuations it is detrimental to long-term returns from the quoted sector so, in my view, it’s important the current owners of these companies don't allow this happen.”
How can investors benefit?
Ed Wielechowski, Manager of Odyssean Investment Trust, said: “We would never advocate investing in a company only because it may seem to be an interesting takeover candidate for private equity – any investment should be made on its individual merits. However, you can potentially tilt the balance of probabilities in your favour by adding certain negative and positive filters to your investment selection criteria. For example, private equity bidders like market leaders with strong cashflows, which are not generating the levels of sales growth and profit margins that the businesses are capable of. They also like businesses which can add value by consolidating industries, and companies which are asset rich and/or have high barriers to entry. On the flip side, in our direct experience, private equity buyers struggle to acquire companies with large defined benefit pension schemes, significant cyclicality or high capital intensity.”
Jonathan Winton, Co-Manager of Fidelity Special Values, said: “Investors are more likely to benefit from takeover bids if they own attractively valued businesses, or those with desirable technology or innovative products. With Fidelity Special Values, our focus is on attractively valued companies that are ignored or underappreciated by the market. It might be because they are experiencing internal issues or are impacted by headwinds in their sector or the wider economy. The key is that we feel these issues are temporary and our due diligence gives us the conviction that the business will positively change over the medium term. The uncertainty and its impact on the valuation create an opportunity for acquirers who typically take a longer-term view. From an external perspective, Brexit clarity and vaccine progress potentially remove two large areas of uncertainty whereas valuations remain attractive, giving acquirers greater confidence to deploy capital.”
James Henderson, Co-Portfolio Manager of Lowland Investment Company, Henderson Opportunities Trust and Law Debenture, said: “The reason we buy shares in a company is because we believe in the sustainable long-term outlook of the business and think the valuation does not reflect this. These factors may also be why another company will want to buy them. Therefore, our investment process can lead to us being invested in companies that receive approaches. This has been very evident in the last year, but we don’t invest purely on the basis that a company may be taken over.”
What does this trend show about UK businesses?
Ian Lance, Portfolio Manager of Temple Bar Investment Trust, said: “I think it shows us three things. First, that the level of private equity bids is elevated because they are flush with cash and can borrow very cheaply. Second, that the UK is being targeted because it is very cheap – it is at the biggest discount to the MSCI World for fifty years. Thirdly, it shows that the UK is quite friendly to takeovers from a regulatory point of view.”
Ed Wielechowski, Manager of Odyssean Investment Trust, said: “Whilst we do not believe UK listed companies as a whole are undervalued, there are pockets of above average quality companies which are trading at below their intrinsic values. Fundamentally, this drives bid activity.
“The growth in private equity activity demonstrates a number of trends. Firstly investors are seeing more potential value or less competition in buying quoted companies rather than buying assets from another private equity house in a secondary transaction. Secondly it shows the prevalence of ‘dry powder’ capital in private equity funds and the current accommodative debt markets supports their ability to bid for quoted assets; and finally, the level of interest in UK listed companies from US-based private equity companies seems to imply there is a perception that UK quoted companies are attractively valued versus their international peers.”
Jonathan Winton, Co-Manager of Fidelity Special Values, said: “The number of M&A bids we are currently seeing by private equity groups and other corporates highlights how attractive UK companies’ valuations are in an absolute sense, and relative to other geographies and the more expensive parts of the market. Many UK-listed companies are market leaders in their industries with attractive growth potential, and with Brexit in the rear-view mirror, companies and acquirers are more willing to commit to making new investments in the country. These dynamics along with the current availability of capital means we’re likely to see more bids if the valuation discrepancy remains in place.”
"The UK is predicted to grow at the fastest pace of the major developed economies"
Jonathan Winton, Fidelity Special Values
Outlook for the UK
James Henderson, Co-Portfolio Manager of Lowland Investment Company, Henderson Opportunities Trust and Law Debenture, said: “In my view, valuations in the UK are too low given the level of long-term interest rates. Additionally, corporate earnings have enjoyed a strong recovery as companies have taken out costs in recent years and now sales are growing. This has resulted in improved profit margins and the extent to which this is happening has led investors to be pleasantly surprised at the level of corporate earnings growth.”
Ian Lance, Portfolio Manager of Temple Bar Investment Trust, said: “The outlook is positive based on two factors. Firstly, the very low starting valuation relative to other markets and, secondly, high exposure to the cheapest sectors such as energy, materials and financials, and low exposure to the most expensive sectors such as technology.”
Ed Wielechowski, Manager of Odyssean Investment Trust, said: “Whilst markets have run hard since the nadir of March 2020 and overall ratings are above long-term averages, we believe that there remain good investment opportunities in the UK equities space. Earnings growth is likely to remain above trend for the medium term due to the recovery of domestic and international economies. We are still able to find companies, typically with international earnings, where this recovery potential has in our view yet to be priced in. Equally, we are finding some interesting reasonably priced growth companies, as the market has been focused on domestic cyclical recovery situations.”
Jonathan Winton, Co-Manager of Fidelity Special Values, said: “The near-term economic outlook is encouraging with Brexit now in the rear-view mirror, most remaining restrictions related to COVID-19 lifted and real-time data suggesting a continued rebound in activity, back to pre-COVID levels in some instances and even ahead in certain areas. The UK is predicted to grow at the fastest pace of the major developed economies providing a good backdrop for UK corporates. UK equities are significantly undervalued compared to global markets, and reasonably valued in absolute terms. While the UK market has looked cheap over the past five years, the key difference in 2021 is that fundamentals on the ground look very good. This backdrop has helped us find attractively valued companies of better quality than would normally be the case, which is reflected in the continued elevated gearing level in Fidelity Special Values.”
The day that changed history
Ian Cowie discusses the economic impact of 9/11.
Global stock markets suffered several shocks during the last two decades, starting with terrorist attacks on the World Trade Center in 2001, followed by the global financial crisis in 2008 and the coronavirus pandemic which continues to this day. But bad times have not prevented many investment companies from delivering good returns.
To be specific, no fewer than 42 investment companies have become “ten-baggers” since September 11, 2001, by growing £1,000 invested at that time into more than £10,000 today, according to independent statisticians Morningstar. Better still for income-seekers, there are 37 investment companies which increased or maintained their dividends every year since 2001.
That’s a remarkable testament to the structural strength of these companies and their ability to cope with the uncertainty inherent in investment. While the past is not necessarily a guide to the future, some understanding of what happened in the last two decades can provide a rational basis on which to consider the future.
Even before the horrors of 9/11, many investors were reeling from the bursting of the dot.com bubble in 2000, when share prices fell sharply. Perhaps surprisingly for short-term speculators, that setback provided the foundation for long-term investors in technology to create substantial wealth out of thin air during the two decades that followed.
While most attention quite properly focuses on the human tragedies of 9/11, the destruction of the World Trade Center can also be seen in an economic context. For a decade before the Twin Towers fell, America had been the world’s only super power, since the collapse of the Soviet Union in 1991.
But, just a couple of months after that tragedy in New York, China joined the World Trade Organisation with very little fanfare in December, 2001, and there have been two rival economic superpowers ever since. No wonder eight out of the top 20 investment company “ten-baggers” are invested in Asia.
Coming down from the clouds of macro-economics, smaller businesses often delivered bigger returns than large, long-established rivals. Not every acorn grows into an oak but six of the top 20 investment company “ten-baggers” over the last two decades focus on smaller and medium-sized businesses.
Investment companies made it convenient and cost-effective for many individuals - including your humble correspondent - to participate in all three trends. These companies automatically
"In an unpredictable and sometimes cruel world, it may reassure investors to know that investment companies have been around for more than 150 years."
Annabel Brodie-Smith, AIC
diminish risk by diversification and enable us to share the cost of professional fund management in sectors where direct exposure is impractical for all but the biggest investor or people with specialist knowledge.
For example, the top performer overall combines all three themes — technology, Asia and smaller and unlisted companies — to reward shareholders in Scottish Mortgage (stock market ticker: SMT) with a current value of £28,786 on £1,000 invested at the time of 9/11.
The same fund manager, Edinburgh-based Baillie Gifford, also runs the second-best performer, Pacific Horizon (PHI), which turned £1,000 into £27,080. Aberdeen Standard Asia Focus (AAS) ranks third with £21,372.
Talk about Scots wha hae! Fortune really has favoured the brave. Full disclosure: I am happy to have owned shares in three of these ten-baggers for most, if not all, of the past two decades.
Polar Capital Technology (PCT) turned £1,000 into £14,274; JPMorgan Indian (JII) grew the same sum into £12,882; while Baillie Gifford Shin Nippon (BGS) delivered £10,021 during this period. I first invested in JII in 1996 with PCT and BGS following in the early Noughties; PCT remains one of my top 10 holdings by value.
More importantly, Annabel Brodie-Smith, a director of the Association of Investment Companies (AIC), points out how many of these shares have delivered excellent returns: “Over the last 20 years since September 11, 2001, a £1,000 investment in the average investment company would now be worth £7,480. The same investment in one of the four best-performing investment companies would be worth more than £21,000 today.”
To put those numbers in perspective, the Bank of England calculates we would need £1,700 today to match the buying power of £1,000 two decades ago. Even at apparently low rates of inflation, as measured by official benchmarks such as the Consumer Prices Index (CPI) or the Retail Prices Index (RPI), the long-established tendency for the purchasing power of money to fall over time remains a real problem for savers and investors - especially those of us hoping to fund decades of enjoyable retirement.
So, the tried-and-tested ability of many investment companies to survive economic shocks and sustain capital growth, while continuing to deliver dividend income, can provide some comfort against uncertainty. Brodie-Smith told me: “In an unpredictable and sometimes cruel world, it may reassure investors to know that investment companies have been around for more than 150 years.
“They have survived the World Wars, the Great Depression, the financial crisis, horrific acts of terrorism and the coronavirus pandemic. They also have some of the longest-serving fund managers who have experienced difficult market conditions before.”
Nobody knows what the next 20 years will hold. But the evidence of the past provides investment companies’ shareholders with some grounds for cautious optimism.
Top-performing investment companies from 11/09/2001 to 18/08/2021. Source: AIC/Morningstar.
Faith Glasgow explores the diversity of the Flexible Investment sector.
As investors in investment trusts will know, the focus of most closed-ended funds is a specific asset - mainly either equities (with a global, regional or sectoral focus) or ‘alternative’ assets such as infrastructure, property or private equity.
But there is one sector that caters to the relatively small number of trusts with a more wide-ranging multi-asset mandate. The Flexible Investment sector was introduced in 2016 by the AIC; as communications director Annabel Brodie-Smith explains, the aim was “to help investors find and compare those investment companies that have the ability to invest in a range of assets”.
That aim reflected the burgeoning interest among self-directed investors and particularly financial advisers looking to outsource clients’ investment requirements through a packaged ‘one-stop shop’ solution.
According to 2020 research from FTSE Russell, “multi-asset funds, together with passive investments, have been the fastest-growing segments of the global asset management business during the last decade”. Even accounting for market movements, multi-asset funds’ share of total worldwide assets under management has risen from 6% in 2003 to 14% in 2020.
The new sector was therefore an important step for the investment company industry, in that it enabled investors to compare closed-ended multi-asset funds with similar open-ended funds.
However, the diverse make-up and range of assets embraced by Flexible Investment trusts makes like-for-like comparisons within the sector pretty meaningless. “Each company stands out for a different style and strategy and they are by no means comparable,” warns Brodie-Smith.
As Andrew McHattie, publisher of the Investment Trust Newsletter, points out: “There is a vein of similarity in that most of the component trusts have some sort of absolute return objective (aiming to deliver positive returns whether or not markets are rising), which usually means they take a multi-asset approach; but the variety means each trust needs to be considered on its individual merits.”
A closer look at the Winterflood daily data sheet for 16 August gives some idea of the level of diversity within the 21-stock sector.
It contains one of the biggest trusts in the closed-ended universe – the £4.2 billion RIT Capital Partners (RCP) – as well as two others with market capitalisations of less than £20 million. Net asset value performance over the past year, meanwhile, ranges from Miton Global Opportunities (MIGO), which has gained 46%, to JZ Capital Partners (JZCP), which has lost 38%.
That range of objectives, structures and performance is very apparent in the spread of ratings in the sector, observes McHattie. “Some trusts such as Capital Gearing (CGT), JPMorgan Global Core Real Assets (JARA), Personal Assets (PNL) and Ruffer Investment Company (RICA) have been able to sustain premium ratings. But sharing the same space is Hansa Trust (HAN, HANA) with its two sets of share classes on discounts of more than 33%, JZ Capital Partners on a discount of 59%, and Tetragon Financial Group (TFG, TFGS) on a discount of 64%."
It’s important to recognise, however, that there are various and complex special factors at play in these cases, so it is dangerous to take these figures at face value. “The ownership structure is definitely something to take into account before you consider investing,” McHattie adds.
There’s equal diversity as far as asset allocation is concerned. According to AIC data, while Capital Gearing holds half its portfolio in fixed interest and 18% in property, with just 22% in equities, Caledonia has a third in equities, 24% in private equity and 28% in ‘other’. Meanwhile, Hansa holds almost 85% in equities and most of the rest in hedge funds.
The upshot is that the trusts in this sector do very different things from each other. For example, a number are extremely successful total return holdings, in that they are invested so as to limit the downside when markets are falling while still capturing a decent percentage of upside during bull runs.
McHattie picks out RIT Capital Partners, which makes a point of issuing data to illustrate its success in this respect. “The trust’s Annual Report 2020 says that since its listing in 1988, it has participated in 73% of the market upside but only 38% of the market declines,” he says. That’s reflected in RCP’s share price returns, up 43% over the past year (second only to Miton Global Opportunities) and joint top of the table over three years.
Some of RCP’s closer peers focus more specifically on capital preservation in their approach. Capital Gearing, Ruffer and Personal Assets all have strong reputations as ‘safe havens’, reflected in current high allocations to fixed interest.
To put that into perspective, looking back at the share price performance data for the month of March 2020, when markets crashed as coronavirus shut down economies worldwide, those three stood firmly at the top of the performance table. CGT lost 3% over the month; PNL less than 1%; RICA actually gained almost 2%. In NAV terms the losses were marginally higher and RICA’s gains marginally larger. Over this period the Flexible Investment sector suffered an average share price loss of 15%.
"This sector is not all about maximising returns, but about achieving a healthy balance of risk and reward"
Andrew McHattie, publisher of the Investment Trust Newsletter
“This sector is not all about maximising returns, but about achieving a healthy balance of risk and reward,” comments McHattie. “PNL, for instance, thinks carefully about the risks, and its investment policy is ‘to protect and increase (in that order) the value of shareholders’ funds per share over the long term’.”
Taking a very different tack, Miton Global Opportunities invests almost entirely in other closed-end investment companies and provides a useful route into some of the alternative asset trusts that might otherwise be too esoteric for private investors.
“Managers Nick Greenwood and Charlotte Cuthbertson root around among the secondary trusts, trying to take advantage of anomalous discount ratings. They have a real eye for value, and their reports are an excellent source of intelligence for research-hounds too,” McHattie says.
Another interesting option, again very different from its peers, is BMO’s Managed Portfolio, a fund of investment trusts run by veteran Peter Hewitt. Shares can be bought in either the Growth or the Income portfolio. But the trust offers the canny benefit that net income in the Growth version is transferred to the Income portfolio in exchange for the same amount of capital, strengthening the income performance of the income portfolio and boosting capital growth for its sibling.
The Flexible Investment sector is something of a corral in which a wide range of trusts have been rounded up for easy inspection. It’s the place to go if you want to find a multi-asset manager - but don’t make the mistake of assuming you can compare like with like, and do make sure you understand what you’re buying.
In order to make a more meaningful assessment of what a trust actually offers, McHattie suggests that as well as looking at the usual performance figures, “it is worth taking a closer look at other metrics, such as volatility, beta, and downside risk”.
Managers comment on the impact of the federal election on their Canadian holdings.
"Irrespective of the outcome of the upcoming federal election, all parties are proposing to use infrastructure spending to stimulate the economy."
Duncan Ball and Frank Schramm, Co-CEOs of BBGI
In the run up to the Canadian federal election on 20 September, the AIC has spoken to managers of investment companies with Canadian holdings. They discuss the opportunities Canada presents for investors, which equity sectors they’re most enthusiastic about and how the result of the election might affect investment company holdings.
The appeal of Canada
Jonathan Morgan, Executive Vice-President and COO of Canadian General Investments, said: “Canada remains an attractive investment destination which has been neglected by international investors in recent years. Canada’s economy has proved resilient throughout the COVID crisis, helped by the support of the federal and provincial governments. This support has been among the most generous but does raise worries of how the debt incurred will be paid off. Fortunately, Canada enjoys the lowest net governmental debt levels in the G7.
“Beyond the economic supports provided by the Canadian governments, Canada has also managed to navigate the epidemiological challenges of the COVID pandemic fairly well so far, with an infection rate in proportion to its population significantly below those of the UK and US, and a vaccination rate in excess of both of these as well. Fortunately, vaccination and other epidemiological safety measures have remained largely apolitical.”
Dean Orrico, Manager of Middlefield Canadian Income Trust, said: “We have witnessed an unprecedented earnings recovery for Canadian companies this year. This has driven a significant move in equity prices. While corporate earnings have exceeded expectations, we believe forward estimates remain relatively modest. As a result, Canadian equity prices continue to be very attractive in our view.
“Overall, the corporate sector is very well positioned. Companies are well capitalised with record levels of cash to deploy as the economy reopens, and consumer optimism remains high thanks to one of the highest vaccination levels in the world. Furthermore, Canada is better positioned than most developed countries to benefit from a rebound in global growth as domestic companies have a large portion of their revenues tied to foreign operations.”
Duncan Ball and Frank Schramm, Co-CEOs of BBGI, said: “BBGI has been investing responsibly and selectively in availability-based infrastructure assets in Canada since our IPO in 2011 and we currently have 15 portfolio investments there. The country is one of our key markets and we are attracted by the strong market fundamentals. The Canadian Federal Government has a very strong credit rating (AAA from Standard and Poor’s, Aaa from Moody’s Investor Service and AAA from DBRS) and the provinces and territories also enjoy strong credit ratings. There is a well-developed pipeline of existing and proposed infrastructure projects with well-established protocols for infrastructure procurement.”
Impacts of the upcoming federal election
Dean Orrico, Manager of Middlefield Canadian Income Trust, said: “First and foremost, regardless of the election outcome, we believe Canada will likely realise a full economic recovery in 2022. Having said that, we do acknowledge that policy changes can create periodic opportunities and price disconnections which can be exploited by active management. For example, our positive long-term view and corresponding positioning in renewable power has been influenced by the Liberal government’s commitment to green energy. As a result of supportive fiscal policy, Canadian companies such as Northland Power and Brookfield Renewables have become international leaders in the renewable power sector. These firms are increasingly responsible for building some of the world’s largest wind and solar projects, helping some of the globe’s leading companies such as Google and Facebook meet their carbon emission targets.
“Perhaps the biggest development in this election is the Conservative Party’s willingness to pivot to the political centre on various social issues as well as their explicit support for measures to tackle climate change and promote growth in green power. Another potential catalyst for the industry is coming from the US, where a flood of government spending toward power grids should benefit Canadian renewable companies and their US-based operations.”
Duncan Ball and Frank Schramm, Co-CEOs of BBGI, said: “Irrespective of the outcome of the upcoming federal election, all parties are proposing to use infrastructure spending to stimulate the economy. As well, many of the provinces have announced large infrastructure spending plans. In addition to these potential primary opportunities, there is an active secondary market – last year we acquired further interests in Stanton Hospital and Kelowna Vernon Hospital and made new investments into Champlain Bridge and Highway 104.”
Jonathan Morgan, Executive Vice-President and COO of Canadian General Investments, said: “We do not expect the Canadian federal election to have a significant effect on the Canadian markets. There are few significant policy divergences between the major parties that are likely to be enacted. All indicators at the moment suggest either a return to the status quo, with centre-left Liberal leader Trudeau back in charge of a slightly diminished Liberal minority government, supported by the left-wing New Democratic Party, or, less likely, a Conservative Party minority government.”
Most exciting investment themes
Dean Orrico, Manager of Middlefield Canadian Income Trust, said: “Our strong performance this year has been led by the sharp rebound in financials and real estate, two segments of the Canadian market which possess significant upside based on the continued positive momentum in fundamentals and corresponding attractive valuations.
“Financials, led by banks, just released their fourth consecutive quarter of double-digit positive earnings growth and we expect dividend increases to be reinstated as early as this fiscal year. As most investors know, Canada has one of the most sophisticated and stable banking systems in the world. Their businesses are diversified across lending, capital markets and wealth management and are also diversified geographically with major networks throughout the United States. They also, on average, continue to trade at a discount to the larger US. banks while possessing higher capital ratios.
“The real estate sector remains equally attractive, especially the industrial property market. E-commerce continues to drive increasing demand for last mile logistics and new supply is unable to keep pace with the rate of absorption. National vacancies continue to fall to all-time lows and Toronto, Vancouver and Montreal now represent the tightest markets in North America for industrial space. As a result, we have a major investment focus on this sector and believe it continues to offer attractive total return potential.”
Jonathan Morgan, Executive Vice-President and COO of Canadian General Investments, said: “The Canadian tech sector has stayed robust, with industry leaders in online commerce facilitation, such as Shopify Incorporated, and relative newcomers, such as Lightspeed Commerce Inc, both showing tremendous growth. The Canadian housing market continues its multiple decade run and detached house and multifamily unit prices continue to hit new heights. The long-suffering Canadian energy sector is enjoying a period of recovery, while the forestry sector, which recently had a major upward spike followed by some weakness, is showing strength again.
“Other companies showing extraordinary potential include Boyd Group Services Inc, an autobody and auto glass repair services company, FirstService Corporation, a property services company, and TFI International Inc, a transportation and logistics services company active throughout North America. Newcomers to the Canadian General portfolio, such as goeasy Ltd, a full-service provider of goods and alternative financial services, and Neighbourly Pharmacy Inc, a network and consolidatory of Canadian community pharmacies are also attractive.”
Duncan Ball and Frank Schramm, Co-CEOs of BBGI, said: “We will continue to follow our proven acquisition strategy which is focused on availability-based investments only with strong ESG performance, which should allow BBGI to maintain long-term, predictable, and stable income to our shareholders, and non-financial returns to the communities our assets serve. We will continue to invest in sectors like transport, healthcare, blue light and justice, education, affordable housing and other sectors which may emerge, so long as they are consistent with our availability-based theme.”