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11. Uncovering Trusts – Canadian General Investments (CGI)
60 Plays4 months ago
In this episode, our director of content, investment trusts Milosz Papst explores Canadian General Investments, which aims to generate above-average total returns from a diversified portfolio of North American (predominantly Canadian) equities. He talks about CGI’s unconstrained investment approach, its track record of outperformance, as well as major active sector weights. He delves into CGI’s recent investment in two uranium producers. He also comments on the company’s dividend distributions, gearing and discount to NAV.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Uncovering Trusts
00:00:04
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, a content-led IR business integrating analyst content, digital targeting, and investor engagement. Each episode will uncover the distinct features and latest developments of a select listed investment company. So tune in to find interesting investment ideas and to stay on top of what's happening in the investment company sector.
Guest Introduction: Milos Pabst on Canadian Investments
00:00:27
Speaker
I'm your host, Will Manuel, and today I'm joined by Milos Pabst, Director of Investment Company Content at the Edison Group. who will talk about Canadian general investments today. Menos, thanks for joining us.
Overview of CGI Fund
00:00:39
Speaker
Yeah, thanks for having me. Let me maybe start with a high-level introduction to CGI. ah The fund was established in 1930 and is North America's second-oldest closed-end fund listed on both the Toronto and London nonst stock exchanges. and Greg Ekel at Morgan Main & Associates has managed CGI's portfolio since 2009, aiming to generate a better-than-average total return from a diversified portfolio of North American equities ah via prudent stock selection and timely recognition of capital gains and losses.
Investment Strategy and Focus
00:01:08
Speaker
ah While most of the fund is invested in Canadian companies, up to 25% may be held in US listed businesses, which are primarily in well niche operations or areas that are underrepresented in the Canadian market. Okay, thanks for that. And what is the manager's investment strategy?
00:01:25
Speaker
Yeah, so Ego believes that CGI can be considered as a one-stop shop for an investment in Canada. He has an unconstrained approach within the remit that a maximum 35% of portfolio may be held in a single sector. And the manager invests without reference to the sector weightings of CGI's benchmark, and meaning the company's performance may differ meaningfully from that of the S and&P TSX composite index. Stock selection is primarily on a bottom-up basis, although ECL does take the macroeconomic environment into account. ah The manager seeks reasonably valued companies with favorable fundamentals and strong management teams, and also takes ESG credentials into
Performance and Sector Weighting
00:02:04
Speaker
account. so
00:02:05
Speaker
ah CGA's portfolio typically has around 60 holdings with a bias to large and mid-sized stocks. Some of these are higher yielding, such as the Canadian banks, ah for example, helping to support CGA's own dividend payments. um A notable feature of the fund is its low turnover, which averaged 6.8% over the last five years, implying around a 14-year holding period. However, positions are reassessed regularly to ensure they are sized correctly and investment cases are still valid. Right. And so a natural follow on question would be to ask, has the strategy been successful? ah Yes, it has indeed been successful. CGI has an available long term performance record. Over the last 25 years, it has outperformed the Canadian market by an average 1.4 percentage points per year. And the 50 year record is even better with an average annual outperformers of 2.3 percentage points.
00:02:58
Speaker
Now, more recently, CGI has generated solid outperformance versus its benchmark over the last five and ten years, um although performance was hampered in 2022 by its underweight energy exposure, which has negatively affected the company's three-year numbers. So now would be a good time to discuss the structure of CGI's portfolio. Can you shed some light on that? Sure. ah As noted before, ECL invests without reference to the benchmark sector weightings. There is a long-standing major underweight position in financials, which makes up around 30% of the Canadian market as the manager finds better opportunities in other areas.
00:03:36
Speaker
The fund has also been underweight energy for many years, although Echo is now viewing the sector more favorably as he believes that um commodity supply demand balances are in better shape and the major operators are returning more cash to shareholders. um Hence, CGI's energy weighting is moving closer to the index. In terms of overweight exposures, there is an above index weighting in technology, which has been ah beneficial to the fund's performance.
Recent Additions and Market Outlook
00:04:02
Speaker
ah Within the top 10 holdings, are US listed Nvidia and Apple, which of course have made significant positive contributions. um n Nvidia is CJA's largest position at 8% of the fund, and its stock price has appreciated by around nine times over the last 18 months, eighteen months ah helped by the growth in artificial intelligence, obviously.
00:04:22
Speaker
um However, it is interesting to note that CJ is not new to the party, so to speak, as Nvidia entered the portfolio in 2016, when its semiconductor business was more cyclical. Between then and the end of 2023, Apple has realized 96 million US dollars in profits. ah He views the company as having a very strong management team and a competitive edge that has transitioned um into higher growth industries including gaming, data warehousing and AI. CGI also has a notable overweight exposure to the diverse industrial sector.
Dividends and Valuation Discussion
00:04:57
Speaker
Right, thank you. and Could you highlight a couple of recent portfolio transactions?
00:05:02
Speaker
Yes, absolutely. um As mentioned earlier, Eker has been adding to CGA's energy exposure. ah This includes two new holdings in uranium producers. Chemico is the world's largest publicly traded uranium company. It produces very high grade uranium from its flagship MacArthur River and Sigur Lake mines in the Athabasca basin in northern Saskatchewan. um The Iranian industry has a complicated and troubled past in terms of success, which has debted some investors. ah However, increased demand for nuclear fuels in an environment of decarbonisation and energy security may lead to a change in perception.
00:05:40
Speaker
ah Governments are reassessing their country's nuclear energy capabilities in terms of extending plant lifespans, restarting idle capacity or considering new builds. um This higher demand could lead to a uranium demand supply imbalance in coming years, um especially as an extended period of lackluster uranium pricing has debted investment in new industry capacity. ah The matter considers that with rising geopolitical tensions and a favorable uranium industry outlook, um chemical looks very well positioned either as an ongoing enterprise or as an acquisition candidate. um Then NexGen Energy was also added to CGI's portfolio. ah The company has a major, ah very low cost uranium resource, which is the highest grade in the world, and production is scheduled to start in 2029.
00:06:29
Speaker
ah Thank you. that that That sounds really interesting in an area that I'm sure a lot of investors would want exposure to. um So you've given a really interesting rundown on CGI. Are there any other features that investors should be considering? Yes, I believe there are three areas that we should focus on, ah the dividends, gearing, and valuation. CGI pays regular quarterly dividends. ah Starting in 2018, the annual dividend has increased by four Canadian cents each year, and there have been no special dividends. The company's 10-year record of higher dividends means that CGI now qualifies as one of the AAC's next generation dividend heroes, which are funds with 10 years, but less than 20 years of consecutive higher annual dividends.
00:07:12
Speaker
but Given CGI's very high level of unrealized gains, Akul believes that the strategy of raising annual dividends is sustainable. Now moving on to gearing, the company has employed a leveraged strategy since its first issue of preference shares in 1998. In June 2023, the last tranche of preference shares was redeemed, and for economic reasons, CGI increased the amount borrowed under its margin facility rather than issue new preference shares. It now has a $175 million Canadian dollar facility, which equated to a net gearing position of um around 12% as the end of May 2024. Finally, CGI has a persistently-wide discount, which is currently around 40%. This may partly be due to the limited free float, as 52.5% of the sharebase is held by Insight owners.
00:08:02
Speaker
ah The company is unable to repurchase shares to help manage the discount as this would invalidate its favorable Canadian investment cooperation tax status.
Conclusion and Further Information
00:08:10
Speaker
It should be noted that there have been brief periods in the past when CDA's shares traded at the premium to net asset value, while they traded very close to par in a period when the company outperformed its benchmark and there was a commodity supercycle and a rising oil price. Right. Thank you. um It's been a very comprehensive insight into this really interesting fund. It's got such a long ah performance track record. that Looks like that could well continue. So you've been listening to Uncovering Trusts, a podcast by the Edison Group. If you want to find out more about CGI and other investment companies we cover, please visit www.edisongroup.com. Thank you very much.