Transcript
Speaker: Welcome to Uncovering Trusts, a podcast by The Edison Group. I'm your host, Will Manuel, and today I'm joined by Milos Papst, Director of Investment Company Content at The Edison Group, who will talk about Canadian General Investments, whose ticket is CGI.
Speaker: Milos, thanks for joining us today. ah Hi Will, happy to be here. Right, so it's um it's been about 12 months since we last discussed this specialist fund, CGI, with this great long-term performance record. So should we start with a brief overview?
Speaker: Yes, sure. So as discussed last year, CGI is North America's second oldest closed end fund established in 1930 and is listed on both the Toronto and London stock exchanges.
Speaker: Greg Eccle at Morgan Main & Associates has managed CGI's portfolio since 2009, aiming to generate a better than average total return from a from a diversified portfolio of North American equities via prudent stock selection and timely recognition of capital gains and losses.
Speaker: Okay, so um you mentioned CGI's strong performance record. What has CGI delivered for shareholders? um There are not many funds that are in a position to provide performance over such a long period.
Speaker: For CGI, in the 25 years to the end of 2024, with dividends reinvested, it generated an annual total return of 9.6%, which was percentage points higher than the Canadian market.
Speaker: um For illustrative purpose, over the period, 10,000 Canadian dollar investment in the fund would have grown to nearly 100,000 Canadian dollars. Looking back over 50 years, CGI's annual total return was 12.1%, which percentage points above the Canadian market.
Speaker: And over this longer period, a 10,000 investment in the fund would have grown to more than 3 million. um I think it is a clear illustration of the benefits of compounding. And while the company has generated strong relative returns, its absolute annual total returns of more than 12 percent over the last half a century are surely worth a note.
Speaker: Wow, that that really is impressive. So so what's the manager's strategy? um Greg considers that CGI can be viewed as a one-stop shop for investment in Canada. um He has an unconstrained approach, meaning the company's performance may differ meaningfully from that of the benchmark, the S&P TSX Composite Index.
Speaker: A maximum 35% of the portfolio may be invested in any one sector. um And so I would note that while most of the fund is invested in Canadian companies, up to 25% may be held in US s listed businesses, ah which are primarily in niche operations or areas that are underrepresented in the Canadian market.
Speaker: ah Stock selection is primarily bottom-up, although Greg does take the macroeconomic environment into account. ah He seeks reasonably valued companies with favorable fundamentals and strong management teams and also takes firms ESG credentials into account.
Speaker: The portfolio typically has around 60 holdings with a bias to large and mid-sized stocks. A notable feature is its low turnover, which averaged 7.9% of the last five years and implies around a 12 and a half year holding period.
Speaker: um However, in 2024, portfolio turnover was higher at 13.7% as stock market volatility created more opportunities. um All holdings are reassessed regularly to ensure they are sized correctly and the investment case are in the investment cases are still valid.
Speaker: Right. So I understand the structure of CGI's portfolio does not change very often. ah But can you remind us of its main features?
Speaker: Sure. and CGI has a long-standing underweight position in financials as Greg generally finds better opportunities elsewhere. then This sector makes up around 15% the portfolio compared with ah greater than 30% weighting in the index.
Speaker: um As we discussed last time around, the manager has reduced CGI's underweight exposure to the energy sector as he thinks that commodity supply demand balances are in better shape and cash returns to shareholders are increasing.
Speaker: Technology remains the largest overweight exposure in the portfolio, which has been very beneficial to CGI's performance in recent years, um but has detracted so far this year, given the pressure on the Magnificent Seven stocks.
Speaker: In keeping with the process of timely recognition of capital gains and losses in the second half of 2024, Greg produced the holding NVIDIA, which has been in the portfolio since 2016.
Speaker: wendy so sixteen at levels considerably higher than the current stock price, locking in around 100 million Canadian dollars in profits. um CGI has positions in three of the magnificent seven, NVIDIA, Amazon and Apple.
Speaker: And how does the manager view the changing investment environment? Yes, so he acknowledges that the stock market rotation is, well, logical. Before the introduction of President Trump's tariff policy, um the United States was seen as the only game in town, attracting major inflows, so ah much of which flowed into the magnificent seven stocks.
Speaker: ah Global investors are starting to redirect their investments into regions that have lacked and are looking more attractively valued, such as the UK and Europe. For CGI, ah Greg says that it is, well, business as usual in the current um tumultuous times, and he's confident that the measured long-term investment approach will be beneficial for the company's shareholders.
Speaker: He believes that the widespread introduction of U.S. tariffs brings a new chapter and that it is important. ah Well, had to play the game when there are no rules. um The manager suggests that once the dust settles, he's likely to carefully adapt the portfolio to make the well the most of the different investment environment as he believes that the changes will be permanent.
Speaker: Okay, that's interesting. So in light of the changing times, can you highlight some of the recent portfolio activity? Yeah, Greg has sold some lower conviction positions, keeping most of the proceeds in cash to reduce the level of net debt in a period of stock market volatility. um These sales include Wood Products Company Interfo and SiteOne Landscape Supply, which are both exposed to the sub-duty US housing market. Then also BRP, which manufactures and sells consumer discretionary power, power sports, vehicles and ah marine products.
Speaker: and a long-standing position in Canada whose post-COVID-19 recovery has lacked those of the US carriers. Within Precious Metals is a new addition to CGA's portfolio. It is the world's leading precious metals streaming company with over 40 high-quality precious metals streams and early deposit agreements of mines, including in Mexico, Canada, Brazil, Chile and the United States.
Speaker: The company 98% exposed to precious metals, ah while its shares are more liquid and less risky than those of a gold producer. Okay, great. i understand Edison covers Wheaton as well.
Speaker: So, um we're coming to the end of this session. Can we just touch on ah three other important features of CGI? So, the dividend, gearing and valuation.
Speaker: Of course, let us take each in turn. Prior to fiscal year 18, CGI paid special dividends in addition to regular quarterly dividends, which may be paid out of income or realized capital gains.
Speaker: Starting in fiscal year 18, the company grew its annual dividend by four Canadian cents per share, but fiscal year 25 has seen a step up in dividend growth. The annual distribution is on course for an eight Canadian cents per share increase, which is 8% higher year on year.
Speaker: CGI has an 11-year record of consecutive higher dividends, meaning it qualifies as one of the AIC's next generation dividend heroes, which are funds with at least 10 years but less than 20 years of consecutive higher annual dividends.
Speaker: CGI has employed leveraged strategy since its first issue of preference shares in 1998. In June 2023, the last tranche of preference shares was redeemed.
Speaker: And for economic reasons, the company's margin facility was increased rather than issuing new preference shares. CGI now has a 200 million Canadian dollar facility, which equated net gearing position of around 12% at the end May 2025.
Speaker: Now, turning to the discounts, the company's persistently wide discount may be due to the limited 47.5% free float. CGI is unable to repurchase shares to help manage the discounts, as this would invalidate its favorable Canadian investment corporation tax status.
Speaker: um There have been brief periods in the distant past when CGI shares traded at or close with or close to a premium to NAV, but this has not happened since 2006.
Speaker: However, the current discount of around 44% is around 10 percentage points wider than the 10-year historical average. So investors may benefit from ah some narrowing of the discount in less turbulent times in the market.
Speaker: Yeah, interesting. So that's that's a great rundown on this specialist fund, um which has obviously got a great long-term track record and and quite a big discount. um So thanks very much. And I look forward to our next discussion in a couple of weeks.
Speaker: 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.
