A Member of Pat McKeough’s Inner Circle recently asked for his advice on Canadian General Investments, a closed-end fund that stands as a venerable player in the investment landscape since its establishment in 1930.
Pat likes the firm’s diverse holdings and strong discount to its net asset value (NAV). It also pays a solid dividend. However, the fact it’s a closed-end fund means the units are thinly traded. What’s more, it may never close the gap between its current valuation and its NAV.
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Canadian General Investments Ltd. (Symbol CGI on Toronto; www.mmainvestments.com) is a closed-end fund that mainly invests in shares of Canadian companies that it sees as average or above-average in quality.
Established in 1930, it is one of the oldest closed-end funds in North America. Morgan Meighen & Associates Limited has managed the fund since 1956.
Canadian General’s largest holdings are Nvidia Corp., 6.7%; TFI International, 4.3%; Canadian Pacific Kansas City, 4.3%; Apple Inc., 4.1%; WSP Global, 3.4%; Descartes Systems Group, 3.4%; Franco-Nevada Corp., 3.4%; Mastercard Inc., 3.4%; West Fraser Timber, 3.2%; and Shopify, 2.6%.
Following are the fund’s holdings broken down by industry: Information Technology, 24.5%; Industrials, 23.3%; Energy, 13.1%; Consumer Discretionary, 10.8%; Materials, 10.5%; Financials, 10.0%; Real Estate, 4.4%; Communication Services, 2.0%; and Health Care, 0.8%.
Canadian General’s units now trade at a 36.4% discount to their net asset value. It pays a regular quarterly dividend; the fund raised that payment by 4.3% in March 2023, to $0.24 a share from $0.23 (for a current yield of 2.7%). The fund’s Management Expense Ratio (MER) is 1.0%.
Inner Circle: Why you should consider buying a fund like Canadian General Investments
Closed-end funds are a lot like conventional, open-end mutual funds. They hold a diversified portfolio of stocks, chosen by a fund manager who gets a fee for his or her services (a key portion of the overall MER).
The key difference between an open-end and closed-end fund is that an open-end fund stands ready to sell new fund units, or redeem existing fund units, on demand. A closed-end fund, on the other hand, works with a fixed asset base invested in a portfolio of securities. The value of those assets rises and falls, depending on how the closed-end fund invests. Its units trade like a stock’s shares, and mostly on a stock exchange.
The fund’s units may trade above the per-unit value of the investments it owns—“at a premium” to net asset value, as brokers say. Mostly, however, they trade at a discount.
This discount is partly due to broker inattention. Brokers have no incentive to sell closed-ends funds to their clients after they go public. They can make larger commissions plus a string of yearly trailer fees by selling open-end funds instead of closed-end funds. For that matter, brokers have a regular stream of new “products” to sell that usually pay high commissions because they are new to the market.
Closed-end funds also tend to be infrequently, or thinly, traded. That’s partly because they give you exposure to a portfolio of stocks rather than just one company, so they don’t go through the kinds of changes that would spur trading.
If the discount to net asset value for a closed-end fund persists, unitholders of the fund may try to persuade the managers of the fund to try and close the discount. The most obvious way would be for the managers to convert the fund into a traditional open-ended mutual fund.
When that happens, much of the discount disappears overnight, and the fund’s shares may jump 10% to 30% or more. Holders can then redeem their shares for net asset value, though they may have to pay a fee.
The major shareholders of Canadian General Investments hold over 50% of the units outstanding, so they will likely continue to maintain the closed-end status of the fund.
Another way for a manager to close the discount on net asset value is to buy back some of the fund’s units. By purchasing units at less than net asset value, it raises the net asset value for the remaining shareholders, and this works to close the discount.
Over a period of years, units in well-managed closed-end funds will occasionally come close to net asset value. That’s just one more way for investors to get a chance to extract most of the value of the fund’s portfolio. However, you may need to wait many years for the opportunity, so closed-end funds are buys only for patient investors.
We only recommend buying closed-end funds when they hold assets that are attractive to buy or hold on their own, and when the fund’s units trade at a discount to the per-unit value of the fund’s assets. If you buy under those circumstances, you’ll have more assets working for you than you paid for—that’s the case with Canadian General Investments.
Recommendation in Pat’s Inner Circle: Canadian General Investments Ltd. is a buy if you want to own a closed-end fund.
