High yield from Canada

This trust aims to return a high level of dividends with capital growth over the longer term, and has been successful so far. Consequently, its share price return is well ahead of its benchmark over one, three and five years, and massively ahead of the FTSE All-Share over three and five years. Its benchmark has been the S&P/TSX Equity Income Index since 2011, before which it was measured against the S&P/TSX Income Trust Index.

Since launch in 2006, the trust's share price has delivered 61.9 per cent against 43.9 per cent for its benchmark and minus 1.1 per cent for the FTSE All-Share.

"A proven investment process, astute balance sheet management both in terms of portfolio composition and gearing management, the relative strength of the Canadian economy and a banking system that the World Economic Forum recently voted the strongest in the world for the fifth successive year are solid foundations for further outperformance," says Alan Brierley, director of investment companies at investment bank Canaccord Genuity. "Middlefield has obvious appeal for investors looking to diversify dividend income streams, and with western economies maybe still facing several more years of sub-trend growth and low interest rates, those funds offering an attractive and sustainable yield have obvious appeal."

Going forward, the trust's returns may benefit from exchange rates as currency exposure has not been hedged since last year. Given the relative health of the Canadian economy against other developed nations, the Canadian dollar may be strong against their currencies.

The trust's managers believe that asset mix rather than security selection is the most important determinant of performance, so Middlefield's investment committee sets asset allocation targets based on their views on the economy and commodity pricing. Within the asset allocation parameters, the portfolio managers choose individual shares and bonds, seeking companies with strong free cash flows, good potential returns on invested capital, identifiable and sustainable competitive advantages, and reasonably leveraged balance sheets. They also look to sustainable dividend payers that are well- positioned to benefit from the relative strength of the domestic economy.

The trust is concentrated on one country, which increases risk, but the managers aim to diversify the portfolio by monitoring sector allocation. However, with the fund typically overweight in economically sensitive sectors such as energy, it has experienced higher asset volatility than some UK equity income trusts. Oil and gas related shares, for example, account for around a fifth of the portfolio.

The trust's attractions have not gone unnoticed and it trades at a premium to net asset value (NAV) of 2.95 per cent, in contrast with a 12-month average discount of 0.31 per cent. However, many income-bearing trusts trade at a premium - with some wider than this while offering a lower yield - so by comparison Middlefield Canadian Income is a strong contender. Buy.

Source: Morningstar & *Canaccord Genuity

Performance data as at 24 September 2012

Top 10 holdings as at 31 August 2012

Sector breakdown