Q – I was wondering if it would be possible for you to comment on Canadian General Investments Ltd. This company appears to trade at a discount to its NAV. Can you please explain why? Is this a potential value trap? Also, this company has a history of consistently increasing it dividends. – Stewart B.
A – This is a closed-end fund that trades on the TSX under the symbol CGI. To my knowledge, it’s the oldest fund of its kind in Canada, having been launched in 1930. Since 1956, it has been managed by Morgan Meighen & Associates.
Closed-end funds have a limited number of shares. There is no new supply unless the company implements a secondary issue, which is rare.
You would think that, logically, units of closed-end funds would be worth more because of the limited supply. But that’s not the case. Many closed-end funds trade at a discount (sometimes aa deep one) to their underlying net asset value. For example, CGI closed on Oct. 22 at $39.26. The NAV on that day was $62.47. That’s a discount of over $23!
This fund has historically traded at a discount to net asset value, but this is close to the extreme end of the range. What’s behind it?
It’s not the portfolio. The top 10 holdings are solid, growing companies like Shopify, NVIDIA, Lightspeed Commerce, CP Rail, TFI International, Descartes Systems, and Amazon.com.
But income investors won’t be excited by the quarterly dividend of $0.22 a share ($0.88 a year). That translates into a yield of 2.2 per cent. However, as our reader points out, the fund does have a history of raising its payout annually, usually by a penny per quarter.
The law of supply and demand plays a role in the pricing as well. Average trading volume for CGI is only 3,784 units per day. If more people are looking to sell than to buy, it drives down the trading price.
Some investors track the discount ranges of closed-end funds, buying when they are at their peak and selling when they approach their lows. But finding the information can sometimes be difficult. Many of these funds are not known for their transparency,
CGI shows a 10-year average annual compound rate of return of 14.25 per cent on its share price. That makes it worth considering, especially if buying stocks at a deep discount appeals to you. But be warned: the units are trading at close to their highest price in 25 years. If the market hits a correction, they’re going to drop in value. – G.P.