The Globe and Mail - 02.11.2019

CapitalDirectIIncomeTrust

CAPITAL DIRECT I INCOME TRUST:

• Investing In Canadian Residential Mortgages


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• D.R.I.P. Available - Distribution Reinvestment Plan


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*Annual return is based on 2018 income produced by Class A Units of the Trust.

**Ten - Year Historical Return as of December 31, 2018, is based on the income produced by the Class A Units of the Trust after any voluntary

reduction in Management fees or Income Participation.

Past performance is not an indication of future returns. All subscriptions for the purchase of units are made pursuant to available exemptions.

Investors should read the offering memorandum, especially the risk factors relating to the securities offered, before making an investment decision.

Capital Direct I Income Trust 305-555 W. 8th Avenue, Vancouver, BC, V5Z 1C6.

Capital Direct cd logo and trademark used under permission from Capital Direct Lending Corp.

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SATURDAY, NOVEMBER 2, 2019 | THEGLOBEANDMAIL O REPORTONBUSINESS| B5

Hudson’s Bay Co.urged share-

holders to continue supporting a

proposed $1.1-billion buyout of

the department-store chain and

poked holes on Friday in a pri-

vate-equity fund’s campaign

against the planned takeover.

HBC, owner of retailers Saks

Fifth Avenue and Hudson’s Bay,

agreed in mid-October to a

sweetened offer for the company

from a group led by chairman Ri-

chard Baker. Late Thursday, Cat-

alyst Capital Group Inc. claimed

shareholders owning 28.24 per

cent of HBC opposed the bid,

which represented enough votes

to block Mr. Baker and his back-

ers. However, Catalyst controls

only 17.5 per cent of HBC, so it

cannot stop the buyout on its

own, and the Toronto-based as-

set manager did not name other

investors who are against the of-

fer.

Brampton, Ont.-based HBC

said on Friday that the special

committee of its board continues

to endorse the $10.30-a-share bid

from Mr. Baker’s consortium

ahead of a shareholder vote

scheduled for Dec. 17. In a news

release, HBC said: “Based on the

extensive analysis of independ-

ent, internationally recognized

financial and real estate experts,

the special committee believes

this offer accurately reflects the

company’s expected perform-

ance due to the continued in-

vestment required at HBC, the

deteriorating retail environment

and the current market valua-

tion of the company’s real estate

assets.”

While Catalyst’s news release

said 28.24 per cent of HBC share-

holders oppose the offer from

Mr. Baker’s group, the fund man-

ager’s filing with securities regu-

lators on Thursday was less de-

finitive. In the filing, Catalyst

partner Gabriel de Alba said:

“Catalyst believes that it and oth-

er shareholders of the issuer,

who taken together are believed

to beneficially own or exercise

control or direction over approx-

imately 28.24 per cent of the is-

sued and outstanding common

shares, will oppose the insider is-

suer bid.”

Long-time HBC shareholder

Land & Buildings Investment

Management LLC dismissed Mr.

Baker’s opening $9.45-a-share of-

fer for HBC in August as inade-

quate, but has yet to state its

view on the improved bid and

declined to comment on Friday.

In making his case against the

buyout, Mr. de Alba highlighted

what he called “massive tax leak-

age” facing HBC investors. The

structure of the offer hasn’t

changed since August, when Cat-

alyst began to build its stake in

HBC. The retailer previously

warned shareholders that the

bid carried significant negative

tax implications for certain types

of investors.

Catalyst manages approxi-

mately $4-billion for pension

funds, foundations and wealthy

individuals.

Large takeovers traditionally

play out with sparring between

buyers such as Mr. Baker, who

want to pay as little as possible

for a business, and minority sha-

reholders, such as hedge funds

that use all their corporate skills

to push for the highest price. The

backdrop to the battle for HBC is

continued struggles at depart-

ment-store chains in the face of

relentless competition from dig-

ital platforms such as Amazon-

.com Inc.

If Mr. Baker’s group fails to

buy the company, HBC shares

are expected to return to $6 lev-

els, where they traded prior to

the opening bid.

Over the past five years, HBC

said the average price of shares

in its peers declined by 51 per

cent, as sales fell by 4 per cent

annually. Since Mr. Baker first

bid for HBC in August, rival Bar-

neys of New York filed for bank-

ruptcy after failing to attract a

buyer. HBC’s most recent finan-

cial results showed that the com-

pany lost $709-million in the

past six months, on sales of $3.7-

billion.

Mr. Baker’s buyout group is

made up of real estate company

WeWork Property Advisors and

private equity funds Rhône Cap-

ital LLC, Hanover Investments

(Luxembourg) SA and Abrams

Capital Management, LP.

HUDSON’S BAY CO. (HBC)

CLOSE: $9.97, DOWN 1¢

HBCurgesshareholders

tosupportBakerbid

Companysaysboard

committeecontinuesto

endorsetheofferdespite

oppositioncitedby

CatalystCapital

ANDREW WILLIS

Hudson’s Bay Co., whose flagship store in Toronto is seen above, says

the average price of shares in its peers has decliend by 51 per cent over

the past five years.MARKBLINCH/REUTERS

Thebackdroptothe

battleforHBCis

continuedstrugglesat

department-storechains

inthefaceofrelentless

competitionfromdigital

platformssuchas

Amazon.comInc.

Encana Corp. expects its decision to move its head office to
the United States will give the company membership in U.S.
stock market indexes, exposing it to large U.S. index funds.
But the move raises questions about which U.S. indexes
Encana might join and the extent to which investors will
benefit.
Shares in Encana, an oil and gas producer currently based
in Calgary, trade on the Toronto Stock Exchange and the
New York Stock Exchange. Encana is part of the S&P/TSX
60, the exclusive index of the biggest companies in Canada,
and is one of the larger energy companies in the S&P/TSX
Composite, the broadest measure of the Canadian markets
and one used for many mutual and exchange-traded funds
(ETFs). That means investors who own any funds that in-
clude stock from companies that are part of the broad index
(often referred to as tracking) will have exposure to Encana.
If it gets the shareholder and regulatory approval to move
to the United States, it should exit those indexes, and Cana-
dian funds may have to sell their Encana shares.
And it will find itself too small to join the S&P 500, the
index that has an estimated US$3.6-trillion, with a ‘t’, worth
of ETFs and mutual funds tracking it. It takes a market value
of US$8.2-billion to join that club, and Encana shares would
have to rise by more than 50 per cent before it would even
be considered.
In December, 2017, research for The Globe and Mail, Mor-
ningstar Direct found just $125-billion in Canadian mutual
funds and exchange-traded funds whose returns were close-
ly correlated with those of the companies in the S&P/TSX
Composite, including the one
that explicitly say they track that
index.
“Inclusion in an index usually
means that there is more de-
mand [for a stock], and being re-
moved from an index usually
means that there is less,” said
Chris Murray, a managing direc-
tor at AltaCorp Capital Inc., who
focuses on changes in index
membership.
“It’s too simple to say: U.S.
good, Canada bad,” he said. “You
are perhaps moving from where you are a larger component
of a smaller index to a smaller component of a larger index.”
Doug Suttles, chief executive officer of Encana, said in a
statement on Thursday that “a domicile in the United States
will expose our company to increasingly larger pools of in-
vestment in U.S. index funds and passively managed ac-
counts, as well as better align us with our U.S. peers.”
Encana expects that shifting to a U.S. domicile – but
maintaining its dual-listing on the TSX and the NYSE – will
raise the value of the company because the U.S. equity mar-
ket is 15 times larger than the Canadian market.
As well, the company noted that U.S. energy peers, in-
cluding Apache Corp., Marathon Oil Corp. and Devon Ener-
gy Corp., benefit from a higher exposure to index investors:
Index funds account for an estimated 30 per cent of the U.S.
investor base for those U.S. energy stocks, versus just 10 per
cent for Encana, according to the company.
Indeed, there is a huge flight to what’s called “passive”
investing, or simply following an index. Mark Wiseman, the
former CEO of Canada Pension Plan Investment Board
who’s now head of Active Equities at asset manager Black-
Rock Inc., told a Toronto audience on Oct. 24 that major
institutional investors are increasingly having difficulty gen-
erating market-beating returns by picking stocks, so they’re
moving money to index funds or private assets that the
ordinary investor can’t access. “This is profound. The world
is moving to two ends of the barbell very, very quickly. In
liquid markets, it’s moving more and more to index and
ETFs. And in [market-beating] strategies, it’s moving more,
more to privates.”
Eric Kirzner, professor emeritus of finance at the the Uni-
versity of Toronto’s Rotman School of Management, said
that while investors and institutions that track indexes will
automatically pick up shares in a company that has joined
an index, “Does that mean higher prices? Not necessarily.”
And which indexes Encana will join remains to be seen.
Most likely is inclusion in the S&P MidCap 400, where the
minimum capitalization is US$2.4-billion, and the MidCap
400 Capped Energy Index, where, according to S&P Global
Market Intelligence, it would be the largest company.
FTSE Russell, a subsidiary of the London Stock Exchange,
manages the Russell indexes. Its Russell 3000, an index of
the 3,000 largest U.S. stocks, is subdivided into the Russell
1000 - the 1,000 biggest companies - and the Russell 2000,
the companies ranked 1,001 through 3,000. The Russell
2000 is a popular index often used to invest in smaller-
capitalization stocks.
Currently, according to S&P Global Market Intelligence,
about 775 companies in the Russell 3000 are larger than
Encana, which would put it in the Russell 1000 - and outside
the popular small-cap index.
The Vanguard Group Inc. and Fidelity Investments’ FMR
LLC are already two of Encana’s five biggest investors, hold-
ing a combined 82 million shares, or 6 per cent of Encana,
according to S&P Global Market Intelligence. The five top
holders of Encana shares are U.S.-based, holding a com-
bined 27 per cent of the company.
The biggest Canadian institutional holder of Encana is
Letko, Brosseau & Associates Inc. of Montreal, with just over
36 million shares.

With reports from Clare O’Hara and Andrew Willis

Therearechallengesas

wellasrewardsinmoving

toalargerU.S.indexpool

DAVID BERMAN
DAVID MILSTEAD

Encanaexpectsthat

shiftingtoaU.S.

domicile...willraise

thevalueofthe

companybecause

theU.S.equity

marketis15times

largerthanthe
Canadianmarket.

CANADIANFACTORYACTIVITYEXPANDS
ATFASTESTPACEINEIGHTMONTHS

Canadian manufacturing activity expanded in October for
the second consecutive month as new orders climbed,
which could temper concern at the Bank of Canada about
the potential for global trade conflicts to derail the domestic
economy. The IHS Markit Canada Manufacturing Purchas-
ing Managers’ index (PMI), a measure of manufacturing
business conditions, rose to a seasonally adjusted 51.2 in
October, its highest level since February, from 51.0 in Sep-
tember. A reading above 50 shows expansion in the sector.
The new orders index rose to the highest level since
February, at 51.8 from 50.7 in September. The measure of
output also notched an eight-month high, rising to 51.1 from
50.2, but was softer than the long-run average for the survey.
The index for new export orders slipped into contraction,
at 49.0 from 50.4 in September, with manufacturers point-
ing to intense competitive pressures.
On Wednesday, the Bank of Canada said the country’s
economy will “be increasingly tested” by trade uncertainty
as it left its benchmark interest rate on hold at 1.75 per cent.
REUTERS