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Manager capitalizes on trust volatility

Says high-quality investments will benefit when dust settles over sector uncertainty


The income trust market has been thrown into disarray by recent moves of the federal government and Standard & Poor's Corp., but that has created opportunities for investors to pick up high-quality trusts at more attractive valuations, according to portfolio manager William Shaw.

Mr. Shaw has been managing the Mavrix Dividend & Income Fund since September, 1998. The $342.8-million fund is up 6.25 per cent so far in 2005 and did even better in the 12 months ended Aug. 31, for which it posted a return of 21.75 per cent. It recorded an annualized return of 17.43 per cent in the past five years and 10.7 per cent in the past 15.

About half of the fund is currently in trusts.

"The current volatility in the trust market should be used to pick up high-quality trusts," said Mr. Shaw, the senior vice-president of Mavrix Fund Management Inc. "I think the government is not going to basically tax trusts as such . . . given the fact that they are a minority government and an election is pending; you don't want to get a lot of your -- how shall we say -- voters quite angry at you," he said. "I think that they will come to some type of compromise and it is going to be both beneficial to current high-yielding securities, both the high-yielding common stocks and trusts, so I would continue to acquire good quality companies that have good yields and, in the case of trusts, good distributions."

Not surprisingly, two of his picks are from the trust sector. He likes Edmonton-based XS Cargo Income Fund (XSC.UN-TSX), which holds an indirect interest in close-out retailer XS Cargo. XS Cargo clears out bankrupt stock, liquidation stock, overruns and returned items through its 25 stores, expected to increase to 27 by year's end. The business is profitable with gross margins in excess of 30 per cent the past three years, he said, adding that the management team owns 49 per cent of the company.

The current yield based on cash distribution of $1.125 and a unit price close yesterday of $13.50 is 8.3 per cent, Mr. Shaw said. The payout ratio of distributable cash is expected to drop to 75 per cent over the next year. He has a 12-month target of $16 on the units.

Given high energy prices, Mr. Shaw expects most oil and gas trusts will likely boost distributions significantly, which helps explain his attraction to ARC Energy Trust (AET.UN-TSX). He said ARC has little or no debt on the balance sheet, and the trust, which is involved in both oil and gas production in more or less equal weights, has been increasing its reserves. The units are trading at just over the estimated net asset value of $22.70, he said. And at yesterday's close of $22.75 on the Toronto Stock Exchange and forecast cash distributions of $1.90 this year and $2.30 next year, the cash yields are 8.3 per cent and 10 per cent. His 12-month target on the units is $26.

Among the financials, a sector he currently favours, particularly the banks, Mr. Shaw singled out Toronto-Dominion Bank (TD-TSX). "I like their continued focus on retail banking and wealth management" and "the foray they have made into the U.S.," he said. He expects the bank will earn a share profit of $4.60 in the fiscal year that begins in November. Its return on equity continues to be "very strong" at 19.6 per cent, he said. And the shares are trading at about 2.6 times book value.

Mr. Shaw described the downside risk from a settlement of the Enron litigation as minimal. Even if TD were to settle for $2.4-billion (U.S.), which is about what Canadian Imperial Bank of Commerce paid Enron, it would only translate into about $2 (Canadian) a share, he said. He has a target of $62 on the shares, which hit a 52-week intraday high of $59.03 yesterday before easing back to close at $57.50.

Opportunity knocks

The income trust market may have been thrown into disarray, but short-term strife can turn into longer-term gains for investors seeking high-yield returns.

Investors Mutual of Canada Fund

CATEGORYCanadian Dividend
MANAGERWilliam Shaw
TOTAL ASSETS$342.8-million

Top 10 holdings

As of August 31, 2005

1Kingsway Financial Services Inc.9.90%
2Northbridge Financial Corp.7.60%
3Manitoba Telecom Services Inc.7.10%
4CIBC - Common5.50%
5Calloway Real Estate Investm5.00%
6Fmf Capital Group Ltd.4.10%
7Toronto Dominion Bank3.80%
8Labrador Iron Ore Royalty Trust3.70%
9Starpoint Energy Trust3.70%
10Norbord Inc.3.60%

Returns to August 31, 2005

1-year compound annual21.75%
3-year compound annual20.47%
5-year compound annual17.43%
10-year compound annual11.40%
15-year compound annual10.70%


© 2007 The Globe and Mail. All rights reserved.

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