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Trust managers take the defensive as they await clarity from Ottawa

Fear of a new federal tax policy has the professionals sitting on the sidelines


Income mutual fund managers are spooked.

Fear of a new federal tax policy for income trusts has got many managers in a risk-averse mood. They're sitting on the sidelines, building cash positions and waiting for clarity from Ottawa. It's a new defensive strategy for aggressive fund managers that have made the most in recent years of the trust sector's bull market.

"I view this time as highly volatile, highly uncertain," said Leslie Lundquist, vice-president at Bissett Investment Management and manager of the Calgary firm's $1-billion Bissett Income Fund. Like many managers, Ms. Lundquist is taking a conservative stance, maintaining a well-diversified portfolio comprising blue-chip income trusts.

"There's a limited amount that we can do," Ms. Lundquist said, adding that she is hesitant to build trust positions or add new names to the fund portfolio. "I'm a little uncomfortable suggesting now is the time to jump in."

On Sept. 19, there were cries of alarm on Bay Street when Finance Minister Ralph Goodale said the Canada Revenue Agency would no longer grant advance tax rulings to help companies become trusts. There's widespread concern a distribution or capital tax targeting trusts may be coming early next year.

Anxiety has ravaged the trust market. The S&P/TSX Capped Income Trust Index, a broad-based composite of Canada's largest trusts, has tumbled 14 per cent in value since Mr. Goodale's announcement. The selloff has wiped out about $18-billion in value from the 70-member trust index.

The ambiguity from Ottawa means income fund managers "are operating in a vacuum," said Sandy McIntyre, vice-president and senior portfolio manager with Sentry Select Capital Corp. in Toronto. While some of Sentry's closed-end trust funds with a long-term investment horizon are actively buying, short-term uncertainty means the company's four open trust funds are sitting on their cash, he said.

"If people call, I say talk to your local MP. This is a political problem. We are portfolio managers, we are not politicians. If you change the market, that changes pricing," Mr. McIntyre said.

Meanwhile, some income-generating funds with a hefty trust weighting are staying underweight in the asset class. The $3.9-billion CI Signature High Income Fund has cut its trust position to about 45 per cent, down from the fund's neutral benchmark of 66 per cent. The fund has a 15-per-cent cash position.

A new trust tax policy "could result in further losses for the asset class. It's a real risk so we are staying underweight," said Eric Bushell, fund manager and chief investment officer of the Signature Funds at Toronto's CI Fund Management Inc. Similarly, the $240-million Mackenzie Sentinel High Income Fund is maintaining a 12-per-cent cash position. The uncertainty has "made me want to sit back and wait . . . just in case things go against you," said Dan Bastasic, fund manager and vice- president of investments at Mackenzie Financial Corp. in Toronto.

"Ultimately, that's what the whole investment community is waiting for in order to make a better assessment as to what allocation people want in their portfolios in this asset class," he said.

Acuity Investment Management Inc. of Toronto is one contrarian. The market's "irrational negativity" means many trusts are undervalued and the Toronto money manager is searching for bargains, said Acuity president and chief executive officer Ian Ihnatowycz.

"When there's pessimism, you get discounts," he said. "It's like going in to a store and they've got a three-for-one sale."

10 biggest Canadian income trust funds

Managers of some of Canada's largest income trust funds are taking a conservative stance, maintaining a well-diversified portfolio compriseing the best blue-chip income trusts. There's widespread concern a distribution or capital tax targeting trusts may be coming early next year.

As of Sept. 30, 2005 Fund nameAssets ($million)1-year3-years5-years
CI Signature High Income3,90023.418.816.5%
Dynamic FocusPls Diver Income 2,48730.324.1-
Talvest Millennium High Income1,52530.819.118.5
GGOF Monthly High Income II1,26434--
GGOF Monthly High Income Mutual1,19534.924.721.9
Bissett Income-A99423.619.9-
Renaissance Canadian Income 74932.721.921.2
Sentry Select Canadian Income50732.828.6-
Dynamic FocusPlus Energy Income46650.4--
Acuity Income42949.5--


© 2007 The Globe and Mail. All rights reserved.

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