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Fund firms scramble for options to uncertain income trust sector

'Everything is kind of on hold' as future of asset class brings sales to a standstill


The once swelling income trust wave has come crashing down on a handful of boutique mutual fund companies.

The uncertain future of the asset class has brought net sales to a standstill. Fund companies that built their business on trusts are holding fast or have managed to successfully migrate clients in to further asset classes.

"Everything is kind of on hold," said Ray Steele, chief financial officer of Mavrix Fund Management Inc. In October, the Toronto fund company reported net redemptions of $12-million. More than $300-million of the company's $423-million in retail assets under management are invested in income trust funds.

"The proper course of action is to stick with income trusts for now and provide advice to advisers in terms of which ones we think are the best," Mr. Steele said.

On Sept. 19, 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 next year. The S&P/TSX capped income trust index, a broad-based composite of Canada's largest trusts, has slipped about 11 per cent in value since Mr. Goodale's announcement.

Fund companies with the bulk of investment dollars in trusts have fallen in tandem. For example, the assets under management of Sentry Select Capital Corp. have slid 11 per cent from September to October. In the space of one month, the value of the Sentry Select Canadian Income Fund fell to $448-million from $507.4-million.

Several firms with a trust fund niche have managed to successfully diversify their offerings. For example, about one-third of Acuity Investment Management Inc.'s $2.4-billion in retail assets under management are invested in income trusts and funds. Nevertheless, the Toronto company reported $53-million in net sales last month.

"We don't just have pure income trust portfolios . . . we have always been broadly diversified in a wide mix of asset classes," said Ian Ihnatowycz, Acuity president and CEO. Several Acuity income funds use trusts to generate yield and diversify risk.

In 2003, the Guardian Group of Funds Ltd. launched a multi-asset diversified income fund aimed at weaning some clients off pure trust funds of funds.

"If you are sensible, you've been looking to diversify your source of sales because it's a volatile asset class and when you get these sharp downturns . . . you tend to see sales slow down quite substantially, if not dry up," said Gavin Graham, director of investments at the Toronto firm.

Dan Richards, a Toronto fund marketing consultant, predicts "a burst of real innovation" will create a new class of income-generating products and funds. Funds employing the high-yield U.S. bond market, derivatives and the mortgage market may soon be in the works, he said.

Already, fund companies are attempting to fill the void left by trusts. Royal Bank of Canada is reporting increased interest in the RBC Global High Yield fund and cash-flow portfolios that employ high-yield corporate bonds. On Nov. 4, BMO Nesbitt Burns closed a $128-million principal protected note tied to the returns of three funds offered by Dynamic Mutual Funds Ltd.

"Interest is picking up," said Luke Seabrook, BMO Nesbitt Burns head of equity-linked and mutual fund-linked products. "There is going to be demand created in more hybrid products that bring multiple asset classes to bear as opposed to something just being pure income trusts."

Holding pattern

The once swelling income trust wave has come crashing down on a handful of boutique mutual fund companies as the uncertain future of the asset class brings net sales to a standstill.

Fund companySept. retail assets under managementOct. retail assets under management (estimate)Percentage change
Guardian Group of Funds Ltd.$5.6-billion$5.2-billion-7.1%
Acuity Funds Ltd.$2.6-billion$2.4-billion-7.7%
Sentry Select Capital Corp.$718.8-million$640-million-11.0%
Mavrix Funds Ltd.$469.3-million$423-million-9.9%


© 2007 The Globe and Mail. All rights reserved.

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