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Investors sour on once-hot income trusts

Asset class slips into redemptions


Mutual fund investors' red-hot romance with income trusts went ice cold last month.

Despite better-than-forecast net sales of $1-billion in October in all types of funds, investors yanked about $190-million from the once-favoured income trust fund sector, which is part of the broader dividend and income category.

It's the first time the group of 31 income trust mutual funds has slipped into redemptions since the Investment Funds Institute of Canada began tracking the category in January, 2004. Between April and September of this year, the fund category averaged about $200-million in net sales, IFIC said.

"Investors may be concerned about the future of tax treatments of income trusts," said Tom Hockin, IFIC's president and CEO.

On Sept. 19, Finance Minister Ralph Goodale said the Canada Revenue Agency would no longer grant advance tax rulings to help companies become trusts. Fears a distribution or capital tax targeting trusts may be coming next year has led to a sell-off in the S&P/TSX capped income trust index. The broad-based composite of Canada's largest trusts has slipped about 12 per cent in value since Mr. Goodale's announcement.

The total market value of the income trust fund category fell to $14.4-billion on Oct. 31, down from $16.1-billion at the end of September, IFIC said. Boutique fund companies specializing in the trust category are out of favour. For example, the assets managed by Sentry Select Capital Corp. slipped to $638.5-million last month, down 11 per cent from $718.8-million in September, IFIC reported.

Nevertheless, the industry's $1-billion in October net sales is higher than the Nov. 2 forecast of between $550-million and $950-million. More significantly, last month's sales performance is a big improvement from net redemptions of $52-million in October last year.

Fund unitholders are searching for yield and income from different asset classes, said Joe Canavan, chairman and chief executive officer of financial advice firm Assante Corp. "Yield, value and balanced funds are really where you are getting demand," he said. "It's anything that generates some form of yield that might be an alternative to income trusts. If income trusts are a dead vehicle, then people are going to go to dividend-paying funds."

Balanced funds were the biggest sellers in October, with net new sales of $740.8-million, down from about $1-billion in September. Total assets under management in balanced funds were $115.4-billion at the end of the month, making the asset class second only in size to out-of-favour Canadian common stock funds. Common share funds reported net redemptions of $394.2-million for total assets under management of $123.8-billion.

In October, net sales of dividend and income funds -- a category that encompasses income trust funds -- dropped to $264.3-million. One month ago, net sales of the asset class reached $702.3-million, IFIC figures show.

Meanwhile, money market funds reported inflows. The fund class reported net sales of $102-million for total assets under management of $47.1-billion, the seventh month of inflows to the asset class in the past 44 months, George Vasic, analyst and chief economist at UBS Securities Canada Inc., said yesterday.

The quest for yield

Net sales to Oct. 31, excluding reinvested distributions, $'000

Yr.-over-yr.Total assets
Fund typeOctober% changemonth end
Canadian common shares- 394,17212.8123,827,987
Foreign common shares- 218,3000.785,346,743
Bond and income550,9822359,970,384
Foreign bond and income40,81013.56,525,057
Dividend and income264,28628.562,811,893
Mortgage33,479- 4.14,849,992
Real estate- 4,35322.72,098,547
U.S. common shares- 101,562- 3.531,066,799
Money market104,027- 8.445,224,460
Foreign money market- 1,586- 1.11,874,120
All funds$1,014,369 13.90%$538,984,288


© 2007 The Globe and Mail. All rights reserved.

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