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Mutual Fund News

New income products rule the day

Investment industry is riding a wave of excellent returns, even better sales, ROB CARRICK writes

Another year, another display of raw power by mutual funds that provide income using dividend stocks, income trusts, bonds and such.

Income funds produced excellent returns in 2005, and sales that were beyond excellent. No wonder the investment industry has been like an assembly line in churning out new products in this category. Let's catch up with some of them.

The most novel new product is a closed-end fund from Toronto-based hedge fund company BluMont Capital Inc., which according to its preliminary prospectus, will yield 6 per cent based on an issue price of $10 and a planned monthly distribution of 5 cents a unit, or 60 cents annually. Closed-end funds are essentially mutual funds that are bought and sold like a stock.

The BluMont Man Alternative Yield Fund will invest in a pair of hedge products, one of them a "fund of funds" that exposes investors to a variety of hedge strategies. The other is a managed futures portfolio that trades futures contracts on stock indexes, bonds, currencies and commodities. The net result for investors is that they will receive tax-efficient income from investments that move in different patterns than the stock and bond markets. If you're concerned about what a slump in the stock market, in income trust prices or in the bond market will do to your income portfolio, this fund would in theory be a remedy. Think of it, then, as an income hedge.

Don't buy this fund without minding the risks, notably the merciless volatility of managed futures funds. The worst-performing mutual fund in the past 10 years is AGF Managed Futures Fund , which lost a compound average annual 14.5 per cent over the period. The fund analysis firm Morningstar Canada reports that if you started with $1,000 in this fund back in December, 1995, you would have had $198 at the end of last year.

Other risk factors in the BluMont fund are the use of derivatives and leverage, or borrowed money.

BluMont Man Alternative Yield will be managed by London-based Man Investments, a global heavyweight in the hedge sector, so there is considerable expertise behind the product. Still, this fund could prove to be a more high-strung beast than those incredibly popular monthly income funds sold by the banks. On a practical note, this fund's distributions may be suspended if the unit price falls below $7.50.

Investors can buy BluMont Man Alternative Yield through major investment dealers for a minimum of $5,000 until Feb. 14, after which it will trade on the Toronto Stock Exchange.

Generating income with dividend-paying common stocks is the ultimate no-brainer investing strategy, but we Canadians tend to do it in a one-dimensional way. While there's a whole world of dividend stocks out there, we focus on domestic financial companies, utilities and such, with occasional forays into U.S. stocks.

Lately, though, a couple of mutual fund companies have introduced funds that will hold large positions in global dividend stocks. One such fund is Templeton Global Income, which is moving toward an asset threshold of about 60 per cent in dividend stocks and 40 per cent in global bonds.

The fund aims to hold stocks with dividend yields higher than 2.75 per cent, said Lisa Myers, a portfolio manager with Franklin Templeton Investments Corp. in Nassau. "There are an ample number of stocks in the portfolio from that level all the way up to 7 or 8 per cent."

An example would be Tele Norte Leste Participacoes SA, a Brazilian telecommunications company that trades on the New York Stock Exchange as an American depositary receipt and has a dividend yield of close to 6 per cent. Another stock held by the fund, Vodafone Group PLC, a NYSE-listed British mobile phone company, has a yield of 3.5 per cent.

There's also a diversification benefit in holding global dividend stocks. Ms. Myers said that in North America, high-yielding dividend stocks are typically in one of just a few sectors, including banks, utilities, pipelines and telecommunications stocks.

"But we're finding dividend opportunities in every industry, in every global region," she said. "It's really a very diverse portfolio."

Another new global offering for dividend-seekers is Winnipeg-based Investors Group Inc.'s Investors Global Dividend, which will hold about 70 per cent of its assets in stocks and 30 per cent in bonds. This is the same formula used by the $11.3-billion Investors Dividend Fund, by far the country's largest fund of any type.

Dom Grestoni, vice-president and portfolio manager at IG Investment Management Ltd., said that holding bonds in both dividend funds smoothes out some of the volatility of a stocks-only fund. To further dampen volatility, the global dividend fund will look at using currency hedging for the stocks in its portfolio.

With its bond holdings, Investors Dividend has been a slightly below-average performer in the Canadian dividend category over the long term. But the currency hedging would be an attraction for the global fund, given the way the strong dollar has recently obliterated returns from funds that focus on markets outside the country.

You can see this clearly in the results of two funds focusing on U.S. dividend stocks: Phillips Hager & North U.S. Dividend Income and Clarington U.S. Dividend. The PH&N fund has made a compound average annual return of just 1.03 per cent since it was launched in July, 2002, while the Clarington fund is basically flat since its launch in September, 2004.

A more attractive U.S. dividend fund right now is Franklin Templeton Rising Dividend, which until late last October was the sad-sack Bissett American Equity Fund. In the past three months, the fund has beaten the average U.S. equity fund 3.6 per cent to 2.7 per cent. Call these numbers promising, rather than conclusive.

A new option for investors looking for exposure to Canadian dividend stocks is an exchange-traded fund [ETF] called the iUnits Dividend Index Fund. Here, you're buying into the Dow Jones Canada Select Dividend Index of 30 high-yielding stocks, including all the major banks, utilities, pipelines and telecoms, as well as industrials such as Magna International Inc. and Russel Metals Inc.

The yield on this fund is roughly 2.85 per cent, based on the 3.35-per-cent yield of the underlying index less a management expense ratio of 0.5 per cent. This ETF will be a strong competitor to Canadian dividend mutual funds, but its near 50-per-cent weighting in banks, insurers and fund companies means it should be avoided by people who already have significant exposure to Canadian financial stocks.

Similar ETFs in the U.S. market are the iShares Dow Jones Selected Dividend Index Fund and the less popular PowerShares High Yield Equity Dividend Achievers Fund. Both yield about 3 per cent right now, but remember that a rising Canadian dollar would undermine your returns.

The iUnits Dividend Index Fund and the other funds mentioned here aren't classic income funds in that they won't give you the highest possible flow of cash every month or quarter. They're better described as total-return investments, where part of your gains come from modest distributions of income from dividends and such, and the rest comes from gains in the value of the stocks in the portfolio. Many of the people buying income funds today are actually total-return investors, although they may not realize it.

Incoming income funds

Sparked by strong sales and returns, the investment industry has been producing lots of new products in the income category. Here are details on some of them.

Description Availability Suitability
BluMont Man Alternative Yield Fund A closed-end fund that holds a variety of hedge fund investments and is designed to produce an annual yield of 6 per cent based on its $10-per-unit issue price.Available from brokers until Feb. 14 for a minimum $5,000; afterward will trade on the TSX.Risk-tolerant investors who want to generate income from sources outside stocks and bonds.
Templeton A global balanced fund that will keep about 60 per cent of its assets in dividend stocks.Most dealers and advisers for as little as $500.Income investors looking for international diversification.
Investors Offers exposure to global dividend stocks with stock market volatility reduced through holdings in bonds. Investors Group advisers sell it with a minimum upfront investment of $1,000.Conservative income investors who want global diversification.
Franklin Templeton U.S. Rising Dividend A core U.S. equity fund that will benefit from holdings in stocks that have shown the ability to increase their dividends.Most dealers and advisers for as little as $500.A wide range of investors, as opposed to just those who want income.
iUnits Dividend Index Fund An exchange-traded fund that holds 30 high-yielding Canadian dividend stocks. ETFs trade like stocks and are available through any broker.Anyone looking for exposure to blue-chip dividend stocks, not to mention dividend income.

© 2007 The Globe and Mail. All rights reserved.

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