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Always on the run

Manager spotlight: GAELEN MORPHET

It's a good thing Gaelen Morphet is a marathoner. All those endorphins are welcome when your world gets turned upside down. Certainly the 45-year-old first vice-president of Canadian equities at CIBC Global Asset Management Inc. needed some in early November after federal Finance Minister Jim Flaherty stunned Bay Street and rattled investors' dentures with his plans to tax income trust distributions.

Morphet leads a team that manages and co-manages 10 funds with a total of more than $6 billion in assets. Among them is the Renaissance Canadian Income Trust Fund, which took a beating as its holdings in the likes of the Yellow Pages Income Fund and the Labrador Iron Ore Royalty Income Fund plunged in the two days after Flaherty's bombshell. "It's going to take time to shake out on a trust-by-trust basis because they're all different," she says, looking something like a cheery, buff version of Margot Kidder, circa the first Superman movie.

The Renaissance fund has had at least 70% of its assets invested in income trusts, and Morphet has run the fund for five years. The trust sector as a whole has been hot over that time, but Morphet has also been selective. She likes trusts that, in their previous incarnations as corporations, showed healthy cash flow and modest capital expenditures over several years. Bell Nordiq, the rural phone business spun out of BCE in 2002, is her idea of a "steady, boring company" that quietly generates consistent income and reliable distributions.

She also likes to diversify. True, about one-fifth of Renaissance Canadian's portfolio is invested in energy, but the rest is spread among various sectors. There are 40 trusts in the fund, and Morphet and her team of five track more than 150 others. To be included, a trust's managers have to convince Morphet that they can strike a healthy balance between maintaining growth capital in the business and paying out enough in distributions to unitholders.

Given these guidelines, and the fact that the trust sector is known for dubious accounting and governance, Morphet prefers trusts with track records that span years of profits, like ARC Energy Trust and H&R REIT. She has held the odd trust that has reduced or suspended its distributions, including the scandal-plagued Atlas Cold Storage Income Trust and the Superior Plus Income Fund, an oddly diversified distributor of propane, natural gas, specialty chemicals and building supplies. But Morphet points out that "there are probably 50 other trusts that cut their distributions or bombed, and we've had hardly any of them."

Flaherty's move will likely cause many trusts to convert back to corporations. That means, Renaissance Canadian could put more money into stocks and bonds. Morphet hopes the stocks will pay hefty dividends. "That would be wonderful for investors," she says. "In Canada, fewer than 45 stocks have over a 2% yield. It's disappointing, and it's one of many reasons why investors were interested in income trusts."

Morphet says this casually. She's used to big changes. The Hamilton native studied psychology at the University of Western Ontario before falling into investments as a temp at the old McLeod Young Weir. Later, she shifted to the buy side with McLeod's eventual parent, the Bank of Nova Scotia, earned her CFA and moved into increasingly senior money management jobs. She and her husband are also raising four children. That's a gruelling schedule, yet even on days when the market is clobbering her fund, she loves the work. Maybe it's her second wind kicking in. --Renaissance Canadian Income Trust Fund

1 year % 3 year % 5 year %
Average annual compound returns (to Oct. 31, 2006) 22.4 21.0 19.0
Index (Globe Canadian Income Trusts Peer Index) 18.7 18.1 16.3

© 2007 The Globe and Mail. All rights reserved.

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