Just how bad has it been for income trusts?
This bad: Since last Halloween's surprise announcement that Ottawa will begin taxing trusts as corporations, only seven of 38 income trust mutual funds examined have posted positive returns.
Income trust funds have fallen an average of 2.7 per cent in value between Oct. 31, 2006, and Feb. 28 of this year. In contrast, the asset class returned an average of 8.5 per cent during the first 10 months of 2006.
Sales have dried up too. In January, 16 of 17 firms that market income trust funds posted net redemptions or no sales at all. The sole exception was Fidelity Investments Canada Ltd., reporting a slender $2-million in net sales in the asset class.
Here's a look at the handful of managers that defied the odds.
Dynamic FocusPlus Small Business Fund: "We own good businesses, we're sitting tight," said Oscar Belaiche, manager of the award-winning fund.
The small-capitalization fund has a flexible mandate, holding trusts and stocks with a market capitalization of less than $600-million.
The fund has no exposure to pricey oil and gas trusts, the hardest hit securities in the trust sector. Less-affected business trusts make up about 50 per cent of assets. A 23-per-cent weighting in small-cap stocks has helped shore up returns.
Fidelity Income Trust Fund: Cecilia Mo, a rising star at Fidelity, benefited from an underweighting in energy trusts and a big position in undervalued real estate investment trusts (REITs). She has been an aggressive buyer in recent months, favouring so-called "broken trusts," firms that Ms. Mo expects will command a premium via a leveraged buyout or takeover.
"The end of October sent me a signal. That's it," Ms. Mo said. Income trusts "will be gone by 2011. But if I can build a portfolio that has an 8- or 10-per-cent yield for unitholders before then, I'll do it."
Mavrix Canadian Income Trust Fund: A dearth of reasonably priced business and oil and gas trusts prompted manager Bill Shaw to sink about one-third of the fund's value in to REITs last fall.
In recent months, the fund has been buying business trusts on weakness and boosted its stock position to about 19 per cent, up from about 15 per cent last summer. Mr. Shaw predicts merger and acquisition activity in the trust sector will drive further gains.
QFM Structured Yield Fund: The little-known QTrade Canada Inc. fund is a money-managed solution that owns a diverse mix of exchange-traded funds, third-party funds and equities. A 35-per-cent weighting in Canadian and U.S. REITs "have helped us immensely," manager Manmeet Bhatia said. The annual management expense ratio is a tiny 0.8 per cent.
Saxon High Income Fund: Manager Richard Howson balked at the oil and gas trust sector's princely 40-per-cent sector weighting last fall and fortuitously bulked up on REITs and business trusts.
Deal making has aided returns too. The fund has held a number of recently acquired trusts, including Alexis Nihon Real Estate Investment Trust, Calpine Power Income Fund and Halterm Income Fund.
Sceptre High Income Fund: REITs make up about 32 per cent of holdings, an asset class with a reliable track record of returns and little correlation to stocks or bonds, said manager Matthew Baillie. Defensive, niche trusts with strong barriers to entry are top holdings. In recent months, the fund has bought a handful of high-yield financial stocks. Trusts make up about 80 per cent of the portfolio, down from close to 100 per cent last fall.
"My guess is the fund will become more and more corporation oriented," manager Matthew Baillie said. "We are trying to keep the fund as conservative as possible. It's all about preserving capital."
Sentry Select Small Cap Income Fund: Odds are, most investors have never heard of many of the trusts in manager Michael Simpson's portfolio. He focuses on small-cap companies with free cash flow, criteria that are key to the fund's monthly distribution of 5 cents a unit.
"We're happily buying businesses that aren't widely followed," Mr. Simpson said, adding that debt and distribution concerns made the fund largely immune to the fall of oil and gas trusts. He sees more opportunity ahead and is watching for takeover candidates and trusts that service the oil and gas sector.
In the money
INCOME TRUST FUNDS WITH POSITIV E RETURNS SINCE OCT. 31, 2006
|Fund||Assets under management Oct., 2006 ($'000)||Assets under management Feb., 2007 ($'000)||Returns|
|Dynamic FocusPlus Small Business||$50,090||$50,809||7.1%|
|Fidelity Income Trust - A||64,226||55,467||0.5|
|Fidelity Income Trust - B||42,334||36,492||0.5|
|Mavrix Canadian Income Trust||50,143||34,643||0.7|
|QFM Structured Yield - F||286||308||2.1|
|Saxon High Income Fund||233,626||198,674||0.6|
|Sceptre High Income||96,567||79,424||0.2|
|Sentry Select Small Cap Income||37,823||29,963||2.1|
© 2007 The Globe and Mail. All rights reserved.
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