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Mutual Fund News

Looking for gems in 'under-loved' trust sector

swon@globeandmail.com

What are we looking for?

This is our final look this week at what some money managers are buying. Consider checking out the top securities of mutual funds to get stock tips, or as part of research on a particular fund. Today, we look at Norrep Income Growth Class at http://www.norrepfunds.com.

The $49.1-million Canadian income trust equity fund has always been run by Alex Sasso of Hesperian Capital Management Ltd. The fund gained 34 per cent for the year ended May 31 compared with 31.2 per cent for the S&P/TSX Income Trust Total Return Index. It has posted an annualized return of 0.27 per cent over three years, and 4.3 per cent since inception in 2005.

The manager looks for quality trusts or companies paying a good yield. The fund is 55-per-cent invested in income trusts; 7 per cent in high-yield bonds; 5 per cent in cash and the rest in dividend-paying equities. Mr. Sasso is bullish on the income trusts even though the sector is shrinking as Ottawa's 2011 deadline nears for these investments to be taxed like corporations.

Since Ottawa sounded the death knell for trusts in 2006 (excluding real estate investment trusts), "they have become under-followed and under-loved," he said. "There are hidden gems. We think there is going to be lots of merger and acquisition activity prior to conversion at the end of the year."

While many trusts have converted to common stock companies, others may wait until the last minute. Trusts that won't have to cut their payouts upon conversion "will do very well," he said.

What did we find?

Black Diamond Group Ltd. and Wajax Income Fund were among the top 10 in the fund that have had a sharper slide from their 52-week highs.

Mr. Sasso, however, is still upbeat on Black Diamond, a Calgary-based provider of temporary work force accommodation to the energy, mining and other industries. The company, which has "great management, " trades at about 11 times trailing earnings and has a 13-per-cent return on equity with tremendous top line and bottom line growth, he said. "We think the stock [a former income trust] is worth close to the mid-$20s over 12 months."

Wajax Income Fund, a distributor of mobile equipment, industrial components and power systems, is a company whose health depends on the overall health of the economy, and still has potential, he said. "In a year or two year from now, we think Canada will continue to be a leader in GDP growth."

The trust trades at 19 times trailing earnings; has a 22-per-cent return on equity and an 8-per-cent yield, he said. His 12-month target price is $30 a unit.

Colabor Group Inc., a Quebec-based food distribution company and wholesaler, is growing by acquisition and has an attractive valuation, he said. The former income trust trades at 11 times trailing earnings, has a 16-per-cent return on equity and 9-per-cent yield, he noted. "Acquisitive growth has catapulted the company to much higher revenue numbers." His one-target is $15 a share.

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Top 10 holdings of Norrep Income Growth Class at May 31, 2010
Company nameSymbol$ Price June 1652-wk high $52-wk low $YTD % price chgP/E% YieldMarket cap ($-mil)Volume
Black Diamond GroupBDI-T17.3521.018.805.014.86.2282.314,867
Bonavista Energy TrustBNP.UN-T24.8125.7016.6411.323.27.73,108.6311,823
Baytex Energy TrustBTE.UN-T33.2336.8017.0511.941.06.53,632.0177,388
New Flyer Industries Inc.NFI.UN-T10.0311.767.32-0.2n/a11.7474.7129,133
North West Co. FundNWF.UN-T19.4120.2214.882.211.47.0939.076,667
Torstar Corp.TS.B-T10.4311.754.3564.812.93.6824.131,417
Wajax Income FundWJX.UN-T23.4028.4815.867.211.77.7388.58,616
Colabor Group Inc.GCL-T12.0812.689.259.112.28.9253.453,595
K-Bro Linen Income FundKBL.UN-T15.0516.0011.7011.713.17.3105.49,162
SIR Royalty Income FundSRV.UN-T9.319.775.5622.56.914.849.91,184
Source: Globe Investor, company

© 2007 The Globe and Mail. All rights reserved.

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