It's time to take inventory if you're one of those investors who have collectively stuffed billions of dollars into monthly income mutual funds.
What you're looking for in these funds are income trusts. Trusts are a cornerstone investment in most monthly income funds, helping them churn out cash distributions each month that collectively yield more in a year than a bond or guaranteed investment certificate. Today, though, there's a measure of risk in having exposure to trusts. The federal government is reviewing its policy on them, and it's possible that there will be tax measures in the next budget that make the sector less attractive as an investment. If that were to happen – remember, we're speculating here – then trust prices could fall and hurt the returns from monthly income funds in a couple of ways.
For one thing, lower trust share prices could drag down the unit price of monthly income funds. If some trusts were to have to cut back on their distributions as a result of government tax measures, then the cash paid out by monthly income funds could be affected as well. The whole idea of monthly income funds is to mix trusts, bonds and dividend stocks to produce income, so you're protected to some extent from dips in the trust market. Still, you'd do well to get an idea of how much trust exposure your monthly income fund has so that you're not blindsided if/when the government acts.
Some fund companies are upfront in disclosing the kinds of investments they've put in their monthly income funds. For example, RBC Asset Management's website included a fact sheet showing that the $7-billion RBC Monthly Income Fund has about 18 per cent of its assets in trusts. On TD Asset Management's website, you'll find out that the $2.8-billion TD Monthly Income Fund has about 27.5 per cent of its assets invested in trusts, and Canadian Oil Sands Trust is the largest holding at 4.1 per cent. On the Acuity Funds site, you'll find that the $1.2-billion Acuity High Income Fund has about 27 per cent of its assets in trusts.
Other fund companies are less forthcoming. They tell you their Top 10 holdings and maybe their sector weightings and allocations to stocks, bonds and cash, but they don't break out trusts separately. If you can't easily find information on trust exposure, talk to your investment adviser, call the fund company's client relations department or consult your fund's annual report using the Sedar.com website. These annual reports provide a complete listing of all fund holdings and they'll give you a sense of how many trusts are in the portfolio and how much of a weighting they've got.
If your only trust exposure is through a monthly income fund, then you might well decide to leave matters up to the fund manager. But if you own trusts directly or have some money in other funds loaded with trusts, you may be in too deep.
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