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Weekly Insight

You have to be quick

You can't keep the income trust market down for long.

Concern about federal government intervention in the trust market caused a 5.5-per-cent drop in the S&P/TSX composite index Sept. 19 to 23, but that understates the damage because oil and gas royalty trusts were pretty much untouched. A better indicator would be the declines of 10 per cent or slightly more in some big name trusts like Yellow Pages Income Fund and Energy Savings Income Fund. What happened next should be familiar to anyone watched the trust market stumble in the spring of 2004 and 2005 within days, the index was on the rebound.

The lesson here for investors is clear: there is so much support for quality income trusts that buying opportunities last no more than a few trading days at the most. Remember this if you're hoping to capitalize on volatility in the trust market caused by speculation over what measures the federal government has in store for trusts.

We'll assume here that whatever tax measures are introduced won't destroy the appeal of trusts entirely, although they may reduce it a little bit. Trusts could conceivably face new taxes that pare down the amount of cash they have to distribute to unitholders, a development that could easily depress trust unit prices. The best trusts will surmount this because of their financial flexibility, which is why some money managers are looking for buying opportunities ahead.

If you're of a like mind, you'll want to familiarize yourself with the trading patterns of the trusts that interest you so you know when an attractive price has been reached. One way to do this is to focus on the yield, which will move up as the unit price falls. Maybe you like the idea of owning RioCan Real Estate Investment Trust with a yield of 7 per cent, which compares to about 6.1 per cent in late September. RioCan is arguably the highest quality REIT on the Canadian market and the stability of its distributions is highly rated by Standard & Poor's and Dominion Bond Rating Service. Given this risk profile, a 7-per-cent yield seems a good deal. How do you get it? By being patient and waiting for RioCan units to decline to $18.50, which would indicate a 7-per-cent yield based on the annual distribution of $1.29 per unit. RioCan may never fall that far, but if it does you have to be ready because it likely won't stay down for long.

A useful tool for keeping an eye on trust prices is the Alert function on GlobeinvestorGOLD. Pick the trusts you want to track you can do any stock or fund and then set a floor price. When and if the trust falls to that level, you'll get an e-mail to tip you off. If trusts are plunging in price for some reason, it might take a leap of faith to jump in. Then again, the experience of the past few years shows that opportunities to earn high yields from strong trusts are both rare and brief.

This article first appeared on GlobeinvestorGOLD.com. If you'd like to profit from the insight of more than 30 financial experts and columnists, including Rob Carrick sign up for a free trial to GlobeinvestorGOLD.com.

© 2007 The Globe and Mail. All rights reserved.

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