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Weekly Insight

Your fund questions

The e-mail box continues to receive a steady stream of mutual fund questions, which are always welcome. Here are some of the latest ones.

Q - I'm thinking about investing in the imaxx Canadian Fixed Pay Fund. Any words of warning or caution? Any advice or alternatives? – W.L.

A – This is primarily an income trusts fund with some bonds tossed into the mix. It has tended to underperform the Canadian Income Trusts category, in large part because of that bond position. Over the 12 months to Sept. 30, it gained 18.5 per cent, which was more than eight percentage points below the category average. The three-year average annual compound rate of return was 18.3 per cent compared at an average of 20.7 per cent.

The major benefit is a high cash yield. The fund pays monthly distributions of 8 cents a unit (96 cents a year). At a recent net asset value of $11.50, that projects to a yield of 8.3 per cent over the next year. The annual survey of income funds published in the April issue of mu Mutual Funds Update newsletter, found very few that did better.

For a group that is not very well known, this fund has done quite well in attracting investor interest. Since its launch in June 2002, it has accumulated over $300-million in assets, a very respectable figure. The portfolio is handled by Glenn Paradis of Aegon Capital Management.

The main risk, as with all income trust funds, is that the sector is very volatile right now. We have already seen a sharp correction, with the fund losing 12.4 per cent in the past 30 days. There’s no guarantee the pull-back is over so you need to take that into account in your decision. Your financial advisor can provide more guidance.

Q - How would you rate Dynamic Dividend Fund? Also, given a good likelihood that investment trusts are due for a correction, would it be a good idea to go for a dividend fund at this time? – K.G.

A - I like this fund a lot but the name is misleading. It used to be a genuine dividend fund, with a high proportion of preferred shares, and Dynamic's description of the fund still conveys that impression: "The Fund seeks to maximize dividend income through investment primarily in preferred and equity securities of Canadian companies as well as income trusts."

In fact, preferreds recently made up only 12.6 per cent of the portfolio. The largest asset group was income trusts, at 36.5 per cent, followed by Canadian common stocks at 28.2 per cent. So in reality, this fund belongs in the Canadian Balanced category rather than the Canadian Dividend category where it currently resides. Its make-up is more akin to a monthly income fund than to a dividend fund.

That said, the fund that has posted some very decent returns in recent years. The three-year average annual compound rate of return to Sept. 30 was 17.8 per cent, two percentage points above the category average. Cash flow is decent, running at 1.8 cents per unit monthly for a projected yield of 2.4 per cent on an NAV of $8.83. This fund is a good choice for conservative investors, although if cash flow is the number one priority there are better options.

However, if you are worried about a further correction in the trust sector, this wouldn’t be the best dividend fund to pick. Rather, look for a fund that is more traditional in its portfolio mix with a relatively high percentage of preferred shares. The Signature Dividend Fund from CI would be a good choice; it has almost 46 per cent of its assets in preferred shares and only a sprinkling of income trusts. Talk to your financial advisor about the options.

Q - In 2000, I bought some labour-sponsored venture funds. I benefited immediately from tax rebates, and can not sell them until 2008 without some tax repercussions. The price on these funds collapsed after I purchased them and show no signs of recovering. I feel I am between the devil and the deep blue sea. If I sell now, I make a significant loss and pay back part of the tax refund gained at time of purchase. If I hold on to them, I am concerned they may be worthless when I can sell them without tax repercussions. In either case, the capital involved has been unusable during the holding period. Do you think there is any chance of their showing some recovery over the next few years? – R.A.

A – Almost everyone who has invested in labour funds is in the same position as you are, most have done badly. However, you need to hold them for eight years or you are on the hook to repay the entire tax credit, which would be 30 per cent of the original price. My advice is to grit your teeth and hope that the units can at least retain their current value until you are free to sell without penalty.

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© 2007 The Globe and Mail. All rights reserved.

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