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Rob Carrick

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Time to let go

Rob Carrick

OTTAWA (GlobeinvestorGOLD) — It's time for a word about those killer income trusts you own. You know, the ones paying a steady stream of income, and delivering capital gains the likes of which most stocks never see. You probably love these guys, but maybe it's time to let them go.

Call it a contrarian hunch, but there could be a chance later on to buy back these guys or other trusts at lower prices. The trust market stumbled a bit in March and early April, just as it did around the same time last year. But this year's pullback hasn't so far been as severe. While some trusts are still off their 52-week highs, they still show huge gains over the past 12 months. Add it all up and there's reason to believe that the trust market still has a nasty correction in store. You can sell your high-flyers now and lock in some gains, or wait until the market slashes their value later on.

Predictions of a reversal of fortune for the trust market are a dime a dozen, so scoff you might at the idea of correction to come. But let's be realistic. The S&P/TSX capped income trust index is up a cumulative 105 per cent over the past five years, an unsustainable track record that practically screams out, "danger, heedless income trust investor, danger." What will send the trust market lower? Rising interest rates are one possibility. Though economic growth seems to be cooling somewhat, inflation is still causing central warning lights to flash for central bankers. Just recently, Bank of Canada governor David Dodge suggested the trend for rates is still up, while some watchers of the U.S. Federal Reserve believe rates south of the border have a lot more room to rise.

Rising rates would affect the various trust sectors differently, but here's something to consider. Yields on high-flying trusts are low right now and if rising rates push up the return on bonds and guaranteed investment certificates, then some investors are going to jump into the safer fixed-income market. Take Energy Savings Income Fund, for example. It currently yields about 5.6 per cent, but has compensated unitholders with unit price gains totalling 160 per cent over the past three years. The unit price has risen so much that even multiple distribution increases have not pushed up the yield.

Energy Savings is an obvious dynamo, but the market is already growing cautious about it. So far this year, the unit price is down about 18 per cent. There are brokerage analysts who see more growth for Energy Savings ahead, which helps explain why the consensus rating is a "buy." But another possibility is that Energy Savings heads lower, bringing its yield up a percentage point or two to a more attractive level. At that point, it would be an even better buy.

The counter-argument here is to hang onto your Energy Savings units, collect your distribution income and ignore unit price fluctuations. In fact, that's the way income trusts should be held. But exceptions can be made for growth trusts, which means those that have been more about capital gains in recent years than boring old distributions. If you sell these over-achievers now, you can lock in your capital gains and you put yourself in a position to be able to buy the trust back later on, when its price has fallen and its yield has risen.

Here are some other hotshot trusts that have risen sharply in the past three years and would look good at lower prices:

There are plenty of stellar trusts in the oil and gas category that you might want to take profits on as well. Then, during one of those periodic downturns for energy stocks, you may be able to buy them back and lock in higher yields. Some examples would include Peyto Energy Trust, Zargon Energy Trust and Canadian Oil Sands Trust.

The obvious risk in selling trusts like these is that they continue onward and upward, delivering more of what they've given unitholders over the past few years. But deep down, you know it can't go on forever. If you make a clean break now, you avoid the heartbreak later.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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