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If you want to invest in income trusts after all that's happened lately, you need professional help.
A shrewd mutual fund manager is what we're talking about here. Someone who has invested in income trusts for years and has demonstrated the savvy that will be needed to make money as we approach the introduction of a new tax on trusts in 2011. Trusts have already been knocked down as a group by skittish investors, but that's just the opening act in what could turn out to be four years of major volatility in the trust market. Investors will continue to struggle to identify the trusts with a future, and those that are going to be road kill in the post-2011 environment.
Confident in your ability to choose good from bad? If not, then the wise move is to find an experienced trust fund manager. The obvious drawback to buying an income trust mutual fund is the cost - the management expense ratio for the Canadian income trust mutual fund category is 2.06 per cent, but some of the largest funds have MERs in the range of 2.35 per cent. If you're investing in trusts for income, you should expect the net yield on your monthly distributions of cash to be lowered by the amount of the MER. For example, a fund owning a portfolio of trusts with an aggregate yield of 8 per cent would actually have a 6-per-cent yield if the MER were 2 per cent.
In return for paying the ownership costs of an income trust mutual fund, you ideally get the expertise of managers like Sandy McIntyre. Of the 10 largest income trust mutual funds, Mr. McIntyre's $633-million Sentry Select Canadian Income Fund ended up with the smallest losses in the two weeks that followed the federal government's announcement of a crackdown on income trusts. The fund wasn't bulletproof - it lost 10.9 per cent over the first half of November - but it was a lot better than the 14.7-per-cent decline in the S&P/TSX capped income trust index. It also compares well with losses of 11 to 15 per cent sustained by other widely held Canadian income trust funds.
Mr. McIntyre's conservative approach is well suited to the uncertain trust market of the next few years. To start with, he prefers to hold the sort of quality trusts that have yields on the low side (lofty yields are a sign of risk). "We have always had a very disciplined process," he said. "Our largest positions don't have a high yield, and they're good businesses. I'm constantly struggling to find best in class companies with competitive advantages."
Unless you're an experienced investor, identifying trusts that can flourish after 2011 will be guesswork. Meanwhile, Mr. McIntyre believes his quality-first approach already has him in good shape for the future. "When I look at the trusts that I hold, about half of them are in a position where they can seamlessly transition into the new reality." As for other trusts, Mr. McIntyre said that even an expert like him doesn't yet have enough information to make decisions. For example, there are lots of questions still to be answered about the net impact the new trust tax will have. "We still don't know enough to do the calculations," he said.
From January through mid-November, Mr. McIntyre's fund was down just 1.8 per cent, which is the best performance any of the 10 biggest income trust funds. Over the past five years, his fund is above average for just about every time frame you can measure. These are the attributes you should look for in an income trust fund you plan to hold over the next four years - better-than-average results over the long run and a demonstrated ability to protect clients from the kind of trust market volatility we may see a lot of in the years ahead.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.