Income trusts have sold off significantly since early September when the federal government first expressed concern about lost tax revenue, but fund manager Kevin Hall hasn't gone bargain-hunting. He remains cautious in face of the uncertainty in the trust market -- a situation that he expects will last for quite some time.
Mr. Hall has been a co-manager of the GGOF Monthly High Income II Fund since 2002. The $1.12-billion fund, which invests in income trusts, is up 10.72 per cent so far in 2005. It gained 19.11 per cent in the 12 months ended Oct. 31 and 22.54 per cent annualized over the past three years.
"We have found some opportunities and have been putting some cash to work in the marketplace, but on a selective basis," he said, noting that the fund's current cash position is about 5 to 5.5 per cent, which is on the high side of the usual range of between 3 to 5 per cent.
He believes that the recent sell-off in the trust sector shows that some of the bad news in terms of a possible negative policy response from the government has already been priced into the market. Still, the portfolio manager with Guardian Capital LP said, "there is potential for further downside, depending on what course of action the government decides upon." Business trusts have been particularly hard hit over the last several months. Energy trusts haven't suffered as much. Real estate investment trusts have gotten off the most lightly because they are at the least risk of a negative policy response, he suggested.
Units of Davis + Henderson Income Fund (DHF.UN-TSX) hit a 52-week high of $24.07 just one day before federal Finance Minister Ralph Goodale first mentioned the issue of lost tax revenue. The units then dropped to a 52-week low of $16.32 on Oct. 19 but have rebounded somewhat, closing yesterday at $18.50 on the Toronto Stock Exchange.
Mr. Hall sees much to recommend Toronto-based Davis + Henderson, which manages the cheque supply programs of Canada's financial institutions and provides related services. "It is a very stable business; a very high quality business," he said. The units offer an approximately 8-per-cent yield, "plus what we believe is about 3-per-cent growth per year in distributable income," he said. Moreover, the balance sheet is "very conservative" with a debt-to-cash flow ratio of 0.7 times. Davis + Henderson's payout ratio is conservative at about 85 per cent of distributable cash.
Unlike Davis + Henderson, units of ARC Energy Trust (AET.UN-TSX) have continued to climb, closing yesterday at a 52-week high of $24.80, up from the 52-week low of $16.34 in December, 2004. The oil and gas royalty trust has "a very solid management team with a proven long-term track record," Mr. Hall said.
Moreover, ARC has "one of the longest reserve life indexes of 12 years," he added. The balance sheet is "very conservative," with a debt-to-cash flow ratio of 0.3 times and a payout ratio of just 55 per cent. ARC is using the retained cash flow to invest in development and exploration opportunities and producing more oil and gas, he said. "We think it is one of the highest quality trusts out there and we think it is currently undervalued, given its superior fundamentals," he added.
H&R Real Estate Investment Trust (HR.UN-TSX) is a "high quality stable REIT that does a very good job of matching long-term leases to creditworthy tenants versus long-term debt financing," Mr. Hall said. Toronto-based H&R, which owns office, industrial and retail properties, has a 99-per-cent occupancy rate and a 90-per-cent payout ratio, he added. He believes the REIT is undervalued relative to its peer group, a situation he attributed to the overhang in the marketplace from a recent equity issue.
"We believe that the undervalued situation will resolve itself as we go forward," he said. H&R REIT units have lost ground since setting a 52-week high of $21.07 on Sept. 9. They closed yesterday at $18.85. The 52-week low was $16.80, established on March 23.
Cautious stance
Fund manager Kevin Hall remains cautious in the face of uncertainty in the income trust market -- a situation he expects will last for quite some time.
Top 10 holdings, As of Oct. 31,2005
| 1 | ARC Energy Trust | 4.56% |
| 2 | Canadian Oil Sands Trust | 4.36% |
| 3 | BFI Canada Income Fund | 3.82% |
| 4 | RioCan Real Estate Investment | 3.68% |
| 5 | Yellow Pages Income Fund | 3.29% |
| 6 | Penn West Energy Trust | 3.10% |
| 7 | Calloway REIT | 2.74% |
| 8 | Summit REIT | 2.71% |
| 9 | Precision Drilling | 2.70% |
| 10 | Cdn. Real Estate Investment | 2.62% |
Returns to Oct. 31, 2005
| 1-month | -9.09% |
| 3-month compound | -6.52% |
| 6-month compound | 6.72% |
| 1-year compound annual | 19.11% |
| 3-year compound annual | 22.54% |
GGOF Monthly High Income II
| CATEGORY | Canadian Income Trusts |
| MANAGER | Kevin Hall |
| LOAD STATUS | Open-Ended |
| TOTAL ASSETS | $1.12-billion |
| MANAGEMENT EXPENSE RATIO | 2.52% |
| GLOBEFUND 5-STAR RATING SYSTEM | ***** |
Daily net asset value, with re-invested distribution: Latest close $14.87
SOURCE: GLOBEINVESTOR.COM
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
