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Income trusts can add juice to your portfolio

02:21 EDT Saturday, August 18, 2001

You've got stocks, bonds and cash in your portfolio, now what about some juice?

Unless you're highly conservative, you're probably on the lookout for ways to squeeze a little extra juice out of your holdings.

Over the past couple of years, many people turned to technology stocks. Now, it's royalty and income trusts.

All right, comparing trusts and techs is a bit like matching minivans against sports cars. Still, there's no question that trusts have been one of the more attractive investments of the past year or so, better than bonds and much, much better than stocks.

Trusts are best thought of as a hybrid of stocks and fixed-income securities. They're listed on stock exchanges and fluctuate in price, while at the same time they pay a regular monthly amount to unitholders. Yields on the 120-plus trusts listed on the Toronto Stock Exchange range from roughly 5 to 20 per cent.

One type of trust is the royalty trust, which invests in resource properties, often in the oil and gas sector. Another is the income trust, which is usually based on real estate assets, but also on a range of businesses that include cold-storage facilities, sugar refining and hydro-electric power.

In simple terms, the profits generated by these assets are paid out to unitholders on a monthly basis. Various tax advantages apply to trusts, which means you can generally expect to pay less in taxes than you would with traditional sources of income, say guaranteed investment certificates or bonds.

Interested? Not so fast.

Trusts are tough to choose on your own because there's not a lot of research available, other than basic financial numbers. Unlike stocks, which everyone has an opinion on, trusts aren't widely covered by analysts and market experts.

Research is essential, though. Some trusts are better run than others and have better-quality assets. This makes their income flows more reliable, and gives you a better chance of reaping capital gains as well.

Maybe you'd rather have a mutual fund manager do the work for you.

Funds that focus on trusts are few -- I found only two. However, there is a larger group that mixes trusts in with dividend-paying stocks and bonds.

You'll find these funds under the Canadian High Income Balanced classification, a reference to the fact they're generally tuned to deliver an income stream that is above and beyond what regular bond funds offer.

The two trust specialists are the $380-million Merrill Lynch Canadian Income Trust Fund and the $28-million Dynamic Diversified Income Trust Fund, which was converted from a T-bill fund at the beginning of July.

Think of the Dynamic offering as a conservative equity fund, even though it pays out income every month.

"We were looking for a safe harbour for people who were worried about the market but wanted to retain some semblance of equity exposure, said Ned Goodman, the well-known financier who co-manages the fund.

Mr. Goodman said the fund is 34 per cent invested in oil and gas trusts, with another 28 per cent in real estate, 16 per cent in resource-based trusts and the rest in various other sectors.

This kind of diversification is important because trusts can bite. In the mid-1990s, for example, the value of oil and gas royalty trusts plunged along with oil and gas prices. Distributions of income can also decline in bad times, which would mean a devastating one-two punch.

The Merrill Lynch Canadian Income Trust Fund returned 27.7 per cent in the year to July 31, which is outstanding when you consider the TSE 300 composite index fell 25 per cent.

As impressive as it is, a return like this also raises questions about how much juice is left in the trust sector.

Dynamic's Mr. Goodman thinks there are still solid gains to be had.

He says we're in a period of time where real interest rates -- regular rates less the inflation rates -- are approaching zero. In previous instances, this type of environment produced stock market returns that topped out at 10 per cent and sometimes were much below that, even negative.

With the pool of income trusts in the fund, Mr. Goodman figures he can deliver annual returns of approximately 10 per cent.

He also argues that if the markets turn around and the economy heats up, then investors will benefit through exposure to inflation-resistant assets such as real estate and oil and gas properties.

If you want to look at individual trusts as opposed to trust-focused mutual funds, try using the Globeinvestor Web site (

Click where it says "Filter" on the home page and then use the pulldown menu under the "Security" heading to select "units."

To see which trusts the pros are buying, use the fund profiles available on Globefund (

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