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In these funds we trust -- at least for now

02:35 EDT Saturday, August 25, 2001

The stock markets are like financial tar ponds these days, unless you own some income or royalty trusts. The Sydney, N.S., tar ponds are one of Canada's most toxic waste sites, ranking right up there with the Toronto Stock Exchange 300 composite index.

Trusts, meanwhile, have routinely served up returns in the low double digits over the past year. I guess this is why so many readers responded to a column last week that looked at ways of investing in trusts through mutual funds.

I mentioned a pair of mutual funds that invest exclusively in trusts -- Merrill Lynch Canadian Income Trust and Dynamic Diversified Income Trust. Many people contacted me to suggest several other ways to get exposure to trusts.

The trust sector includes royalty trusts, which typically hold oil and gas assets, as well as income trusts based on businesses such as power generating, cold storage and sugar refining. A sub-set is the real estate investment trust, or REIT.

In each of these cases, a trust passes on the profits from the businesses they're in to unitholders in the form of regular monthly or quarterly distributions that have the benefit of certain tax advantages. These distributions are the real appeal of trusts, although they can also deliver capital gains.

The two trust-focused funds most mentioned by readers were GGOF Guardian Monthly High Income and Bissett Income.

The $753-million Guardian fund seems to be a particular favourite, and it's easy to see why. For the three years to July 31, the fund averaged 10.9 per cent a year, and its one-year gain is 24.5 per cent. The $26-million Bissett fund has been around since last November and has racked up a six-month gain of 9.7 per cent.

In assessing the recent performance of these funds, it has to be noted that trusts have been extremely hot in the past year and that at least some observers believe the easy money in the sector has been made.

If you want a fund that mixes trusts in with dividend-paying stocks and fixed-income securities, then check out the Canadian high-income balanced category of funds.

Two such funds suggested by readers are CI Signature High Income, which had about one-quarter of its assets in corporate debentures at the end of July, and Elliott & Page Monthly High Income, with a mix of trusts, stocks and bonds.

Another option for those who want a pure play on trusts is a closed-end fund.

Think of a closed-end fund as being an actively managed mutual fund that is listed on a stock exchange. Don't confuse closed-end funds with exchange-traded funds, which are passive investments in that they track various indexes.

Here are a few closed-end funds suggested by readers as a way to gain exposure to a diversified portfolio of investment trusts:

Citadel Diversified Investment Trust (CTD.UN-TSE): Holds a varied portfolio of trusts and currently yields almost 12 per cent. This fund is to terminate on Dec. 31, 2007 (for more information: http://www.citadelfunds.com).

Sentry Select Diversified Income Trust (SDT.UN-TSE): This fund is about 40-per-cent invested in resource-related trusts, mainly in oil and gas. The rest of the fund is mainly in REITs and infrastructure-related trusts. The fund now yields about 12.2 per cent (http://www.sentryselect.com).

Middlefield High Income Trust (MID.UN-TSE): This fund is about 70-per-cent invested in trusts, with the remainder in debentures and dividend-paying stocks. The yield is about 10 per cent (http://www.middlefield.com).

One thing to watch out for with closed-end funds is that they often trade at a discount to their net asset value. Check a fund's Web site for data on how net asset values compare with market price.

If you want to focus specifically on REITs in the U.S. market, there's an ETF listed on the American Stock Exchange that may be of interest.

It's called the streetTRACKS Wilshire REIT Index Fund (RWR-Amex) and its unit price has risen to around $123 (U.S.) from the $112 range at its launch this spring.

Aside from diversification, the big advantage of buying a fund that invests in trusts, as opposed to buying individual trusts, is professional management.

With their regular payments to unitholders, trusts may sound benign. But as anyone who owned oil and gas trusts during their collapse in the mid-1990s will know, their share prices can fall alarmingly.
rcarrick@globeandmail.ca




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