OTTAWA (GlobeinvestorGOLD) – A tough question awaits you once you’ve made the decision to get into income trusts.
Which trust will you buy? A real estate investment trust, or REIT? An oil and gas royalty trust? A pipelines trust, or a business trust, which can be based on companies in areas such as fast-food, waste management, cold storage, peat moss production and so on? All of these sectors have their own nuances and risks. In fact, you’re best off with a mix of different trusts (for more background on trusts, see some columns I’ve written in the past couple of weeks).
If you’ve got the time and dollars in your portfolio to buy a basket of trusts, great. If not, you’ll want to look at a fund that focuses on trusts. There are traditional mutual funds that do this, and several closed-end funds that trade on the TSX. Let’s take a closer look at these closed-end funds.
First off, you have to understand that a closed-end fund works pretty much the same as a traditional fund, except that it’s bought and sold like a stock. That means you’ll need a brokerage account and you’ll have to pay commissions (they start at $25 or so if you use an on-line broker).
Why consider a closed-end fund of income trusts as opposed to a traditional mutual fund that focuses on this area? Here are a few reasons:
-The potential for a moderately higher yield: Closed-end funds do little self-promotion, so they’re able to charge less in ongoing management expenses. They also don’t need to keep cash on hand to fund redemptions by unitholders. Both these factors should help a closed-end fund offer a higher payout than a traditional mutual fund.
-The possibility of buying the fund at a discount: Closed-end funds generally trade at a discount to their net asset value, but the amount of the discount varies. If you find a fund trading at an usually large discount, you may have a decent buying opportunity.
-Liquidity: You can buy or sell any time during the trading day, whereas mutual funds can only be sold at end-of-day prices
The popularity of income trusts right now means a few closed-end funds that focus on these securities are actually trading at a premium. It’s unlikely that this will continue over the long-term, so it’s probably a good idea to wait for a decline in which these funds move to a discount.
An easy way to tell if a closed-end fund is trading at a premium or discount is to click on the "Closed-End Funds" link you’ll find under the Tools menu in the Funds area of GlobeinvestorGold. Among the many closed-end funds listed here are several income trust funds, including the new Sentry Select Commercial & Industrial Securities Trust, or COINS. In early July, this fund traded at a $19.79, a 5.6-per-cent premium to its net asset value of $18.73.
When evaluating a closed-end fund of trusts, pay attention to the mix of trusts being held. Ideally, you’ll have a mix of REITs, oil and gas trusts and business trusts. If a manager puts a big emphasis on one particular sector, say oil and gas trusts, then the fund may be more volatile than others. Another issue is the experience and reputation of the fund’s manager. The COINS closed-end fund is managed by Sandy McIntyre, an income trust specialist who also handles two other Sentry Select closed-end funds of trusts. Middlefield Group has a couple of closed-end funds that are co-advised by Guardian Capital, a respected pension fund manager.
Closed-end funds aren’t for everybody because of the requirement that you have a brokerage account to buy them, and also because they’re somewhat more arcane than traditional mutual funds. Still, closed-end funds are worth a look if you want a cheap, easy-to-buy way into one of the top-performing areas of the stock market right now.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.
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