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The trouble with trusts

00:00 EDT Saturday, June 01, 2002

TORONTO (GlobeinvestorGOLD) -- Thereís something just a little misleading about all the money being made in income trusts these days.

As well as paying monthly distributions that might yield anywhere from 6 to 12 per cent over a year, trusts are delivering major capital appreciation in many cases. If youíre new to trusts, you might just get the impression that total returns of 20-per-cent-plus are the norm for this type of security.

That would be wrong. While trusts are in vogue right now, theyíll cool off sometime. Then, youíll be left with your distributions and a unit price that may not do much of anything. The lesson here is to buy income trusts for the yield and accept any capital gains as a stroke of good fortune.

As with any investment that provides a fixed payout, your prime concern with a trust is the sustainability of the monthly distributions. How do you evaluate a trustís solidity? Pretty much the same way you would with any stock -- through careful research that starts on a Website such as GlobeinvestorGold. You can check up on a trustís financial statements, balance sheet and recent corporate announcements on the site, and you can get a consensus rating from the analysts who increasingly cover the trust sector. Donít forget to look at the company snapshot -- often thereís a link to the trustís own Website, which is an excellent place to get a handle on a trustís character.

If all of this sounds too onerous, an easy alternative is to look at mutual funds in the Canadian income trust category. According to GlobeinvestorGold, there are 34 such funds from both large and small fund companies. A big benefit of owning one of these funds is diversification. The GGOF Guardian Monthly High Income Mutual Fund, one of the largest funds in this niche, has its assets spread around to the extent that no one position takes up more than 6.9 per cent of the fund. Even if the fundís managers pick a dud trust, it shouldnít have a crippling impact on your investment.

Another option is to buy a closed-end fund traded on the TSX that specializes in trusts. These funds are like regular mutual funds, except that you buy and sell them like stocks.

You can find a broad list of TSX-listed closed-end funds in the Funds area of GlobeinvestorGold. Just look under the ďToolsĒ heading on the left side of the page for a link. Youíll have to do some sifting through the list of funds because only some of them focus on income trusts. Itís worth the effort though because closed-end funds can be a low-cost alternative to traditional funds (you do have to pay brokerage commissions, however).

A good way to think of trusts is as a high-octane additive to your fixed-income holdings. If youíre a reasonably aggressive investor, you might allocate half your fixed-income holdings to trusts, or a fund of trusts. Overall, about 15 to 25 per cent of your total portfolio will do it.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years

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