Winnipeg Free Press - PRINT EDITION

Income trusts an equity dressed to look like bond

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WITH equity returns having improved to a large degree since the beginning of April, it's surprising that investor confidence hasn't bounced back, too.

But judging by the number of calls I've received from readers and clients alike, asking about low-risk alternatives, I have to believe it's going to take a lot more than five weeks of positive gains to make believers out of beleaguered investors who have seen their account values shrink by as much as half over the last three years.

Subsequently, interest has turned away from equity funds and the promise of big returns, to income funds and expectations of more modest gains and less volatility. It appears that since the irrational exuberance of the 1990s, the average guy investing for his retirement has finally gotten his expectations in line with his tolerance for risk. And by risk, I mean short-term fluctuations in value.

For some, a reasonable alternative to equity funds may be what are known as high-income funds that hold income trusts. Income trusts, for those who haven't been approached by a broker or adviser trying to flog them in the last 12 months, are sort of an equity/bond hybrid. Simply put, they represent ownership or equity in a company, but they are structured in such a way as to produce a monthly stream of income.

Because stock markets have been disappointing and income trusts promise to provide steady income payments, the price of many of them has been bid up. In a way, they are like a bond wherein price and yield are inversely related -- the income per unit is fixed, but if you have to pay a higher price per unit, the yield is decreased.

The problem with income trusts is that they are really just an equity dressed up to look like a bond. The price of the units can be just as volatile as the stock in the company that issues them. Furthermore, the income they promise is not guaranteed. But like any investment vehicle there are some good ones and some bad ones. Obviously the safest way to participate in the income trust market is via mutual funds with professional managers sorting the worthy from the wretched.

The selection of high-income funds available isn't large. Globefund.com lists 36 funds and only 16 of them have been around long enough to have a three-year performance number. The best return of the group belongs to the Bissett Income fund available through Franklin Templeton. Its three-year average compound annual return to the end of March has been 22.4 per cent.

Looking at a longer period, the average Canadian income trust fund has produced solid gains over the last 10 years with an average compound annual return of 9.1 per cent.

Slightly behind the Bissett fund in terms of total returns is the Elliott and Page monthly High Income Fund which has averaged 19.1 per cent over the last three years with substantially less volatility. It currently holds about 20 per cent bonds and 15 per cent cash as well as some common stock to go along with its income trusts, making it a far more balanced fund than one holding nothing but income trusts. And what my clients tell me is that they would much rather have consistently modest returns than big gains one year followed by big losses the next.

Before you go jumping into an income trust fund with both feet, remember that during the bull market of the '90s nobody wanted these low-performing puppies because funds rocking and rolling with technology stocks were bringing home returns north of 75 per cent. And the same will be true in the future when the next bull market comes along and dazzles investors once again. In the meantime, unit prices may be about as high as they're going to go and realistic investors shouldn't expect to receive much more than the income stream of six to eight per cent.

Randy Reynolds is an advisor at Griffiths Reynolds Financial and an investment marketing consultant with Manulife Securities International Ltd. in Winnipeg. Contact him at 982-4743 or email grfrr@mts.net

Republished from the Winnipeg Free Press print edition May 15, 2003 $sourceSection$sourcePage

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