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New fund aims to avoid cash-strapped, potentially troublesome income trusts

by Wayne Cheveldayoff, 2004-12-02

When investing in income trusts, a major concern for investors is that a trust may cut or reduce its cash distributions in the future due to some unforeseen event.

A new fund being offered by Lawrence Asset Management aims to address this concern by investing only in income funds or trusts that are flush with cash – those that have low cash payout ratios.

Details of the new fund, called Lawrence Payout Ratio Trust, are available in the prospectus filed at

The fund, which will invest in 40 income trusts in various sectors, will be an exchange-traded fund with it units listed on the Toronto Stock Exchange, rather than a mutual fund.

The fund manager maintains in the prospectus that by sticking with those trusts that have the lowest cash payout ratios – meaning they hold back a significant amount of distributable cash – the greater is the likelihood that a trust will continue to be able to meet its distribution targets even if business conditions turn sour.

Trusts that are paying out all or close to all of distributable cash each month have little margin for error. If distributable cash slumps for some reason, the trust has to borrow to continue paying out the same monthly distribution or it has to cut or cease the distribution.

Several trusts have recently faced this problem. For example, Clean Power Income Fund, which had been paying out all its distributable cash, recently cut its distributions by 27 per cent due to difficulty with some of its projects and the impact of the rising Canadian dollar.

Investors holding the Clean Power units not only are receiving less monthly income than before but have taken a major hit to the value of their portfolios, as the units fell from $9.50 before the cut to $6.70 recently.

Investors no doubt want to avoid surprises like this, and the Lawrence fund is designed to meet the demand for safer situations.

The fund will have 40 income trusts or funds chosen from various trust sectors, including business and industrial funds, commodity based royalty trusts, real estate investment trusts (REITs), and pipeline and power generation funds, with each fund having a weighting of 2.5 per cent.

To qualify for inclusion, aside from having the lowest cash distribution ratios in their respective sectors, the funds must have a market capitalization of at least $200 million, have not reduced or suspended distributions for the previous 24 months, and have had their units listed on the TSX for at least 12 months.

As an illustration, the prospectus lists the 40 income trusts or funds that meet the criteria. Investors making their own choices may want to use this list as a starting point for their own research.

Those on the list from the business and industrial sector are: Bell Nordiq, BFI, CCS, Cineplex Galaxy, Connors Brothers, Consumers’s Waterheater, Davis + Henderson, Livingston International, Menu Foods, Movie Distribution, Newalta, Noranda, North West Company, Parkland, Sleep Country, Transforce, Trinidad Energy Services and UE Waterheaters.

From the commodity based sector, the list includes the following energy trusts: Acclaim, ARC, Bonavista, Canadian Oil Sands, Crescent Point, Focus, Harvest, Peyto, Vermilion and Zargon. Among the REITs are: Borealis, Calloway, Canadian, Cominar, H&R and Riocan. The list for power and pipeline trusts includes: Calpine, Gaz Metro, Great Lakes Hydro, Inter, Pembina, and TransCanada Power.

The prospectus says that if the Lawrence trust had existed and was fully invested October 12, 2004, it would have had an annual yield of about 7 per cent.

Since the Lawrence fund will be passively managed, the management fee is a relatively low 0.45 per cent, although together with a 0.30 per cent service fee and ongoing expenses of $200,000 a year, the overall management expense ratio (MER) should be around 1 per cent.

Anyone investing in this fund should not consider it a quick flip. The 5.25-per-cent commission paid to selling brokers, plus other new-issue expenses, are deducted from what is available to invest. The manager gets less than $9.475 of the $10-per-unit issue price to invest and it will take some time for the net asset value of the fund to climb back to $10 per unit.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2004 Wayne Cheveldayoff