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New international fund aimed at investors wanting monthly income

by Wayne Cheveldayoff, 2005-12-22

If monthly income is the goal, there are many Canadian securities and funds that provide it. But thinking that it may be advisable for a number of reasons for Canadians to diversify to foreign sources of income, Franklin Templeton Investments has recently introduced a new international fund, the Templeton Global Income Fund.

The fund is essentially for investors looking for the risk-lowering, yield-enhancing advantages of international diversification and who believe the Canadian dollarís rise is about over.

If you think the Canadian dollar will rise another 10 or 15 per cent (putting the Canadian dollar close to par with the U.S. dollar), it would be best to stay in Canadian income investments, since the new Templeton fund will not be hedging its foreign currency exposure.

However, given that the Canadian dollar trading near 86 cents (U.S.) is already undermining our manufacturing industries, it is probably at or close to a peak and therefore any international investments from this point on are unlikely to show significant losses because of foreign exchange exposure.

The new fund, which will pay monthly distributions, aims to invest in dividend-paying stocks and bonds from around the world. Annualized distributions of 6 per cent are targeted, though not guaranteed.

Franklin Templeton says the bond portion of the new fund will be made up of a combination of corporate, agency and government debt securities from numerous countries including emerging markets.

While the fundís current holdings have not yet been disclosed, Alexander Calvo, a Templeton portfolio manager specializing in bonds, cited potential examples such as the Korean won-denominated treasury bond due 2007 with a coupon of 8 per cent and a yield to maturity of 4.3 per cent.

Other possible investments include Ukraine government bonds due 2013 with a 7.65 per cent coupon and a yield to maturity of 6 per cent, Belgium-based Telenet Communications corporate bonds due 2013 with a 9 per cent coupon and a yield to maturity of 6.9 per cent, and Ireland-based JSG Funding corporate bonds due 2015 with a coupon of 7.75 per cent and a yield to maturity of 9.8 per cent.

The equity portion of the fund will focus on dividend-paying stocks with growth potential picked from the value-oriented lists of world securities maintained by Franklin Templetonís analysts. The company manages more than $500 billion worldwide.

Lisa Myers, a Nassau, Bahamas-based Templeton equity fund manager, said the new fund is modeled on the Templeton Income Fund, set up for U.S. investors in July 2005, with the same rationale drawn on research showing that since 1970, 70 per cent of the returns of the Morgan Stanley Capital International (MSCI) World Index, encompassing equities from all countries of the world, came from dividends and reinvestment of dividends. The other 30 per cent came from capital gains.

Templetonís research shows that companies around the world are building up significant free cash flow due to their attention to cost cutting and efficiency. With payout ratios at historical low levels, it is likely that dividends are going to be increasing and this will benefit investors holding carefully chosen dividend-paying stocks, trading inexpensivel but with some growth potential.

Examples of stocks that may be included in the new fund are large U.S. banks like J.P. Morgan and Bank of America, with dividend yields in the order of 4 to 5 per cent, Unicredito Italiano with a dividend of 4 per cent, Taiwan technology giant Compal Electronics (dividend just under 4 per cent), Hong Kong-based conglomerate Hutchinson Whampoa (dividend of 2.5 per cent), Finish paper concern UPM-Kymmene (dividend of 4.5 per cent) and U.S pharmaceutical powerhouse Merck (dividend greater than 5 per cent).

One complication of investing for income abroad is that many countries impose withholding taxes on income flowing out. Thus, the reported returns to Canadians will be diminished by such withholding taxes.

Templeton keeps track of all such withholding taxes and itemizes them in its annual T3 tax receipts, giving unitholders in Canada the opportunity to offset Canadian income taxes with taxes paid abroad. However, if the new fund is held in an RRSP, that would not be an option and this represents a drawback for an otherwise proper portfolio-building strategy of diversification.

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 www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2005 Wayne Cheveldayoff