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Income trusts are ideal assets for a growth-oriented RRSP

by Wayne Cheveldayoff, 2006-02-16

When properly selected, income trusts are ideal assets to include in a growth-oriented RRSP.

Canadians have traditionally focused on buying stocks or equity mutual funds to obtain super-sized growth for their retirement nest egg, but the successful track record of many income trusts shows that they can also meet RRSP growth objectives.

Income trusts are essentially high-yield equities. Unlike a traditional corporation that pays income taxes on earnings and then pays a dividend from the after-tax funds left over, a trust simply distributes most cash flow to unitholders who are responsible for paying all income taxes.

The cash payouts can be quite hefty – many in the range of 7 to 10 per cent annually – which is the kind of return that has been historically available from stock markets and which advisors typically target for growth portfolios.

Since the cash distributions go directly into the RRSP, income taxes are deferred and the returns can be compounded over time. Some trusts make it easier by offering distribution-reinvestment plans, which conveniently convert cash distributions into new units of the trust.

As for growth, there are many examples of trusts that have provided total returns of 10 to 30 per cent annually, but there are also some that have bombed. So, trust-picking is just as important for success in the trust market as stock-picking is in the stock market.

Investors without the time or inclination to read a lot of fine print have usually delegated that role to mutual fund managers.

Among the more successful mutual funds devoted to income trusts is the Sentry Select Canadian Income Fund, which, according to, provided a total return of 22.46 per cent in the year ended January 31, 2006.

Among its top holdings are Penn West Energy Trust, Yellow Pages Income Fund, H&R REIT, Canadian Oil Sands Trust, Connors Bros. Income Fund, Canetic Resources Trust, ARC Energy Trust, RioCan REIT and Tree Island Wire Income Fund.

The fund, with assets of $536 million and a management expense ratio (MER) of 2.4 per cent annually, has rewarded unitholders with a 30-per-cent annualized return over the past three years.

Another top-ranked example is the Guardian Group of Funds (GGOF) Monthly High Income Fund, which has returned 23.24 per cent over one year and 26.5 per cent annually over three years. The fund has $1.13 billion in assets and its MER is 2.4 per cent.

Among the largest mutual funds focused on income trusts is the CI Signature High Income Fund ($4.1 billion assets, MER 1.6 per cent). The fund recorded a 16.6 per cent gain in the past year and 20.2 per cent annually over three years. It is mainly focused on income trusts but also contains dividend-paying stocks.

A recent addition in the income trust area is the iUnits Income Trust Sector Index Fund, an exchange-traded fund (ETF) that trades on the TSX under the symbol XTR.

For an MER of 0.55 per cent a year, this iUnits fund provides investors with the return of the S&P/TSX Capped Income Trust Index.

There are definitely advantages of having a portfolio manager choosing the best income trusts in a mutual fund or closed-end fund and some managers have accomplished better-than-index returns.

At the same time, the iUnits income-trust ETF offers low fees and guarantees at least that your investment won’t underperform the broad portfolio of trusts in the index.

Among the key considerations of portfolio managers in choosing trusts is the sustainability of cash distributions. In most industries, a trust should be holding some cash back for capital investment and to cushion unforeseen dips. The lower the distribution ratio, the safer generally is the distribution.

Fund managers also look for trusts with good growth prospects, which depend both on a management’s strategy and industry dynamics.

But even the best trust-pickers don’t always see trouble coming. The Connors Bros. Income Fund had been widely regarded by top mutual fund managers as a strong business with an aggressive management team, sustainable distributions and great growth prospects. It was a surprise to many when it ran into a road bump and its units, which touched $19.90 a year ago, fell to a low of $8.90 recently before recovering to the $11-range. This illustrates the advantages of being invested in a basket of trusts.

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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©2006 Wayne Cheveldayoff