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New investment funds aim to catch the upside of oil sands and booming Alberta

by Wayne Cheveldayoff, 2006-04-20

Several new closed-end funds have been launched recently to catch the upside for energy, long-life assets such as the oil sands and booming Alberta.

The funds provide instant diversification for your portfolio, but you should buy them only if you believe that the oil price will remain at a high level for years to come.

Some economists think there is a good chance that the oil price will be at least $60 per barrel (U.S.) for some time, given the growing demand worldwide (particularly from China and India) and the threat of supply disruptions from hurricanes in the Gulf Coast, rebellion in Nigeria and the troubling political-terrorist-war developments in the Middle East.

Others expect it to drift down to around $45 per barrel, which would still allow the oil companies to be profitable but perhaps not as profitable as energy stocks currently are anticipating.

Individual investors need to make their own forecasts, since the experts donít agree and many have been predicting lower prices for the past couple of years and have been wrong.

Investors have had many ways to participate in the energy boom, including oil and gas, coal and uranium stocks and mutual funds specializing in the energy sector.

Added to the list now are five closed-end funds, which provide diversification in the same way as mutual funds but are listed on the TSX and give the managers the additional tool of leverage Ė allowing them to borrow between 15 and 25 per cent of assets depending on the fund and sometimes also the ability to sell short. When the portfolio manager has picked the right stocks, leverage can certainly enhance returns.

The closed-end funds launched since the beginning of the year include the following:

1. Oil Sands Sector Fund. The fund was launched by Markland Street Asset Management Inc. and has AGF Funds as the advisor. It will invest in around 50 companies participating in the oil sands sector, including such heavy weights as Suncor, Canadian Oil Sands Trust, Petro-Canada, Imperial Oil, Shell Canada, Nexen, Western Oil Sands, UTS, Canadian Natural Resources, Husky, BlackRock, Enerplus, Connacher, OPTI Canada and Total S.A.
2. Long Reserve Life Resource Fund. Launched by Fairway Advisors, the fund will be managed by Lawrence Asset Management Inc. and will scour the world looking for bargains in resource companies with long-life reserves in oil and gas, diversified base metals, precious metals, coal and uranium.
3. Oil Sands and Energy Mega-Projects Trust. Sentry Select Capital Corp. launched this fund to invest in producers, servicers, pipeline and infrastructure companies and construction and real estate companies participating in the oil sands mega projects.
4. Enervest Energy and Oil Sands Total Return Trust. Offered by Enervest with the portfolio managed by Cypress Capital Management Ltd., this fund will invest in a combination of oil sands and other energy and energy service companies.
5. Alberta Focused Income and Growth Fund. The fund will be managed by Calgary based Middlefield Focused Management Ltd. with Houston-based Groppe, Long & Littell as a special advisor. As the name suggests, it will invest in any company focused on taking advantage of the boom in Alberta, including oil and gas royalty trusts, business trusts, REITs and pipeline and power trusts.

All of these funds aim to achieve capital appreciation and will pay a monthly or quarterly cash distribution, initially at 5 per cent annually based on the issue price of $10 per unit, except for the Alberta Focused Income and Growth Fund, which aims to pay a distribution equivalent to 6 per cent annually based on the $10 issue price.

All five will have a management expense ratio (MER) of just under 2 per cent, made up of management fees of 1.1 per cent, a trailer (or service) fee of 0.4 per cent (going to the dealer holding the units for the investor) and other administrative expenses.

The fund prospectuses, which are available at, also note in some cases that if the cash distributions, including dividends, coming from securities held in the portfolio are not enough to pay the MER and targeted cash distribution to unitholders, the fund managers may sell securities to maintain the targeted distribution. However, like all other trusts, the distributions arenít guaranteed.

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