Canada's income trust sector, which had been nicely rebounding from Ottawa's nasty Halloween tax surprise, took another pounding recently on concerns about credit woes.
With more volatility expected in the broader stock market, some fund managers argue that real estate and high-quality business trusts are now safer bets.
"I think you are going to have a lot more volatility in the market with lower highs and lower lows as we grind our way down," said Michele Robitaille, a manager with Toronto-based Guardian Capital. "That is the same trend that we would expect to see in the income trust market."
Ms. Robitaille sees valuations in the income trust sector as "pretty reasonable," and expects more investors to shift into more defensive trusts. The manager of the GGOF High Monthly Income Fund now favours real estate investment trusts (REITs) for their "strong underlying businesses" and takeover potential.
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Before the recent stock market downturn, REITs, which are sensitive to rising interest rates, had already begun a correction.
"As a result, you have some pretty good downside protection," she said. "It becomes a bit of a safe haven."
REITs are also "trading at about a 2-per-cent discount to net asset value," Ms. Robitaille said. "If you see that discount widen, it becomes very attractive for private money to take out that real estate."
Some of the "attractive" trusts, she said, include Rio Can REIT, a shopping mall developer for big-box retailers; Calloway REIT, a developer of shopping centres anchored by Wal-Mart, and Canadian Real Estate Investment Trust, which has retail, industrial and office properties.
Trusts like Yellow Pages Income Fund, BPI Canada Income Fund and Teranet Income Fund are in stable, recession-proof industries, and should also hold up, Ms. Robitaille added.
The income trust sector plunged about 16 per cent after the federal government said last October that it would levy a 31.5-per-cent tax by 2011 on oil and gas, power and pipeline and business trusts.
REITs were spared, and takeover activity has helped the other trusts make a comeback before the recent market correction.
"There have been $26-billion of trusts taken over since this time last year," with an average takeout premium at around 18 per cent, said Sandy McIntyre, a manager with Toronto-based Sentry Select Capital Corp.
"We are the most bullish on the REIT sector right now," Mr. McIntyre added. "We think the sector is very oversold ... the average yield in the REIT sector is about 6 to 6.25 per cent. When your 10-year Canada bond is 4.4 per cent, it's not bad."
During the recent downturn, the manager of the Sentry Select Canadian Income Fund has been adding to his positions in Artis REIT, Calloway REIT, Cominar REIT and H&R REIT.
Pension funds have been interested in buying real estate assets, and that is expected to continue, he said.
Because he also looks for "high-quality business trusts" with strong balance sheets, and growth in sales, profit and cash flow, he was recently buying units of Cineplex Galaxy Income Fund and Teranet Income Fund.
But Leslie Lundquist, a manager with Calgary-based Bissett Investment Management, is finding better opportunities in trusts other than REITs.
Ms. Lundquist looks for "strong stable companies" whose business outlook is not affected by the volatility, and are expected to produce good distributions well into the future.
During the correction, she bought names such as Boston Pizza Income Fund, Sleep Country Canada Income Fund, Freehold Royalty Trust and CML HealthCare Income Fund.
If you buy trusts with relatively little debt, "then you don't have to worry too much that credit markets are weak, and whether companies can refinance their debt," Lundquist said.
While she had hoped to snap up units of Morneau Sobeco Income Fund, which operates a pension consulting firm, the trust "unfortunately held in too well" in the market slump.
"When times are tough, there is a flight to quality," Ms. Lundquist said. "The fact that you can get a distribution regardless of what the market is doing can be comforting."
Seeking stability
The trust index peaked July 13, but there are still some strong performers.
| 24-Aug. | 13-July | % change | |||
| Yield | Close | Close | From July 13 | ||
| North West Company Fund | NWF.UN-T | 5.2% | $21.04 | $19.38 | 8.6% |
| Cineplex Galaxy Inc. Fund | CGX.UN-T | 6.7% | $17.74 | $16.94 | 4.7% |
| Cdn. Real Estate Investment | REF.UN-T | 4.4% | $30.74 | $30.00 | 2.5% |
| Cominar REIT | CUF.UN-T | 6.0% | $21.90 | $21.39 | 2.4% |
| Legacy Hotels Real Estate Tr | LGY.UN-T | 2.6% | $12.54 | $12.45 | 0.7% |
| AltaGas Income Trust | ALA.UN-T | 7.5% | $27.77 | $27.93 | -0.6% |
| Pembina Pipeline Income Fund | PIF.UN-T | 8.8% | $16.10 | $16.23 | -0.8% |
| Enerflex Systems | EFX.UN-T | 9.9% | $10.20 | $10.32 | -1.2% |
| CCS Income Trust | CCR.UN-T | 4.7% | $44.78 | $45.40 | -1.4% |
| Focus Energy Trust | FET.UN-T | 9.8% | $17.38 | $17.64 | -1.5% |
SOURCE: GLOBEINVESTOR
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