|
By Barry Critchley
Investment Executive
February 2005 Issue
Northwest Top 75 Income Trusts Plus and Matrix Income Fund take slightly different approaches to investing.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Overall, such products have a place. For a number of portfolios, those products will fit the bill, — although they are not for everybody.”
To boost returns for unitholders, a number of managers of income fund products have adopted diversification structures that allow them to add a different group of assets to the basic portfolio of income funds. Proponents say the strategy has the additional benefit of reducing volatility of the returns.
Wayne Adlam, a managing director of equity capital markets at CIBC World Markets Inc., expects this trend will strengthen. At a recent Toronto CFA Society presentation, Adlam said issuers are looking for ways to do something different. “1 think you’ll see more ways to take core assets [that yield 6%-8%] and then build on [them] through high-yielding common shares or private placements,” he says.
Two recent examples of this asset diversification trend are playing out now.
Northwater Top 75 Income Trusts Plus, a closed-end fund of income trust funds from Toronto-based Northwater Capital Management Inc., has a two-pronged investment strategy The bulk of the proceeds from the issue are to be invested in Canada’s largest 75 income trusts. Plans call for the income trusts to receive equal investments — meaning the manager won’t attempt to pick winners — in each of the income funds.
Such a strategy is expected to generate annual distributions after fees in the 6% range.
Northwater will use 10% of the proceeds to gain exposure to a market-neutral hedge fund portfolio managed by Northwater. The hedge fund portfolio holds about three dozen funds, which embrace about a dozen investment strategies. The issuer believes that exposure to Northwater’s hedge fund portfolio should generate an extra return of 3.5% a year.
(Northwater’s fund has been around for more than a decade. During that period, the exposure would have been worth, on average, about 2.4% a year.)
By combining the two strategies, unitholders should — if everything goes according to plan — be in line for an annual distribution in the 9.5% range, or about two to three percentage points more than what a traditional fund of funds anticipates.
The issue, however, is costly: the issuer expects that annual fees will be around 2.25%.
Northwater emphasizes that the strategy generates additional return without much additional risk. The manager attributes this outcome to the lack of correlation between Northwater’s hedge fund portfolio and the trust fund index. Accordingly, the plan should generate better returns than would be available by investing exclusively in income trust funds
Another new product, from Toronto-based Middlefield Management Ltd., seeks to generate similar returns but with a different mix of assets. Through Matrix Income Fund, Middlefield is hoping that, an investment - strategy that -calls for 50% of fund assets to be invested- -in small-cap trusts (those with market capitalizations of less than $400 million each) and 50% invested in large-cap trusts will generate overall returns in the 9% range. (Of the 9% return, 9.8% is expected to come from the small-cap trusts, while 8.8% is expected to come from the large-cap trusts. Fees are 150 basis points.)
Middlefield believes the strategy will provide unitholders with a healthy exposure to small-cap trusts, a sector it says is not only the fastest-growing but also one that offers the best returns.
“Many small-cap trusts offer attractive value and growth potential due largely to the fact that these issuers generally receive little or no institutional research coverage and are relatively new to the income trust sector,” the prospectus says. -“[The expectation] is the small-cap segment of the income trust universe [will] continue to account for the majority of growth in the market for the foreseeable future.”
Of course, the new strategy must also consider the needs of clients. “Does it fit their risk profile, their time horizon and their diversification goals? The wishes of the clients have to be determined,” says Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc., a fee-only financial planning firm.
Overall, such products “have a place,” he says. “For a number of portfolios, those products will fit the bill, — although they are not for everybody.”
Mastracci suggests clients not look to be consistently at the top in terms of returns but rather “they should be looking for a consistent return.”
“From a diversification point of view, some of these products are attractive and useful,” he says. “However, I wouldn’t get too carried away with any of them — everything in moderation, including structured products. Clients should not have to worry that they have too much in one strategy and in one particular product.”
He argues that once the product is selected, investing in a broad range of income funds is better: “Inside a product diversification is a good thing. It’s best to have a basket of income funds so that clients are diversified.”
The two initial public offerings that are now on the market are following the example set by two other issues-that allowed the managers to invest in two asset classes:
- INCOME & EQUITY INDEX PARTICIPATION Fund last spring closed an offering with $152 million in proceeds. The proceeds were used to invest on an equal weighted basis in a pool of in come funds.
The rest of the proceeds were set aside to purchase a five-year capped call option of the S&P/TSX composite index. The issue was sponsored by Calgary-based Citadel Group of Funds.
- ACTIVENERGY INCOME FUND this past fall closed its offering with $289.5 million in the kitty The fund, managed by Guardian Capital LP and Middlefield Capital Corp., invested the proceeds in two asset classes: 90% in oil and gas royalty trusts and 10% in common shares of North American oil and gas companies.
|
