Q&A: Enervest Diversified Income Trust

Gordon Pape | August 26th, 2013

A reader is intrigued by the Enervest Diversified Income Trust and its 10.4% yield. Gordon Pape gives his view.

 

Q – I would like to know if the Enervest Diversified Income Trust (TSX: EIT.UN) is a good investment. It is trading at $11.51 (July 29) but the net asset value is $13.47. Annually the company allows redemption at 95% of NAV. The holdings are blue-chip Canadian stocks and good quality bonds and debentures. In 2012, 65% of the distribution ($0.10 monthly) was return of capital and 35% taxable dividends. – Max V., Vancouver

 

A – Enervest is a $1.1 billion closed-end fund that trades on the TSX. Such funds normally trade at a discount to NAV so the price differential is not unusual. About two-thirds of the portfolio is in Canadian equities with stocks such as Royal Bank, Scotiabank, Suncor Energy and Canadian Natural Resources topping the list. Of the remaining assets, 16.5% are in U.S. stocks, 3% in international equities, 12.3% in bonds and 4.3% in cash.

According to the company’s own website, recent performance has lagged the benchmark which is the S&P/TSX Total Return Index. The fund posted a gain of 2.6% over the 12 months to June 30 compared to 8.3% for the benchmark and showed an average annual loss of 2% over two years. Taking the longer view, the fund matched the TSX over the past decade with an average annual gain of 8.5%.

Distributions have remained steady at $0.10 a month since 2010, which works out to a very attractive yield of 10.4% based on the current market price. However, both the NAV and the market price have declined over that time some investors have given back some of their cash flow in the form of a loss of equity.

Although I have recommended a few closed-end funds over the years, none has ever turned out to be an outstanding performer. Enervest appears to be no exception. If you like the cash flow, go ahead and invest but be prepared for the possibility of a gradual decline in market value over time, in part due to the relatively high management expense ratio of 1.73%. – G.P.

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