Energy boosts mutual fund category

I confess to being a numbers junkie. There is often valuable information to be found lurking in some of the most obscure statistical reports that are published in media such as the Globe and Mail Report on Business.

Scanning the Saturday paper for some good news (hard to find), my attention was drawn to a box headed ‘The Week in Mutual Funds’. It’s a report on the gains and losses in all the mutual fund categories over one week, four weeks, and year-to-date and it offered some interesting insights.

For example, since January 1st, the category that has performed best is one that few people pay any attention to: high-income balanced funds. As a group, this bunch is ahead 9.1 per cent so far in 2001. The reason is the strength in the energy sector.

Oil and gas funds
Most of these funds invest heavily in royalty income trusts, and of course a lot of them are based on oil and gas. Because the energy trusts were so badly beaten down in the late ’90s, they became extremely cheap. Over the past year, they’ve rebounded sharply and that’s been the main driving force here, although falling interest rates have also boosted the valuations of the REITheld by these funds.

But with natural gas prices tumbling, you would expect the latest returns from this category to be showing weakness, right? Certainly I did, which is why it came as a surprise to see a 0.8 per cent average advance over the past four weeks. The category is still doing well.

Non-registered funds
These funds should be of special interest to high tax bracket investors looking to generate income in non-registered portfolios. The distributions from many of these funds are received in part on a tax-deferred basis. Effectively, they’re passing on the tax savings from the underlying royalty trusts and REITs. That means you keep more cash in your pocket.

You’ll eventually be on the hook for a higher capital gains tax liability when you sell because the tax-deferred portion of your distributions are subtracted from your adjusted cost base. But with the capital gains inclusion rate down to 50 per cent, it’s a very acceptable trade-off.

From the September 10, 2001 edition of the Internet Wealth Builder.