Investors continue to pull their money out of mutual funds at a record rate. In doing so, they are overlooking some real gems that have been generating good returns and should continue to do so.
One example is a fund that most people have never heard of, the Talvest Millennium High Income Fund. It’s not the top performer in its class, but it offers a combination of advantages that will appeal to many investors.
Every year, my Mutual Funds Update newsletter publishes an analysis of all income mutual funds in which we look particularly closely at their cash yield and their tax effectiveness. The survey for 2002 appeared in the March issue. In it, we concluded that this fund offered the best combination of tax deferral, cash flow return, and total return from the dozens that we reviewed. More important, this was no flash-in-the-pan. The fund has rated highly on all counts ever since it was launched in 1997.
This fund has recorded above-average returns over all time frames. The five-year average annual compound rate of return to April 30 was 10.5 per cent, well above the average of 6.6 per cent for the category. Three-year annual return was 18.3 per cent, whi in the latest 12-month period the fund produced a total return of 9.4 per cent.
Equally impressive is what we refer to as the fund’s cash flow return. This is like the yield on a bond; it reflects the percentage of cash flow received over a year based on a reference price. For the year 2002, the fund generated a cash flow return of 7.6 per cent, based on its net asset value as of Jan. 1 of that year. This wasn’t the highest of the income trusts funds that we surveyed, but it was a very respectable performance and combined with a total return of 10.7 per cent and a tax deferral of 59.1 per cent of distributed income, it produced the best overall combination in the category.
Officially, the Talvest Millennium High Income Fund is classified as an income trusts mutual fund. However, its mandate allows manager Barry Morrison to invest in just about every type of income security imaginable, including bonds, convertible debentures, common shares, preferred shares, and, of course, income trusts.
As of the end of April, just over half the portfolio was in income trusts and stocks, about 21 per cent was in bonds, and the rest was in cash and short-term securities. This mix is reasonably conservative in the context of income trusts funds in general.
The fund makes monthly distributions, which are currently paid at the rate of $0.06 per unit, or $0.72 a unit per year. There is no guarantee that payments will always be made at that rate, but they have been at least that amount for the past five years.
This is not a risk-free security. Since the fund holds a sizeable percentage of income trusts plus some stocks, it is vulnerable to market risk. Like stocks, income trusts can fluctuate in value, sometimes significantly, so if stability of capital is of prime importance you should be aware of that. When compared with other income trusts mutual funds, the risk here is about average.
This fund is best suited for non-registered portfolios because of the excellent tax advantages that it offers. These are lost inside a registered plan such as a RRIF. The ideal investor would be someone who is seeking a decent level of monthly income with some capital gains potential and who is willing to accept a moderate degree of risk.
Consult your financial advisor before making a final decision.
This article originally appeared in Mutual Funds Update, a monthly electronic newsletter of common sense mutual fund advice edited by Gordon Pape. To take advantage of a three-month trial subscription available to 50plus.com users for just $9.97 plus tax, go to http://www.buildingwealth.ca/promotion/50plusproducts.htm