Trust funds aren’t created equal

It’s been a rough ride for income trust mutual funds. Ever since Finance Minister Ralph Goodale dropped his “no more tax rulings” bombshell on Sept. 19, the market has gone straight down, taking the funds with it.

In the 30 days following the announcement, every income trust fund took a pounding, with the losses ranging as high as 14 per cent.

So what should you do now with your income trust funds? It depends on how much exposure you have to the sector and the type of investor you are. If Mr. Goodale decides to slam the trusts, the value of your fund units will fall even more. However, if the mounting pressure pushes him to take a softer approach, the market will rebound strongly. We should know sometime in January.

At this stage, no one can predict what he will do. That means each person needs to decide how much risk he or she is prepared to accept in exchange for the high yields offered by the trust funds.

The problem is that not all income trusts funds are created equal. Some are almost 100 per cent invested in the sector while some hold other types of securities to provide a measure of diversification. Nor is it always easy to figure out just how mu of a portfolio is invested in trusts. Many fund companies do not show them as a separate asset category but instead bundle them in with stocks. In those cases, you have to get the most recent financial report and go through the portfolio item-by-item to determine the percentage that is actually in trusts.

A good source for this type of information is the fund company’s website. One of the best is that of CI Investments which provides a very detailed breakdown of the asset classes held by each fund. From that site, I learned that the Signature High Income Fund, which is officially included in the Canadian Income Trusts category, actually had slightly less than half its portfolio (46.6 per cent) in trusts at the end of September. The rest was in bonds, stocks, and cash. As a result, the fund had one of the lowest 30-day losses in the category in the period immediately after Sept. 19 at -6.3 per cent.

Conversely, the Mavrix Canadian Income Trust Fund had 92.4 per cent of its holdings in trusts entering September. Not surprisingly, it was the biggest 30-day loser over the period at -14.1 per cent.

The pattern is the same across the category. The larger the percentage of trusts in the portfolio, the bigger the hit the fund took.

All this means that some care is needed when you’re calculating the asset mix percentage of the income trusts funds you own. You have to look at the portfolios to see what they really contain. For example, if 5 per cent of your portfolio is invested in Signature High Income Fund it actually only represents about a 2.5 per cent trust weighting.

If you’re not clear about how to assess the trust exposure in your mutual funds, ask a financial advisor for assistance. They have access to all the necessary data.

Abridged from an article that originally appeared in Mutual Funds Update, a monthly newsletter that offers practical advice on sound fund investing. For more information go to