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Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
Q4/5 Saxon High Income
Q3/5 Saxon Small Cap
Q3/5 BG Income
Q2/5 Trimark Canadian
Q2/5 MB Fixed Income
Q1/5 BG Canadian Intrinsic
Q1/5 MB American Equity
Q1/5 Mawer N.C. Closure
Q4/4 Mawer Cdn Equity
Q4/4 Mawer Balanced RSP
Q3/4 Sceptre Equity Growth
Q3/4 Saxon World Growth
Q2/4 BG Small Cap
Q2/4 Mawer U.S. Equity
Q1/4 PH&N Cdn Growth
Q1/4 Leith Wheeler US Eq
Q4/3 iShares S&P500
Q4/3 BG Canadian Equity
Q3/3 North Growth US Eq
Q3/3 HSBC Mortgage
Q2/3 MB Cdn Eq Growth
Q2/3 Batterymarch US Eq
Q1/3 Saxon Stock
Q1/3 BG Balanced
Q4/2 Mawer New Canada
Q4/2 Perigee T-Plus
Q3/2 PH&N Dividend Inc
Q3/2 PH&N Bond
Q2/2 Leith Wheeler Cdn Eq
Q2/2 Perigee Diversifund
Q1/2 PH&N Cdn Equity
Q1/2 Mawer U.S. Equity
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Saxon High Income
Over the past five years the Saxon High Income fund has enjoyed a great deal of success, with a sizeable average annual return of 14.5%. However, this pales in comparison to the Scotia Capital Income Trusts index (SCITI), which had average annual returns of 26.3% over the same period. Continuing a lagging trend the fund struggled in 2005, yielding only 6.8% compared to the index's 29.4% return. Much of the lag can be attributed to conservative equity selection. The fund is managed by Rick Howson and, like all Saxon equity funds, the High Income fund follows a value-oriented investment style. More specifically, the fund takes a bottom-up approach which favours trusts that have strong balance sheets, little debt, and growing distributions. Recognizing the risks inherent with income trusts, Mr. Howson aims to maintain a comfortable margin of safety in terms of retained income. He prefers trusts for which the ratio of distributions to distributable cash flow, the so-called payout ratio, is on the low side. Of particular importance to Mr. Howson is a trust's ratio of enterprise value to earnings before interest, taxes, and depreciation (EBITDA). Prospective purchases for the fund must have ratios of no more than nine. Mr. Howson also favours businesses which are underpinned by long-term or non-depleting assets. Examples include manufacturing facilities and power plants which stand in contrast with the depleting assets of, say, an oil well. Despite a preference for non-depleting assets, the fund's bottom-up analysis does occasionally lead it to buy solid yet undervalued resource trusts. At the end of 2005 the fund held 52.4% of it assets in the consumer, industrial, and utilities sectors. In contrast, the Scotia Capital Markets Income Units index, which reflects the broader trust sector, had over 61.4% of its assets in oil & gas, resources, and real estate trusts (REITs). Mr. Howson typically likes to hold at least fourty different income trusts in the fund to ensure a well-diversified portfolio. Once purchased, a trust is held until it is considered to be overvalued. According to Mr. Howson this generally translates to a holding period of four to five years. Adverse changes in a company's fundamentals could, of course, prompt an early sell decision. The fund's low 16% average turnover does indeed reflect Howson's long-term approach. As previously mentioned, when compared to other measures of income trust performance such as the SCITI, the fund has lagged for the past two years. The reason for this lacklustre performance lies in the fund's deliberate underweighting of energy trusts, whose valuations have benefited greatly from high oil prices. Mr. Howson continues to believe that the energy trust sector is overvalued, and that such businesses are not suitable for the fund. Taken in aggregate, the fund's portfolio at the end of 2005 was moderately priced. Although it's earnings yield of 4.0%, which corresponds to a price-to-earnings ratio of 25, was lower than that of the S&P/TSX Composite index, it's low price-to-book value ratio of 1.6 was attractive. The fund's average dividend yield, which reflects the high distributions paid by its constituent income trusts, was also very attractive at 8.5%. Reflecting Mr. Howson's preference, the average payout ratio of the fund's holdings was roughly 90%. Four of the trusts held by the fund paid out no dividend at the end of the year, suggesting that they were forced to cut their distribution to address other financial priorities. Trusts that have stopped paying distributions are often called 'broken trusts' and can represent interesting opportunities for value investors. At the end of 2005 the fund's fourty-seven income trusts and five stocks represented 97.2% of the fund's assets. A further 1.2% was held in corporate bonds and the remaining 1.6% was in cash. The fund's top three holdings were the Canadian Oil Sands Trust, the North West Company Fund, and ARC Energy Trust. During the fourth quarter the fund took advantage of generally depressed prices, caused by uncertainty surrounding the taxation of trusts, to add to existing positions where bargains could be had. It also sold the Advanced Fibre Technologies Income Fund on declining fundamentals. Mr. Howson also sold the Superior Plus Income Fund, which had become too expensive. Despite the federal government's pre-election retreat from boosting taxes on income trusts, which has generally been seen in a positive light, Mr. Howson still expresses some concern about this issue. He believes the story isn't necessarily over and that the issue might be revisited at some future, less politically-charged, time. Especially if the number of trust conversions continues to grow. But in the short term he feels it is more likely that trust valuations will be driven by energy prices and interest rates, rather than tax issues. Going forward, Mr. Howson expects that the income trust sector should continue to provide solid single digit returns. But a repeat of the strong returns of the last five years shouldn't be expected. For a $5,000 minimum investment the Saxon High Income fund can be purchased directly from Saxon Mutual Funds in Ontario or through brokers and dealers in other provinces. With a low 1.34% MER, no load, and a solid track record, the Saxon High Income fund is suitable for more adventurous frugal investors who seek greater income than that available from traditional bonds and GICs. However, it is best to think of the fund as a stock fund which should be held as part of the equity portion of a wellbalanced portfolio. The fund could also be seen as a substitute for dividend funds or riskier highyield bond funds. FF: Q4 2005 |
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