Bissett re-opens flagship income fund

Three-and-a-half years after it was closed to new investors, Franklin Templeton Investments has announced it will re-open its flagship Bissett Income Fund, effective immediately.

First introduced in June 1996, the fund was capped in November 2002. However, since then, the income trust market has matured and broadened out significantly; investments have longer and more reliable track records; and obstacles like unlimited liability concerns and tax issues have largely been overcome, managers say. Concerns have also dissipated about whether or not the structure would even last in the long term.

“From a corporate point of view we’d like our flagship fund to be open, and in the income trust space ours wasn’t,” says portfolio manager Leslie Lundquist. “We’ve seen some good times in the income trust space. I think a lot of the mania has come out of it. People are a little more familiar with trusts too. We got the sense that if we were to open the fund again we wouldn’t have the unreasonable expectations that we were afraid people had when it was open.”

In looking at the current host of opportunities in the marketplace today Lundquist says, although there are no “table pounding screaming buys”, there are many companies available now with stable and growing distributions that don’t require a lot of capital to operate.

At the moment though, she says there doesn’t appear to be any one particular sector or business model conducive to producing better quality trusts. “I think real estate investment trusts are really nice in a trust structure, but that’s not to say all REITs are OK. Certainly some of the more recent REITs that we’ve seen come to market are a more aggressive species and they may not be as stable as some of their predecessors.”

In other areas, despite the sector’s relative dominance, the fund is currently underweight in energy — about one-quarter of the fund’s assets are allocated to conventional oil and gas royalty trusts. “We don’t think things are going to go badly in the foreseeable future, otherwise we wouldn’t hold a quarter of our portfolio in it, we just don’t think it’s prudent to have half or even close to half of the portfolio in names that are cyclical and going to fluctuate over time,” she says. “We want to be there but we don’t want to turn this into a resources fund.”

In other parts of the market, she says some companies are starting to look at spinning out specific divisions as income trusts separate from their existing businesses. She says these spin-offs, if they succeed in coming to market, will likely look a lot like “the classic, old-style trusts” with stable, cash generating business models that don’t require a lot of money to maintain. “Hopefully these will be a size that could be interesting to more than just a few retail investors,” she says.

The downside, unfortunately, is the fact that a lot of investor money has been tied up in smaller initial public offerings in the past few years. “With the market pulling back, I think investors are a little bit more nervous. We’re not seeing as great a flow into the market, so it may take some time until we start to see come of these larger companies come up as income trusts. Investors may not have the cash on hand for the companies to get maximum value for their spinouts right now.”

Higher interest rates are also a concern. Although the market has largely shrugged off rate increases this year, the most recent increase announced last week prompted a slight sell off, though managers say recent gyrations in the oil and gas market were largely to blame. A larger sell off could be possible if other markets continued to perform well, but Lundquist points out that stocks and trusts are up about the same amount on the year, while the bond market has declined.

Overall, the fund, with $1.1 billion in assets under management, invests primarily in income-producing Canadian securities with a focus on income trusts. According to the company prospectus, 30% of distributions, the fund aims to generate $0.08 per unit each month, are considered tax-deferred return of capital.

The fund distributes cash and accrued cash, less any expenses on the last business day of each month and distributes any realized net capital gains annually in December. It may also pay distributions at other times during the year.

The fund is available for sale on a front-end, low-load or deferred sales basis. Front end commissions are 0-6% negotiable with the client with a 1% annual trailer fee. Low load funds pay a 1% commission with 1% trailer fee, and the company pays a 5% commission with 0.5% trailer for deferred sales charge shares. Redemption fees range from 6% in the first year of the standard deferred sales charge redemption schedule, and 3% in year six. Low load redemption fees are 2% if the funds are redeemed within two years of the sale. Management fees are 2.25% or 1.25% for F-class shares. Minimum investment is $500.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com