CANADA TIP SHEET: Ihnatowycz, Fenton Preserve Capital
By Lynne Olver
Of DOW JONES NEWSWIRES
24 September 2002
12:00
Dow Jones News Service
English
(Copyright (c) 2002, Dow Jones & Company, Inc.)
VANCOUVER -(Dow Jones)- With stock markets showing no firm signs of stabilizing, it isn't surprising that the Acuity High Income Fund is one of the fastest growing offerings from Acuity Funds Ltd.
The C$90 million fund's mix of fixed-income assets, stocks and income trusts is geared to capital preservation. The target return is 8% a year, but it has exceeded that in many years, says Ian Ihnatowycz, lead manager at Acuity.
"In volatile markets, our unitholders have really appreciated the returns because they've been there consistently," Ihnatowycz said.
The mutual fund returned 10.3% in the year ended Aug. 31, above the group average of 9.9%, according to Globefund.com. It is up about 4.4% year-to-date. An identical pooled fund for wealthy individuals has slightly better returns, due to lower management expenses.
Portfolio manager Warren Fenton emphasizes that the stocks and income trusts selected for the mutual fund, and for the C$30 million pooled fund, are chosen to provide a quality portfolio with low volatility.
While the specific asset mix can fluctuate depending on market conditions, it's divided roughly equally with one-third of assets in each of stocks, bonds and income trusts.
The equity portion of the fund has both stable businesses with solid growth, such as Canadian supermarket chains Loblaw Cos Ltd. (T.L) and Metro Inc. (MRU.A), and more economically sensitive stocks like U.S. home-improvement chain Lowe's Cos. (LOW) and Canadian auto-parts maker Magna International (MG.A).
"If the market does move higher, we'll benefit, and if the markets remain choppy, we should still be able to make some good returns from the equity portfolio, as we have this year," Fenton said.
Stocks in the portfolio generally have "reasonable" dividend yields of between 1% and 3%.
Includes Variety Of Income Trusts
Among the Acuity High Income Fund's income trust component, the managers concentrate on what they call "business trusts" - businesses that are in the middle ground when it comes to risk and reward. These are sandwiched between the ultra-stable but low-growth pipeline, utility or real estate income funds, and the higher yielding but more volatile commodity-based royalty trusts.
"We have tended to be concentrated in the business trust sector because that's where our expertise is," Ihnatowycz said. This area provides opportunities to buy reasonably priced trust units with attractive and growing distributions, he said.
For example, a recent addition to the fund is KCP Income Fund (T.KCP), which owns a manufacturer of private-label bleach. The fund went public in August and has a distribution yield of just under 10%.
Fenton said the company is well managed, has a dominant position in private-label bleach in North America, and is trying to penetrate the U.S. market with other private-label cleaning products. "It looks like they're making some very good headway with some of the bigger guys like Wal-Mart and Safeway," Fenton said. He expects KCP Income Fund to increase cash flow by 30% to 35% a year, with distributions growing at a similar pace.
The fund managers also like Heating Oil Partners Income Fund (T.HIF), which went public in May. Its underlying business distributes heating oil primarily to residential customers, Ihnatowycz said. "Although the existing business is a very stable cash-cow type of business with modest internal growth, the opportunities (for growth) are through acquisitions because the industry is scattered with mom-and-pop-type operations," Ihnatowycz said. The Heating Oil Partners Income Fund yields about 11.5%.
Another fund holding is Energy Savings Income Fund (T.SIF), which sells natural gas and electricity to Ontario consumers. Its distributions have historically grown at 20% to 25% a year when its predecessor, Direct Energy Marketing, focused on natural gas. With the introduction of competition in Ontario's electricity market this year, the fund should be able to make use of its existing sales force and boost distributions aggressively, Ihnatowycz said. It yields about 7.5% to 8%.
The fixed-income component of the Acuity fund includes government and high-quality corporate bonds.
By Lynne Olver, Dow Jones Newswires; 604-669-1595; lynne.olver@dowjones.com