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The good news about income trusts — and the better news

According to this Canadian advisory, it’s hard to tell who’s doing better — the holders of common stocks or income trusts. So hold both.

What would you like first, the good news or the better news? Actually, we’re not sure which is which, so we’ll start out in the middle. Canadian income trusts are doing very well. Canadian common shares may be doing even better.

That’s the word from one of Canada’s leading experts on the trust market, the Income Trust Guide published by the Money Reporter. And it doesn’t feel slighted that stocks have been doing a little better lately.

Because what really matters is that the Canadian market is doing much better than might have been expected just a short time ago. Remember all the hand wringing about America’s credit worries hitting the Canadian market in the solar plexis?

It could still happen — we do have some recession-like symptoms in parts of Canada. But it hasn’t dragged down the market yet.

In the midst of this relative plenty, we’ll start by taking a look at which income trusts this advisory believes will perform best in the months ahead.

Top three trusts

The Income Trust Guide selects three “Best Buys” in trusts each month. This month it has a mixed bag of trusts. In general, oil and gas trusts have been the peak performers of late. But only one of these trusts fits neatly into that category.

AltaGas Income Trust (TSX-ALA.UN) does not actually explore for natural gas or extract it. Instead, it provides the infrastructure natural gas companies need to go get the stuff. “And right now, with natural gas prices spiraling, they need all the help AltaGas can give them,” says the advisory.

CI Financial Income Fund (TSX-CIX.UN) is in the one sector of the Canadian economy that “the markets detest,” the advisory notes. But unlike some other financial firms, it’s doing just fine. It gained 2.5 per cent in the past month, and there should be a lot more to come. If the markets are slow to pick up on this trust due to its unsavoury association with the financial sector, “a cash yield of 8.21% will keep you warm while you wait.”

Northland Power Income Fund (TSX-NPI.UN) has an advantage over many of its competitors among power generation funds. Unlike hydro trusts, which may suffer from low water flows, Northland uses wind power which is much more predictable. And it has not diversified into other areas. It is “a pure power play,” says the advisory, and its cogeneration technology gives it an edge when natural gas costs are high.

Which one is better?

Now it’s time to pit trusts vs. stocks. Over the past month, the S&P/TSX Composite Index gained 5.70 per cent in value. During the same period, the S&P/TSX Capped Income Trust Index gained 4.10 per cent.

During the bull market of 2003 to 2007, there were more spectacular numbers to be had, of course, but in today’s stop-and-start markets, those figures are impressive. And there are even more impressive figures.

When the advisory turned to the year to date, the Income Trust Index was well out ahead, having gained 9.1 per cent against the TSX’s 3.20 per cent (as of today those figures are 13.43 per cent for trusts, 5.73 per cent for stocks). And income trusts have topped stocks in 15 of the first 19 weeks of the year. So which is the better investment?

(If this reminds you of “It’s a candy mint!” vs. “No, it’s a breath mint!” or “Tastes great!” vs. “Less filling!” you’ve been watching TV for a few years now.)

The important fact, says the advisory, is that “they’ve both been performing well, and both are expected to continue to perform well.” There is yet another group of gratifying statistics to support this good news.

Since the first day of the millennium

RBC Capital Markets released a study of stock market performances in four different regions: Canada and the United States; Europe; Asia/Pacific; and Latin America.

Canada and the U.S. came out on top — and Canada came out ahead of the U.S. The S&P/TSX Total Return Index was the “hands-down winner,” says the advisory, finishing ahead of the Dow Jones, the S&P 500, Nasdaq and the Russell 3000 Index.

How long did this superior performance go on? You name it. “The Canadian market was the best performer over the past three months, for the past year, for the past three years compounded, for the past five years compounded, and since the first day of this millennium.” Whew!

Were there better markets anywhere else in the world during any of these time frames? Yes, two. Brazil and Mexico each finished above Canada during select periods. But that’s beside the point.

The Canadian market has not only been the best place to be, it will continue to be the best place for investors, the Income Trust Guide assures its readers. So here is the advisory’s advice.

With interest rates near their bottom and soon to rise, stay light in fixed income investments just now. But don’t skimp on stocks or trusts.

“You want to be overweight in Canadian equities and Canadian income trusts, relative to equities anywhere else in the world.”

At a time when investors hunger for good news, we are glad to be the bearers of even better news. All that remains is to take advantage of it.