In its latest portfolio strategy report, CIBC World Markets is nudging up its heavy overweight in income trusts, cutting its overweight in bonds and boosting its cash allocation.

CIBC reports that so far this year overweights in energy and income trusts, along with an underexposure to the languishing info techs, has helped its model portfolio outperform the benchmark by a material 170 bps year to date. “July was another blowout month for the income trust sector,” it notes, adding, “We’ve raised our projected total return for the sector this year to 28%, rivaling 2004’s sizzling performance.”

“Energy trusts spearheaded the trust sector’s climb in July. Good prospects in that heavily weighted segment and buying due to index inclusion limit the sector’s near-term vulnerability to modest rate hikes,” it says. It has a double weighting on trusts, at 10%, versus a benchmark weight of 5%.

It also remains significantly overweight in energy stocks. “With non-OPEC production disappointing and China still expanding rapidly, oil prices have yet to see their peaks,” it suggests. “Justifying a continued healthy 30% overweighting in the equity part of our portfolio, the TSX energy group is still not fully priced for our forecast of an average $55/bbl West Texas crude price this year, rising to $65/bbl in 2006. Oil intensive producers and tar sands plays, pacesetters in the energy index’s near-50% run-up this year, hold strong appeal. Multiples should rise further as Canada’s receptive business environment and interest in non-conventional plays sparks an ocean swell of inbound energy investment.”

While it’s overweight oil, CIBC says it remains benchmark equities as a whole, “given the modest potential for capital appreciation implied by our year-end 10,800 target for the TSX Composite”. The Bank of Canada’s non-energy commodity price index has eased by about 6% since the spring hampering materials stocks, it notes. “Industrial stocks are also vulnerable to downward pressure as record oil prices take a toll on the global economy,” it says. “Stretched valuations warrant an underweight on tech stocks as well.”

And, the firm has dropped 2%-pts from its bond overweight this month, “a tactical response to the Bank’s recent more hawkish policy chatter,” it says. “While a rate move in September looks pretty much like a wrap after May’s firm GDP number, low inflation and the drag of an over-80-cent dollar still militate against an aggressive, extended tightening cycle. We expect the rally to resume in 3-4 months time, as the Bank’s bark proves worse than its bite.”