Two-thirds of inves—tors calculate their retirement income needs on a monthly basis and not from an annual or lump-sum perspective, a recent study on retirement trends shows. That makes sense, as most people are used to regular paycheques and because government pensions are paid out roughly every 30 days.

It’s not surprising, then, that every fund complex offers a series of income funds that wrap high-yield common stocks, income trusts and bonds into a package that distributes cash every month.

One of the largest is CIBC Securities Inc. ’s $6.5-billion CIBC Monthly Income Fund, a steady performer that has registered a noteworthy first-quartile return for the five years ended Nov. 30, 2006. The fund was highlighted at the recent 2006 Canadian Investment Awards, capturing the trophy in the Canadian income balanced category.

After producing a strong 15.1% return in 2003, the fund was a sound performer in 2004, gaining 12.3%. For the 11 months ended Nov. 30, the fund is up roughly 10.4%, producing a five-year average annual compound return of 12.5% and a monthly income stream of 6¢ a unit.

Let’s compare it with Elliott & Page Ltd. ’s $1.4-billion Elliott & Page Monthly High Income Fund, another strong performer and a 2003 Canadian Investment Award winner.

Up 19.2% in 2003, it delivered an even stronger 18.9% in 2004. For the 11-month period, the fund has staggered, however, and is up only 4.2%. Still, the numbers translate into a 13.9% average annual compound return for five years to Nov. 30, which is considerably more than most funds in the balanced income category. It generates 5.5¢ a unit each month in income.

Both funds receive five-star risk-adjusted rankings from Morningstar Canada and have outperformed the median fund in their category over various periods. Recent changes in the income trust market, however, mean the funds will have to undergo some adjustments to maintain their goals of steady income and capital preservation.

The CIBC fund’s manager, Stephen Gerring, started out with Prudential Insurance, later working for the Ontario government and Citicorp. He joined TAL Global Asset Management Inc. in Toronto 14 years ago, then CIBC acquired TAL in 2001.

Gerring has altered the CIBC fund’s asset allocation several times in the past five years, yet one of his strategies is always to remain exposed to five asset classes. When the market took a downturn in 2000, he boosted the fund’s exposure to bonds, reaping the benefits of falling interest rates and bonds yields. Until earlier this year, his most recent move was to be tilted toward stocks.

Gerring has allowed cash to rise to 18.3% of assets and bonds to fall to just 13.9%. The fund also contains 10.3% in income trusts — down sharply from a year ago — with a further 3.1% in preferred shares. The fund has a 54.4% equity holding, higher than virtually all its peers, and the weighting in energy and telecommunications securities is heavier than most. Because of the CIBC fund’s income mandate, Gerring avoids investing in information technology and health care, favouring financials.

Regarding the E&P fund, Allan Wicks has been with E&P since 1996 and has looked after its monthly income fund since its inception in 1997. Prior to joining the firm, he held various pension fund responsibilities with Aetna Canada.

A conservative value manager, Wicks looks for large, high-quality companies that are undervalued according to his discounted cash-flow models. He will also invest in companies that have fallen out of favour. Wicks limits individual positions to about 5% of the fund’s assets and keeps turnover fairly modest, at around 35% annually.

Recently, about 45.9% of the E&P fund’s holdings were in equities, with 18.7% in Canadian bonds, 3.2% in foreign bonds, 21.2% in Canadian income trusts and roughly 10.3% in cash. In part because of a decline in valuations, the income trust allocation — which has accounted for roughly a third of the portfolio in the past two years — has dropped sharply. On the equity side, the fund is overweighted in telecoms and industrials. Like most high-income funds, the portfolio is also sharply overweighted in financials.

There are many common names among the two funds’ larger holdings, and a few of their bigger bets are similar. The E&P fund holds about 70 stock positions, whereas the CIBC fund holds closer to 50. E&P’s top 10 holdings account for 29% of its assets, whereas CIBC’s represent more than 41%. Neither fund has significant foreign holdings, although E&P does have a 2.5% of its portfolio in U.S. stocks and a 3.2% weighting in foreign bonds. E&P’s Wicks is required to hedge his currency exposure should the foreign holdings account for more than 10% of fund assets.

@page_break@The conventional valuation ratios of both funds are somewhat similar to the average Canadian balanced income fund. The E&P fund has a slightly lower price/earnings ratio and sports a lower average market capitalization. But its 4.95% dividend yield puts it in the category’s top quartile.

The CIBC fund has one of the highest average market caps in the category and is already very large, so burgeoning cash may become an increasing problem, given its focus on large-cap, dividend-heavy stocks. In fact, some funds in the monthly income category have actually placed restrictions on accepting new money.

Size, however, is not a factor at this time for the E&P offering.

Although the CIBC fund has delivered less volatile returns than almost all its peers, the E&P fund’s profile is quite different.

For the five years ended Nov. 30, the CIBC fund has had a standard deviation of 4.76, whereas the E&P fund has had a standard deviation of 6.37, which is substantially higher than that of the benchmark and the majority of its peers. In addition, the CIBC fund’s five-year Sharpe ratio of 1.96 pushes it ahead of the E&P fund’s 1.67.

Both funds are solid offerings, but the CIBC fund comes out slightly ahead because of its risk-adjusted returns and the fact that its 1.43% MER is significantly lower than both the category’s median 2.1% and the E&P fund’s 2.19%.

Yet, the E&P fund is no slouch. In all of the trailing one-year periods since its inception, the fund’s eclectic approach has beaten the median fund in the category 73% of the time. And the E&P fund has produced negative returns in only nine periods since its inception, vs 27 for the median fund, Morningstar Canada’s data show. IE