When the federal government clamped down on the income trust sector in September by announcing the end of advance tax rulings for corporations seeking trust status, nervous investors yanked an estimated $22 billion out of the sector.

Now Sandy McIntyre has his work cut out for him. As vice president of Toronto-based Sentry Select Capital Corp. and lead manager of Sentry Select Canadian Income Fund, a $480-million fund with holdings in 94 income trusts, he is bracing himself for Ottawa’s next move.

The best-case scenario, from his point of view, would see the government level the playing field by reducing corporate tax rates to make income trusts less appealing to businesses looking for tax breaks.

But it’s widely believed the government will target trusts with a new tax to offset the $300 million in taxes lost Ottawa claims it suffered last year as a result of a booming income trust sector. Fear of that has prompted a $20-million dip in Sentry Select Canadian Income Fund’s assets under management.

“Our investor services reps are being flooded with calls from the public,” McIntyre says. “People are very nervous, but you have to recognize who these investors are.
They are individuals with limited capital who are forced to live off that limited capital and maintain a standard of living. When they see their capital at risk, they get nervous because they can’t get it back.”

While other income trusts are scrambling to build cash positions until Ottawa resolves the issue, McIntyre and co-managers Michael Simpson and Dennis Mitchell have decided to ride it out with their current allocation. “We tend not to change our holdings because of extraneous factors,” McIntyre says. The fund has about 2.5% in cash, 35% in business trusts, with the rest in a mix of oil and gas, real estate, resources and infrastructure trusts.

“buy good businesses”

“The logical thing is to continue to own the businesses we think are viable because their underlying productive assets are solid,” he says. “We try to buy good businesses with good balance sheets, with long-term growth potential.”

That philosophy has yielded impressive returns. For the three years ended Sept. 30, the fund reaped an average annual compound return of 21.9%, easily besting the category’s median return of 20.7%. Since its inception in February 2002, the fund has posted an average annual return of 22.6%.

Names such as Canadian Oil Sands Trust, BFI Canada Income Fund, Keyera Facilities Income Trust and RioCana Real Estate Investment Trust meet McIntyre’s criteria (among them, a good debt/cash flow ratio), but he limits the weighting of each to no more than 5% of the fund. Anything more would put unitholders at risk, he says.

With a weighting of 4%, long-time favourite Canadian Oil Sands is his top pick. “What
I like about Oil Sands is my reserve replacement risk is negligible,” he says. “It has a high operating cost, but I don’t have to use complicated geophysics to determine if there is a pool of oil or gas 3,000 metres below the surface of the Earth.”

McIntyre says many of the 94 trust holdings are given only a slight weighting until they demonstrate performance. If not, he won’t stick it out. Turnover can reach up to 60% in the resources sector, but stays at about 20% in other areas.

“If we buy an IPO that doesn’t work out, we’ll move on,” he says. “But our overarching theme is if we buy a good business that’s well-capitalized and has very good distribution coverage, I don’t need public market liquidity to make money. I’m making money from the business.”

He protects against the effects of rising interest rates through exposure to businesses he
believes can grow with the economy. BFI Canada Income Fund and Yellow Pages Income Fund are examples of “putting yourself in the way of where dollars are transacting on Main Street,” he says. “I want to be exposed to companies that will participate in broad economic growth.”

Don’t get him started on Ottawa’s assertion that income trusts run the risk of becoming unsustainable because their cash is going out in distributions rather than being reinvested in their companies. That’s bunk, he says: “Productivity isn’t an income trust problem. Corporations have been the predominant productivity vehicle for the past two generations. They’re the ones that have done a bad job. We’re trapping capital in bad companies in this country. An income trust actually frees up that capital.”

@page_break@After a 20-year gig managing money for high net-worth clients at Jones Heward Investment Management Inc., McIntyre joined Sentry in 2000 to head up a then-rare
income trust fund in a bear market.

It was a perfect fit for his evolving mindset. He was beginning to see boomers’ needs shift from the accumulation model to one that provides income. “I started to realize the conventional equity model was a bad one for someone trying to live off investments,” he says.

His enthusiasm for the sector wasn’t shared by everyone, least of all by the $45-million client who fired him for selling Nortel Networks Corp. shares in 2000 to buy income trusts. But he stuck with it.

Today, he manages $2.8 billion spread over 15 funds, including Sentry Select Balanced and Sentry Select Diversified Total Return. It’s a long way from his days as a student of commerce and finance at the University of Toronto in the mid-1970s. He hated accounting, dropped the courses and earned a bachelor of arts instead.

It wasn’t until he bought his first computer in the early 1980s that he got hooked on
money management. “I started building models on the computer and discovered I could make some sophisticated management tools,” he says.

Those management skills are being tested as he works to protect the assets of clients
who rely on income trusts to fund their retirement. “This is not a rich-person issue,” he says. “The government has to understand that [an attack on] the income trust sector is an attack on a pillar of retirement for thousands of Canadians.” IE