Oscar Belaiche, vice-president and portfolio manager at Toronto-based Goodman & Co., Investment Counsel Inc., has been boosting the equity portion of the seven-month-oldDynamic Strategic Yield, of which he is co-lead manager.
"We have been selectively adding equities to this fast-growing high-income fund as the economy is showing signs of recovery," says Belaiche. Of the asset mix, he notes: "When we launched Dynamic Strategic Yield, there was a huge buying opportunity in fixed-income securities, such as investment-grade corporate bonds and high-yield bonds." At that time, he says, the fixed-income market was pricing in a depression.
Belaiche's initial portfolio had two-thirds in fixed income and one-third in equities. "Since then, we have been moving to a more neutral equity/fixed-income asset allocation, by applying new money coming into the fund to equities." At the end of August, Dynamic Strategic Yield held 44.1% in bonds, 45.4% in equities and 10.5% in cash.
As part of its income-generating line-up of funds, Goodman & Co. launched Dynamic Strategic Yield on March 1 andDynamic Strategic Yield Class, a "tax-efficient version" of this fund, on July 13. The two funds now have combined assets of more than $550 million.
A specialist in income-producing equities, Belaiche and his team manage the equity component of Dynamic Strategic Yield. Colleague Michael McHugh and his team are responsible for the fixed-income segment.
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At the end of August, this fund held 10.9% in Canadian equities -- "primarily banks, pipelines and telecom stocks, all dividend-paying stocks." Income trusts constituted 13.4% of the total portfolio and real estate investment trusts (REITs) represented 5.6%, for a combined 19% in trusts.
Belaiche is one of the few surviving major players in the shrinking universe of Canadian income trust mutual funds. HisDynamic Focus+ Diversified Income 
, originally named Dynamic Focus + Diversified Income Trust when launched in 2001, has more than $1 billion in assets.
"The change in the tax treatment of income trusts, except REITs, which comes into effect in 2011, has put a question mark over the viability of some trusts," says Belaiche. Canadian business trusts have proven to be the most vulnerable of the income trust categories, he says. "A number of the smaller trusts could be acquired or taken private prior to 2011."
Other income-trust categories, such as energy and infrastructure/utilities trusts, are generally in better shape, he says. In Dynamic Strategic Yield's portfolio, the largest energy equity holding is Vermillion Energy Trust VET.UN/TSX, at 2.8% of the fund.
This oil and gas royalty trust is a prime example, says Belaiche, of the equities that he and his team invest in. "We look for best-in-class management, stable businesses, strong balance sheets, good profitability, high cash-flow generation and sustainable dividends/distributions." His well-honed discipline is QARP or "quality at a reasonable price."
Vermillion's management team is underestimated, says Belaiche. "This trust, with an international reach, has consistently grown through acquisition, without dilution to the unitholders." He notes that the trust, which has $2.1 billion in market capitalization, recently acquired an 18.5% interest in the Corrib gas field off the northwest coast of Ireland. Corrib is expected to generate significant operating cash flow when it comes on stream.
Belaiche says Vermillion plans to convert to a corporation by the fall of 2010. "Most importantly, this trust, intends to maintain its distribution/dividend post-conversion, which will protect investors' cash flow." Vermillion's estimated distribution per unit for 2009 is $2.28.
A larger-cap business trust that is "expected to maintain its distribution/dividend post 2011" is Cineplex Galaxy Income Fund CGX.UN/TSX, says Belaiche. This trust, which has a market capitalization of $900 million, is the dominant movie-theatre chain in the country. Cineplex Galaxy currently has some two-thirds of Canadian box-office revenues. It is, he says, a prime example of "the quality business trusts in the portfolio."
Cineplex Galaxy is, he says, successfully expanding its sources of revenue through, for example, increased advertising in its theatres and alternative programming, such as opera movies. The trust's payout ratio for 2009 is estimated at 60%, which is "certainly modest." The estimated distribution per unit for 2009 is $1.26.
Turning to REITs, Belaiche notes that he has a "small position" in H&R Real Estate Investment Trust HR.UN/TSX, which owns a portfolio of North American properties. This Canadian REIT has a market capitalization of $2.1 billion and is currently building EnCana Corp.'s new headquarters, The Bow, a two-million-square-foot building in downtown Calgary.
"H&R ran into difficulties earlier this year with the financing of this project, but has successfully resolved this and is now fully funded to complete construction," says Belaiche. "This has removed an albatross from around H&R's neck," he says, yet the REIT still trades at a discount to its peers.
Of the Canadian banks, Belaiche says that they are "among the few around the world that skated so well through the financial crisis and have been able to maintain their dividends."
His two key holdings are Royal Bank of Canada RY/TSX and Toronto-Dominion Bank TD/TSX "as I consider that they have the strongest business platforms." Based on their recent closing stock prices, Royal's dividend yield is 3.5%, as is TD's. "I started buying these stocks when the fund was launched in the spring and bank stocks were in the doldrums," Belaiche says. "This has worked out well as they have rebounded strongly since."
