A Canadian Yield

02/18/2005 12:00 am EST


Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

If, five years ago, you put one dollar put in the bond portfolio maintained by Richard Lehmann , you would now have $2.29. At the same time, that same dollar invested in the S&P 500 would be worth 76 cents. Here’s his latest idea for your income "dollars."

"It’s always risky to pick favorites among income securities, but this year I think the Canadian energy trusts represent a unique opportunity for individual investors. The one specifically I like is Petrofund Energy (PTF AMEX). The fund is paying double-digit, monthly payments. It’s like earning interest, but for US tax purposes, it’s considered a dividend. So not only are you getting 10% plus rate of return, but you are getting 15% tax treatment on that.

"The reason I find these shares attractive is not because I can predict what oil prices are going to do, but rather that there have been changes in the Canadian law which now make these trusts eligible for purchase by US pension funds. Until recently, these trusts had unlimited liability, which was a small risk, but nevertheless on the books, and thus made these trusts something that US pension funds wouldn’t buy. Now that the issue of liability is gone, I think we will see massive buying by pension funds. By this time next year, I think that Petrofund, as well as other Canadian energy trusts, will all have just single-digit yields. That means that the prices will go up and you will also have capital gains, while locking in a great rate of return. If the price of oil stays above $35, these share should provide fairly stable dividends."

Aside from his latest income idea, Richard Lehmann shared some intriguing insights during the Forbes Newsletter Editor Roundtable . Despite the enormous amount of commentary in the financial press about the Fed and interest rates, I’ve rarely heard such a clear and common-sense explanation of the Fed’s activities. Says Lehmann, "What we’ve been seeing in the last year or more is that the Fed has been on a very predictable rate-hike program that has had the effect of leveling the yield curve. I think the strategy there is very simply that there have been trillions of dollars invested in hedging operations whereby people would borrow short-term and buy long-term instruments. And in April of last year, when these funds got nervous about Fed policy, we saw a spike in interest rates that really shook everyone up.

"Because of that, the Fed took the strategy of broadcasting its rate hikes to avoid the possible panic that could ensue. The amount of money that could suddenly unravel in these holdings could create a panic. So we are on this steady program. Unfortunately, it had the immediate effect of increasing the amount of speculation because now you had a predictable Fed policy. But as we see, the yield curve is flattening, and the effect is that it takes the profit out of those hedging positions. So, in effect, we have an 'organized unraveling' of these hedges. I think it will continue through the end of this year, and if all goes as planned will keep long rates from rising significantly."

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