For many investors, going against the market is too much pressure. In a fear-drenched environment like this one, they’re going to sell first and ask questions later.

The trouble is the flight instinct only kicks in after real damage has been done. Sometimes, there’s more to come. Often, however, the sell decision comes at the bottom or very close to it, with re-entry generally late or never.

The only way to completely avoid the fallout from a bear market is to go 100 percent into cash. The Holy Grail for market timers is to sell out at a top, stay in cash all the way down and then buy back at the bottom.

Unfortunately, as the honest ones will tell you, you’re going to top or bottom tick only a handful of times in your life, if you’re lucky. In fact, most would-be timers usually wind up getting whipsawed. (i.e., pulled in and out of positions during what on a long-term chart would be minor blips.)

If you’re a successful timer, more power to you. But for my money, most of us are better off with a longer-term approach: buying good businesses that pay high yields and holding them as they gain value over time.

You’re going to have plenty of ups and downs along the way with this strategy. But in the long run where the most money is made investing—three to five years and longer—the stock market is a weighing machine. And the bigger and stronger a company becomes, the more its shares will be worth, and the higher cash distributions it will pay.

Identifying the Canadian income trusts with the best businesses is the primary goal of Canadian Edge. The Portfolio lists my top candidates, from the noncyclical fare in the Conservative Portfolio to the more volatile and cyclical Aggressive Portfolio.

Like that famous investor from Nebraska, my favorite holding period is forever. I want to stick around to watch a trust build its business, grow cash flows and increase its distribution year-by-year, steadily pushing its share price higher as investors recognize its value.

Doing that, of course, means living through environments like this one, when even trusts putting up good earnings numbers are taken down on perception. I’m not willing to hold onto a falling stock whose business is coming apart. But as long as a trust is putting up the numbers it needs to stay on track for long-term growth and pay its distribution, I will stick.

Things may get even more volatile in the next few months. This week, for example, the otherwise strong Bank of Montreal reported a charge to its first quarter net income from the continuing meltdown of US financial services. The amount isn’t significant to the bank’s financial health. But it’s another sign that US weakness is spilling over into some industries in Canada.

Three months ago, the headline of the Portfolio section was “Numbers Count.” That’s still the bottom line here. Almost all trusts have taken a whack since this bear market began in mid-2007. And judging from recent market action, there will almost certainly be more bad days when even those seemingly most impervious to turmoil are knocked down.

Those that keep making their numbers will keep paying their distributions. In fact, they’ve proven they’ll continue to increase those yields. Eventually, the clouds overhanging this market will blow away, and they’ll recover lost ground and very likely a lot more.

Looking ahead to the rest of 2008, strong trusts have much to look forward to. The natural gas market has at last stabilized and prices are moving higher. And as the Feature Article points out, the fog surrounding 2011 trust taxation is starting to clear, with the upshot that prospective change isn’t nearly as severe as once feared—or what’s currently priced into the market.

That’s two of the stress tests that have plagued trusts for the better part of two years. It still leaves the weak US economy, tighter global credit conditions and the strong Canadian dollar as challenges, and more than a few trusts are still vulnerable. But again, good numbers assure us that trusts are proving up to the task, that dividends will be maintained or increased, and that share prices will ultimately bounce back fully and then some.

Making the Grade

So how have our favorite trusts been stacking up? As I’ve pointed out in flash alerts during the past month, the answer is very well, with a few exceptions. We’ve also reviewed numbers in detail in the weekly Maple Leaf Memo, which is complimentary to all CE readers who sign up for it. We’ll continue to update earnings as they appear in the next several weeks in both MLM and CE flash alerts.

Front and center on the honor roll are the March High Yields of the Month: Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) and Macquarie Power & Infrastructure (TSX: MPT-U, OTC: MCQPF).

Keyera Facilities Income Fund’s yield of nearly 8.5 percent and reliable upper-single-digit annual dividend growth make it one of the world’s best growth and income plays and a buy up to USD21. Macquarie Power & Infrastructure pays perhaps the world’s most secure 12.5 percent-plus dividend and is a buy up to USD12.

Last month, I reported Bell Aliant Regional Communications Fund’s (TSX: BA-U, OTC: BLIAF) robust earnings. This month, it hiked its distribution 2.9 percent, bringing 12-month payout growth to a robust 5.2 percent. Yielding nearly 10 percent, Bell Aliant Regional Communications Fund is a buy up to USD33.

Elsewhere in the Conservative Portfolio, AltaGas Income Fund (TSX: ALA-U, OTC: ATGFF) finished 2007 very strong. Cash flow from operations hit CAD1.03 per share, up from 65 cents Canadian a year ago. The power segment was the standout, as the company boosted output, controlled costs and successfully locked in higher prices.

This division has seen strong growth in recent years, particularly from the build out of AltaGas’ wind power assets. The next big move is the Bear Mountain Wind Park, set for service in November 2009. The trust is also expanding its hydro plants, with a focus on the stable watershed of British Columbia. These are carbon-neutral power sources, which will be in rising demand in coming years as greenhouse gas (GHG) regulation tightens.

In 2008, however, the now-completed acquisition of Taylor Natural Gas Liquids LP will play a far greater role in the profit picture. The deal increases the trust’s overall asset base by 64 percent and, more important, adds a wealth of fee-generating, long-lived energy infrastructure assets, which are complementary to its existing asset base. The transaction roughly doubles AltaGas’ processing capacity and natural gas liquids production.

In short, it was another strong quarter from this very solid trust. Paying a growing yield just below 9 percent, AltaGas Income Fund is a buy up to USD28.

Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) also had a solid fourth quarter, reporting record profits as it builds infrastructure. Buy Pembina Pipeline Income Fund up to USD18.

For more on Algonquin Power Income Fund’s (TSX: APF-U, OTC: AGQNF) strong fourth quarter, see Bay Street Beat in Tips on Trusts. Algonquin Power Income Fund is still a buy up to USD9.50.

REITs in the US have been hard-hit by economic worries. But thus far, Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) and RioCan REIT (TSX: REI-U, OTC: RIOCF) aren’t showing any weakness. In fact, both came in with strong fourth quarter results on the back of rising occupancy rates and higher rents, as well as successful acquisitions.

Canadian Apartment’s strategy of diversifying outside its core eastern Canada markets appears to be paying off. Occupancy reached 97.9 percent by year-end, rents rose 3 percent portfoliowide, and parking revenue increased 12.1 percent. Same property net operating income growth—the best measure of how a REIT is doing, leaving aside its acquisitions—actually accelerated in the fourth quarter to 6 percent from a full-year number of 3.9 percent.

The bottom line was a 7.9 percent boost in fourth quarter distributable income per unit and a drop in the payout ratio to a steady 91.3 percent, or 74.1 percent of cash after the dividend reinvestment plan. Those are solid results in any environment and a major vote of confidence for this REIT in these turbulent times. Canadian Apartment Properties REIT is a buy up to USD20.

RioCan’s retail portfolio logically makes it at least somewhat economically sensitive. This REIT, however, has minimized exposure by sticking only with high-quality projects and hitching its wagon to only the most creditworthy tenants. As a result, it continues to pump out solid results, including a 7.7 percent boost in fourth quarter funds from operations (FFO).

Portfolio occupancy stood at 97.6 percent at the end of 2007, a number about which US retail REITs can only dream. No individual tenant comprised more than 5.6 percent of annual revenue, and 83.4 percent of its space was leased to extremely strong anchor tenants, with two-thirds of revenue coming from high-growth markets.

Those are standards RioCan adhered to when Canadian real estate was slumping in the 1990s, and they’re serving it well now. Buy RioCan REIT up to USD25.

Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF), GMP Capital Trust (TSX: GMP-U, OTC: GMCPF) and Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) were all big winners in the market last year. This year, their shares have been kicked around a bit, as investors have perceived recession risk.

All three, however, posted strong fourth quarter earnings that more than backed up their recent distribution growth. And, despite investors’ gloom, the trio maintains a solid outlook for growth in 2008.

For Energy Savings, the fourth quarter was another strong one for US customer growth, gross margins (up 16 percent) and distributable cash flow per share (up 19 percent). Gross margin per new customer was up 11 percent over the trust’s target, and management reaffirmed its long-standing, full-year (end March 31) target rate for distributable cash flow of 15 to 20 percent.

In pushing down its share price this year, investors seem to be concentrating on the weaker-than-projected customer additions in Canada and the potential for weakness in US additions because of a slowing economy here. US operations are also challenged in Illinois by a rate dispute with the state attorney general.

In the latter battle, Energy Savings is hardly alone; the state is rapidly earning a reputation for hostile utility relations. Even a worst case, however, is unlikely to derail overall growth, as operations in other states continue to grow.

It’s possible that a weak US economy could hurt cash flow, as customer growth slows and bad debt rises. That’s why we have to keep reading the results. As of this juncture, however, that’s not showing up in the numbers, which continue to support strong dividend growth for 2008.

That makes Energy Savings very cheap, yielding nearly 11 percent and selling for 84 percent of sales. Energy Savings Income Fund is a buy up to USD18 for those who don’t already own it.

Yellow Pages Income Fund shares have also taken a hard hit in recent weeks, despite putting up some very impressive fourth quarter numbers. Sales rose 17.2 percent, as the trust added assets and continued its strategy of rapidly taking its business to the Internet. Online directories and other so-called vertical media posted 44 percent growth in “organic” revenue or that realized from existing assets. That exceeded the trust’s 30 percent growth target and pushed online revenue above 10 percent of overall sales for the first time.

All those numbers haven’t been enough to convince many investors that the trust isn’t heading for the same dire fate as US directory companies. Fears reached a crescendo when online advertiser Google announced its growth would likely be slowing in 2008. And although Yellow hasn’t fallen nearly as much as its US counterparts—some of which are off as much as 80 percent in recent months—it does yield nearly 11 percent and sells for just 98 percent of book value.

As I point out in the Feature Article, one of the most interesting things about Yellow Pages Income Fund is management’s continued assertion that it will be able to earn its way past any 2011 tax obligations. Although acknowledging that dividend growth is slower than it would otherwise have been without the pending tax, it’s contemplating no distribution reductions when it converts to a corporation in late 2010.

That strength clearly isn’t in the share price at these levels. Neither are the strong fourth quarter numbers—which indicate little, if any, recession vulnerability—nor the fact that the trust continues to build on what’s effectively a monopoly market position, inking the purchase of a northern Ontario yellow pages business last month.

Again, if Yellow were to report bad numbers, I’ll have to reassess. But at this price and given what we know, Yellow Pages Income Fund is a steal up to USD16.

As for GMP Capital, fourth quarter numbers did show some expected weakening, largely because of less activity in facilitating mergers and acquisitions in Canada. This business is likely to remain weak until credit conditions ease further. Capital markets activity overall saw a 6.8 percent drop in revenue and a 21.6 percent dip in income, despite explosive growth numbers for the full year.

The business, however, remains very healthy, with the trust maintaining a market share of 12.4 percent in trading volume on the Toronto Stock Exchange. GMP expanded its presence in Europe and continued to post strong results in wealth management and alternative investments, where it operates as a major private capital concern. And although management isn’t expecting an immediate rebound in business conditions, cash flow did cover the distribution with a respectable 87.7 payout ratio in the fourth quarter.

That strongly suggests management has been conservative with its payout policy, despite recent increases, in anticipation of less favorable conditions. That provides a great deal of protection to the yield, which is more than pricing in a still improbable dividend cut.

In short, this is a trust hit by perception that’s not likely to ever be matched up with reality, short of a full-scale North American depression. GMP Capital Trust is a buy up to USD25 for those who don’t already own it.

High Energy

One of the greatest ironies about this year is what’s been outperforming: energy producer trusts. Historically, energy prices have faded when the US economy has skidded. This time around, however, oil has remained strong on still robust global demand and tight supplies, while natural gas is staging a comeback on lower North American production, a return to more normal weather patterns and an explosion in prospective new demand from US electric utilities “rush to gas” to reduce GHG emissions.

As I’ve pointed out in prior issues, energy trusts’ ace in the hole has been the way they sell output forward to lock in prices. This is the only responsible way to do business, given the capital costs of producing energy, trusts’ need to pay a monthly distribution, statutory restrictions on issuing new trust shares and tight credit markets. But it has the effect of creating a lag of at least a couple quarters between trusts’ cash flows and moves in spot market prices for oil and gas.

The way it’s played out this time is trusts’ realized prices for selling oil were $20 to $25 per barrel below prevailing spot prices in both the third and fourth quarters of 2007. The spot price would have to come down at least that much to have any negative impact on their cash flow. And as long as spot prices remain at these levels, trusts’ realized selling prices will keep rising quarter by quarter as they replace old contracts with new ones.

The situation with natural gas is even more pronounced. Spot gas has now broken well above USD9 per million British thermal units. That’s 40 to 50 percent above where trusts sold it in the third and fourth quarters. Clearly, trusts’ realized prices for selling natural gas are going up in coming months. And unlike oil sales, a drop in the US dollar won’t hurt trusts’ proceeds in Canadian dollars.

The bottom line is trusts’ cash flows from both oil and gas sales are going to keep rising in 2008. That’s what’s been behind recent upward price action. And with many of these trusts selling for little more than breakup value, the uptrend is only just beginning.

We got our first inkling of what lies ahead with the strong fourth quarter earnings reported by our “Big Three” producers: ARC Energy Trust (TSX: AET-U, OTC: AETUF), Enerplus Resources (NYSE: ERF, TSX: ERF-U) and Penn West Energy Trust (NYSE: PWE, TSX: PWT-U).

All three trusts’ focus is long-term sustainability, and once again, they delivered with their results. ARC enjoyed a 6.5 percent increase in distributable cash flow per share over 2006 totals, thanks to a combination of higher oil prices, cost controls and a mild recovery in natural gas prices over third quarter levels. That pushed its payout ratio down to 72 percent.

More exciting, however, the trust replaced 101 percent of its production with new reserve finds, even while cutting its finding, developing and acquiring (FDA) costs down by 15 percent. Debt was held to 1.07 times annual cash flow, shares outstanding increased just 2.7 percent, and the trust exited 2007 with a production rate of about 65,000 barrels of oil equivalent a day. And it added greatly to future reserves with its discoveries in British Columbia.

Enerplus reported basically flat production for the quarter but boosted 2008 output by roughly half by closing the acquisition of Focus Energy in February. That deal will weigh overall output significantly toward natural gas at 61 percent, a big plus with gas prices on the rise this year. But the balance will shift back toward equality as the trust adds more production from its oil sands projects and from Baaken light oil development in coming years. Debt to cash flow was just 0.8-to-1, one of the lowest in the trust sector, and reserve life based on proved reserves remained about 10 years.

As for Penn West, it posted a 17 percent increase in cash flow per share, as it increased production modestly from third quarter levels. Those numbers will go up dramatically to roughly 200,000 barrels of oil equivalent a day now that the Canetic Resources and Vault Energy Trust acquisitions have closed. Debt is modest at 1.46-to-1 times cash flow, and share increases—not including the takeovers—remain modest.

Important, all three achieved fourth quarter payout ratios in the 70 to 74 percent range while selling their oil and gas from $25 to $35 per barrel below current spot prices. And their realized natural gas sales were 40 to 50 percent below prevailing prices. That’s a lot of downside protection against a potential US recession and massive upside even if prices decline as much as 20 percent from current levels over the next year.

All three are strong buys: ARC Energy Trust to USD25, Enerplus Resources to USD50 and Penn West Energy Trust to USD38. I’m confident we’ll see them well above current levels in coming years.

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) is a slightly different animal, given that 70 percent of its cash flow comes from energy production outside Canada. Its results, however, were–if anything–more impressive. The trust replaced 138 percent of 2007 output with new reserves, even while covering all distribution and capital costs with internally generated cash flow—with plenty of cash left over.

Net debt remained low at 1.1 times annual cash flow as the company boosted output 14 percent from 2006 levels. Reaching diverse markets has enabled the trust to cash in on higher energy prices outside North America, and the income is shielded from 2011 taxation as well. That’s the very definition of sustainability, and it’s why Vermilion Energy Trust rates a buy up to USD40, despite paying a lower yield than the Big Three.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) has already reported an increase in reserves for the eighth straight year, with a 125 percent reserve replacement ratio. Net present value per unit rose 3 percent as the company realized an astronomical 4.7-to-1 reserve enhancement ratio for every dollar spent on development. Production levels dropped roughly 10 percent in 2007, but costs fell even faster. Peyto Energy Trust’s stock is still a buy up to USD20.

Our other oil and gas picks–Advantage Energy Trust (NYSE: AAV, TSX: AVN-U), Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) and Provident Energy Trust (NYSE: PVX, TSX: PVE-U)–will be reporting in coming days. Indications are the numbers will be favorable.

All three are buys: Advantage to USD12, Paramount (USD10) and Provident (USD14). Advantage, Paramount and Peyto are most leveraged to a boost in gas prices this year. Provident shareholders look to get a boost this year from management’s plan to potentially spin off and sell its US investments.

The Laggards

Unfortunately, not every Canadian Edge recommendation has reported strong fourth quarter numbers. In addition to Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF)—reviewed in the Dividend Watch List in Tips on Trusts—TransForce Income Fund (TSX: TIF-U, OTC: TIFUF) was also a laggard.

When I first re-entered TransForce in February 2007, I was fully aware that its business could be affected by economic weakness in the US. What I missed was how much more its business would be affected than other transportation trusts, in large part because of its policy of making aggressive acquisitions.

I reviewed the trust’s numbers in detail earlier this week in the March 4 flash alert. Now that the market has had a few days to digest them—as well as management’s announcement that it’s considering early conversion to a corporation—it’s time to make a couple more points.

First, TransForce is in no danger of insolvency, though at a yield of 24 percent-plus it’s clearly priced for that risk. The working capital ratio—which compares easily salable assets with current liabilities—is still at a healthy 1.16-to-1, roughly even with 2006 levels and well above end-year 2005 levels.

And as I pointed out in the flash alert, the trust only recently reached a new credit agreement, boosting borrowing capacity from CAD600 million to CAD800 million. That amount is sufficient to cover all the long-term debt on its books as of Dec. 31, 2007, by a 1.23-to-1 margin, and a little less than half of its obligations aren’t due for five years or more.

Rather, this trust has the cash on hand and credit lines to continue management’s stated primary goal of acquiring smaller rivals to consolidate its markets. The fourth quarter payout ratio of 155.9 percent is clearly unsustainable, and business conditions look likely to get worse, making a reduction almost certain.

Even halving the dividend would still leave a yield of more than 12 percent, far more than enough to support the share price. And although converting to a corporation could mandate a cut of that level, it would also leave the trust in much better shape to continue what should ultimately be profit-expanding acquisitions, without the overhang of 2011 trust taxation.

Our main enemy here is uncertainty. And unfortunately, until management makes its future plans clear, there’s going to be pressure on the shares. However, at this extremely low valuation—and with the caveat that this is an aggressive trust on which no one should double down—I’m inclined to hang in there, pending further developments. Hold TransForce Income Fund.

Finally, Newalta Income Fund (TSX: NAL-U, OTC: NALUF) reported fourth quarter cash flows that still lag its distribution. Management, however, affirmed its intention to keep paying at the current high rate at least through 2008, citing growth in its eastern Canada operations and the growing likelihood of recovery in its western Canada energy patch operations later this year.

Coupled with the trust’s low valuation and solid niche in environmental cleanup across Canada, that’s plenty of reason to stick. Newalta Income Fund is a buy for those who haven’t already up to USD25.