Pick any measure you like: The nearly 40 percent loss in the S&P 500, and greater losses in developing world markets; the junk bond meltdown; the crackup in commodity prices; the halving of oil prices; the implosion of the global financial system; or any one of a few dozen other once-unthinkable major disasters. Last year was easily the worst for the investment markets since the Great Depression of the 1930s.

With that backdrop, it’s little wonder 2008 was also the worst ever in the relatively short lifespan of Canadian income trusts. The broad-based S&P/Toronto Stock Exchange Income Trust Index fell nearly 38 percent, around 58 percent counting the more than 20 percent drop in the Canadian loonie versus the US dollar.

The Canadian Edge Portfolio suffered an overall loss of 38.8 percent, including currency losses. Broken down, the Conservative Holdings lost 29.6 percent and the Aggressive Holdings dropped 46.6 percent. The Mutual Fund Alternatives shed an average of 57.7 percent, almost exactly in line with the S&P/TSX trust index.

Those numbers would actually have been a lot worse were it not for a recovery that began Christmas week. That recovery has continued thus far into 2009, as trusts that had been buried under wave after wave of relentless selling have suddenly been targeted by bargain hunters in large numbers.

The upshot: Since early December, the average CE Portfolio holding is up 27.7 percent. And counting the Portfolio’s average monthly yield of slightly less than 1.5 percent–or 17.6 percent annually–that figure rises to about 29.2 percent.

Standouts

The clear standout was one of three additions last month to the Conservative Portfolio: Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF). The trust has returned more than 75 percent, as investors have caught infrastructure fever. That was despite the announcement in mid-December that one of its major projects in the oil sands region would be delayed. Bay Street remains bullish on Bird Construction Income Fund, but I wouldn’t pay more than USD20.

Robust buying pushed Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) up 36.2 percent, back to its levels of last summer. And it’s erased a good chunk of 2008 losses for other trusts that continue to report solid business numbers as well, such as High Yields of the Month AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) and Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF), up 23.3 and 21.5 percent, respectively.

Also big winners were a handful of trusts the market seemed to give up for dead just a few weeks ago. Artis REIT (TSX: AX-U, OTC: ARESF) soared 54.5 percent over the past month, vindicating the insiders who’ve been voracious buyers as well as the Bay Street analysts who remained almost universally bullish despite the stock’s temporary slide under USD4 per share.

The amazing thing is despite this run, Artis is still trading for a fraction of its old highs and only 65 percent of book value. That’s despite consistently posting double-digit profit growth, the fact that its rents are still well below market levels, and management’s ongoing repurchase of up to 10 percent of the REIT’s shares. In short, yielding more than 14 percent, Artis REIT is still a bargain and a buy up to USD10.

Another battered trust to come up off the mat was Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF). Like Artis, the trust’s earnings have yet to miss a beat after more than two years of stress tests. In fact, management has projected more strong results in 2009 and expects to be able to pay at least the same distribution in 2011 it does now.

Energy Savings also declared a special cash distribution of CAD0.10 per unit, payable Jan. 31. That was at the high end of management’s previous projection, reflecting, in its words “the solid operating performance of the fund during the current quarter.” (Its fiscal third quarter, which ended Dec. 31.)

CEO Rebecca McDonald went on to state last month that “Energy Savings is a unique vehicle that will perform despite the recession.” That’s a statement she and other insiders have backed up with their own money, as they’ve locked away shares over the past several months at low prices. And Bay Street has apparently also concurred, giving the company high marks.

Whether the shares’ 58.5 percent run over the past month will prove a flash in the pan or the start of a long-overdue recovery to levels last held in mid-2008 is a major question mark.

What isn’t in doubt is Energy Savings still yields more than 15 percent and sells for 60 percent of sales. Energy Savings Income Fund is a strong buy up to USD10.

Management at Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) is no doubt sick to death of hearing their company compared to Algonquin Power Income Fund (TSX: APF-U, OTC: AGQNF), the former CE Portfolio power trust that pulled a fast one on us by gutting its distribution last year. But MP&I’s efforts to prove its dedication to and ability to pay a lofty dividend may finally be getting some notice, at least outside the three Bay Street firms that have been relentlessly bullish month after month.

The stock is up 35.8 percent over the past month. Nonetheless, it still yields more than 18 percent and sells for just 75 percent of book value. I’m looking for a lot more from this stable yet misunderstood outfit. Buy Macquarie Power Infrastructure Income Fund up to USD10.

Conservative Is Cool

That yield-hungry investors would gravitate toward the generally steady businesses in the Conservative Portfolio is normal action in an environment of sluggish economic growth. These trusts were sold off in the heat of the panic last year as depression-fearing investors sought to liquidate positions in stocks across the board.

Now that the financial crisis has subsided and credit markets are unfrozen, the focus is back on the economy and owning companies with the best chance of weathering it. As long as investors remain confident the system will hold together, these trusts should hold their own.

The next round of gains may not come as quickly as those over the past month. But things will continue to move in the right direction, as long as the underlying business numbers remain robust. We’ve got to continue paying attention to the underlying numbers, and it’s always possible some of our holdings will falter before the North American economy really turns. The stress tests of tough credit and weakening growth will continue to hammer at weaker trusts, and anyone who does business with them as well.

But again, these trusts have proven their ability to weather all conditions over the past two years, despite being basically cut out of the capital markets since Halloween 2006. And as I wrote in the September 2008 Feature Article and several times since, these trusts are also positioning themselves so they’ll be able to pay big distributions in 2011, regardless of how they’re taxed.

Put another way, there’s simply no way their dividend yields are going to stay this high for new buyers. Some may indeed fall prey to the economic turmoil and make cuts. That, again, is why we’ll have to pay close attention to fourth quarter earnings as they’re released in coming weeks.

But those trusts that are able to maintain their current distribution rates are going to attract a lot of buyers. That means their share prices are going a lot higher. And as the speed of the last month’s rally shows, it’s likely to happen a lot faster than anyone believes possible.

Canadian real estate investment trusts (REIT) are one area of deep value that’s capable of staging a massive comeback. Of the Portfolio REITs, Artis is obviously the highest potential play. But even ultra-stable plays like Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) and RioCan REIT (TSX: REI-U, OTC: RIOCF), up 40.5 percent and 27.9 percent over the past month, respectively, are capable of big moves.

Both were hammered in the market last year but continued to execute on long-term growth strategies, while holding debt to very conservative levels and occupancy rates to very high numbers. Canadian Apartment, for example, announced the purchase of a 153 suite luxury apartment building in Quebec City, Quebec, for CAD17.8 million last month.

The deal was financed safely with a Canadian Mortgage and Housing Corporation-insured mortgage at an interest rate of 4.21 percent, a five-year mortgage at a rate of 3.62 percent and cash from reserves. And the property is 99 percent occupied, complimenting the REIT’s existing properties in the region.

In short, the deal offers a fair and transparent low risk return to the REIT, come what may for the economy. That’s typical of every deal management does.

RioCan REIT CEO Edward Sonshine announced some months ago that his company–Canada’s biggest shopping center REIT–intended to take advantage of the turmoil in the economy and financial markets to build future profitability. Last month, he once again matched words with deeds by inking the purchase of a 12.25 acre site from Loblaw Properties and a subsequent land lease agreement with Wal-Mart (NYSE: WMT).

If you’re going to rent shopping center space, Wal-Mart is the bluest of the blue chip clients, consistently posting strong earnings even as rivals flounder. RioCan’s focus over the years has been to secure all of its 237 operating properties (16 under development) with such anchor tenants. That’s a huge plus in any recessionary environment, as the REIT has proven time and again.

Ironically, both Canadian Apartment Properties and RioCan took it on the chin last year in the share market. Even investors who should have known better bailed out of them, as well as arguably even more economically shielded Northern Property REIT (TSX: NPR-U, OTC: NPRUF). Northern Property has also picked up a bit this year, though it’s nowhere close to making back its 2008 loss of 42 percent in US dollar terms.

Neither is RioCan close to recouping its 52 percent US dollar loss in 2008. RioCan and Northern Property currently yield nearly 9 percent and sell for just 1.84 and 1.35 times book value, respectively.

Those are unheard of valuations for such solid companies and all the reason anyone needs to buy RioCan REIT up to USD18 and Northern Property REIT below USD20. Canadian Apartment Properties REIT is a buy up to USD15.

Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) has been a relative outperformer during this bear market, losing around 25 percent last year. The trust, however, continues to yield more than 10 percent, which represents just 88 percent of cash flow after capital spending.

Last month, management affirmed the trust’s financial strength with the announcement of a 15 percent increase in capital spending for 2009 over 2008 levels. More than half the total spending will be focused on the construction of the Nipisi and Mitsue pipelines and related assets, Pembina’s most recently launched projects in Canada’s oil sands region, with the rest going to conventional energy projects and enhancing the trust’s midstream operations.

In hitting the stock, some investors seem to be betting on a fall off in revenue from the company’s oil sands division, given the huge drop in oil prices and the recent scaling back of several big developments there. Pembina’s contracts, however, are with only the strongest producers. Its exclusive transportation contract with the Syncrude venture, for example, is backed by the likes of ExxonMobil (NYSE: XOM). And all contracts are based on capacity, not throughput. Even if Syncrude doesn’t want to mine the tar sands a particular month, it still has to pay Pembina.

In my view, the rumors of the death of Canada’s oil sands are greatly exaggerated. True, it’s highly risky to build a project now that needs USD80 to USD90 per barrel oil to be economic. But neither is it in dispute that oil sands output is needed to meet normal demand. And unless the world sinks into an increasingly unlikely permanent depression, normal demand is what we’re going to get.

Whatever the case, Pembina is going to get paid. And that’s the name of the game for maintaining and increasing its now very generous distribution to 2011 taxation and beyond. Now is the time to buy and lock away Pembina Pipeline Income Fund up to USD18, particularly if you haven’t already.

Still Bargains

Two recent additions to the Conservative Portfolio posted news last month that makes them more valuable as purchases. CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) announced the Ontario Association of Medical Laboratories (OAML) has reached a new funding agreement for laboratory services with the Ontario Ministry of Health and Long-Term Care.

The deal boosts the provincial payment cap for lab services to OAML members by 3 percent for 2009, as well as retroactively for the first nine months of 2008. The cap will be boosted an additional 2 percent for 2010 and 1.3 percent for 2011. It also includes additional funding for 2010 and 2011 that will be added to the cap if industrial billings reach certain thresholds. And the parties will also meet again a year from now to determine if further modifications are needed.

The increased funding boosts CML’s pro forma distributable cash flow by CD1.4 million, pushing its third quarter 2008 payout ratio down to just 80.3 percent from the 84.3 percent previously disclosed. The payout ratio should also be lower in the fourth quarter and beyond, particularly given the very stable nature of demand for the trust’s testing services.

On the negative side, the company received some bad publicity in late December regarding an alleged mishandling of patient records that Ontario’s privacy commissioner is apparently probing. Any company doing business at close quarters with government runs risks in this regard. And at this point there’s nothing to suggest this incident poses any threat to CML, which has historically managed its relationships well with Ontario.

CML Healthcare Income Fund is a buy for those who haven’t yet purchased it up to USD13.

Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF) was the only CE Portfolio stock not to score gains over the past month. One reason is it was one of the very few trusts to hold its value over the past year. But the power trust also seemed to take a mild hit from management’s move to buy the 189 megawatt Prince Wind facility in Ontario and a 50 percent interest in the 45 megawatt Pingston Hydro joint venture in British Columbia from parent and 50.1 percent owner Brookfield Asset Management (TSX: BAM, NYSE: BAM).

The deal’s reliance on equity financing is probably part of the reason. The share sale proceeds, however, are already locked in by virtue of a bought-deal arrangement with the underwriters at a price of CAD16 per share and total proceeds of CAD75 million to CAD85 million. The only risk to the deal is a due diligence review by the independent board of trustees, aided by the fairness opinion of independent financial advisor Blair Franklin Capital Partners. Such a degree of separation ensures against self dealing by Brookfield, providing solid protection for Great Lakes shareholders.

Moreover, the assets generate CAD13 million of distributable cash flow annually, feature CAD240 million in “favorable tax attributes” and are well known to management. As such, they’re expected to be immediately accretive to Great Lakes’ distributable cash flow, reducing the payout ratio, enhancing liquidity and further aiding management’s goal of being able to maintain the current CAD1.25 annual distribution rate well past 2011.

No one is going to get rich quick with Great Lakes. But the 8 percent dividend and modest growth potential are an ideal way to get rich slow, and this is an ideal income pick for the most conservative investors. Buy Great Lakes Hydro Income Fund up to USD18.

The other Conservative holding that’s failed to get a big lift the past month is Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF). The trust made another move last month that showcased its strength in these tough times, expanding its revolving bank facility from CAD250 million to CAD450 million and increasing its total committed bank lines to CAD1.15 billion.

The new revolving facility has a maturity date of May 2011, which should give Yellow plenty of time to permanently refinance its Series 1 Medium Term Notes that mature in April 2009. Meanwhile, the total facility provides plenty of capital to make additional acquisitions of directory and advertising assets of the sort management has integrated so effectively in recent years.

Importantly, management also again affirmed the security of its distribution, both as long as this recession lasts and after 2011 taxation kicks in. Yellow currently plans to convert to a corporation “on or about December 31, 2010” and expects to maintain its current annual dividend rate of CAD1.17 beyond that point. Management notes its current strategy has already reduced the payout ratio to 78 percent of distributable cash flow in the third quarter of 2008, and “remains confident in its ability to achieve its objective of further reducing the payout ratio to the low 70s range by 2010.”

Unfortunately, Yellow continues to face a legion of skeptics who are convinced it must follow the path of US directory companies into oblivion. The original bear argument was the print directory business was steadily losing pages and becoming obsolete as Internet alternatives proliferated. Now that the trust is rapidly and successfully transitioning to the Internet, it’s morphed into a critique of the value of its web offerings versus other allegedly less expensive alternatives.

I don’t claim to be a visionary on these issues. But what I do know is Yellow Pages’ numbers to date have provided no backing whatsoever for the bears, and particularly for the notion that its offerings are anything but useful for customers and profitable for the trust. Rather, they paint the picture of a trust that continues to fulfill its promises for growth, just as it has since Bain Capital took it public early in the decade.

Of course, in a brutal environment like this one, it shouldn’t surprise anyone if Yellow’s revenue and cash flow did take a hit in either the fourth quarter of 2008 or in early 2009. But with the stock trading at a yield of nearly 17 percent and selling for 62 percent of book value, I challenge anyone to argue rationally that this trust isn’t pricing in a lot of bad news that hasn’t yet happened, and at this juncture isn’t likely to.

Even in normal times, I strongly advise against really loading up on any one recommendation, no matter how attractive it looks. But Yellow at less than USD10 would have seemed a ridiculously low price just a few months ago. And I have every expectation we’ll be wondering in coming months just how it got as cheap as it is currently. Buy Yellow Pages Income Fund up to USD10 if you haven’t already.

Raw Deals

All current Aggressive Portfolio holdings are focused on natural resource production, with the majority on energy. That was a major plus in the first half of 2008, but it guaranteed massive losses in the second half, as oil prices fell by more than USD100 a barrel and other commodities fared even worse.

As I point out in the Feature Article, natural resource producer trusts always follow the prices of the resources they produce. And when the underlying commodities are volatile, so are share prices and distributions.

The silver lining here is the producer trusts’ prices have fallen to such low levels that they discount practically every cataclysmic event but a return to a pre-industrial economy.

Markets always go to extremes and the more inherently volatile the asset, the greater the extreme. That’s the time to bet against the trend and the crowd that’s jumped on board.

My biggest regret about 2008 was not following up my mid-summer article The Case Against Oil and Gas with more aggressive selling of energy producer trusts. That’s a mistake I’ll definitely work to avoid the next time energy or any other market goes to an upside extreme.

The biggest mistake in this market, however, is not hyper-bullishness. Rather, it’s following what’s become an almost unanimously bearish consensus for energy and energy stocks.

Since early December, CE Aggressive Portfolio holdings have risen anywhere from 16 to 32 percent. That was despite a slew of distribution cuts, which were obviously more than priced in well beforehand. Some of the gains were due to the rebound in oil prices. But I suspect most of it was simply due to the growing realization that they’ve been kicked down too far and are due for a rebound.

Those are basically the same conditions under which last year’s big rally in energy producer trusts began. That’s not a prediction. But it is a pretty good reason to own a basket of the energy producing trusts I focus on in the Feature.

Outside of energy, Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF) also presents compelling value as a bet on a rebound in agricultural commodities, namely corn. A leading manufacturer of portable and stationary gain handling, storage and conditioning equipment, Ag Growth announced it will pay a special distribution of CAD0.24 per unit in cash, a sign that its business prospects remain strong in a weak environment.

In hindsight, I jumped too soon when I added Ag Growth to the Portfolio nearly a year ago. The trust’s shares, for example, have never really recovered from the hit they took from production problems suffered last year, even though management has long since resolved them to its benefit.

But yielding more than 11 percent and in better operating shape than ever, Ag Growth Income Fund is certainly a bargain now and a buy up to USD25.

Lastly, Newalta (TSX: NAL, OTC: NALUF) has now converted to a corporation. Unitholders will receive one share of the new corporation for every share of the former trust. The move will free up cash to enable the trust to growth faster without adding debt, particularly in the oil sands where its environmental cleanup expertise is in high demand.

Looking ahead, the most bullish fact about Newalta is the 1,774,656 shares corporate insiders purchased in the month of December alone, versus not a single sale. That follows on the heels of buying in November and is in stark contrast to the shoddy way investors have treated the shares.

Only time will tell if management’s optimism is justified. But this is one very solid business that’s consistently generated strong growth and sells at the very low price of 59 percent of book value and 50 percent of annual sales. Even the post-conversion dividend rate of CAD0.80 a year presents an attractive yield of more than 10 percent at current prices.

I’m sticking with Newalta; more aggressive, patient investors can buy up to USD13.