Most of the time, investing is about building wealth. For the past 12 months, however, just hanging on to what you have has been challenging.

Canadian trusts’ trials and tribulations began considerably earlier, with the rapid decline in natural gas prices from post-Hurricane Katrina highs. They became a good deal worse with the Halloween 2006 announcement of 2011 taxation and restrictions on issuing new shares.

By the time the credit crunch and rapid slide of the US economy began, the weakest had been weeded out. That set the stage for the recovery of the survivors, particularly in the oil and gas patch as oil and gas prices began their torrid run.

The Canadian Edge Portfolio currently holds 27 individual trusts, two newly converted corporations and three funds of trusts. Of the trusts, nine produce oil and gas and have given us an average total return of 47 percent this year. The corporation and trust that provide services to the energy producing industry are up 30 percent together.

The four REITs are up a far more modest 3.3 percent but have vastly outperformed their US counterparts. The three energy infrastructure trusts, meanwhile, have ticked up an average of 8 percent, an equally superior outperformance of their US rivals. Finally, the three recommended closed-end mutual funds—which hold a mix of all trust sectors—have returned 13.4 percent.

That’s the good news. The bad news is our business trusts—which hail from virtually every other sector—have been generally disappointing. Bell Aliant Regional Communications Income Fund (TSX: BA.UN, OTC: BLIAF) has outperformed US telecoms with a 4 percent return. And Boralex Power Income Fund (TSX: BPT.UN, OTC: BLIAF) is actually in the black, despite a devastating dividend cut earlier this year.

Other once-high-flying picks, however, are still well in the red for the year. And still others seem to keep losing ground almost daily. Most disturbing, the list of losers includes trusts from supposedly stable sectors, such as electric power (see Feature Article), as well as trusts that continue to post strong operating numbers, such as Yellow Pages Income Fund (TSX: YLO.UN, OTC: YLWPF)—down a toe-curling 30 percent-plus year-to-date.

Happily, at least to this point, our winners are outnumbering the losers. In fact, warts and all, the average half-year return for all 32 current CE Portfolio picks is a little more than 13 percent.

Disparity of performance between the individual picks, however, ranges from returns of nearly 70 percent for two-time dividend booster ARC Energy Trust (TSX: AET.UN, OTC: AETUF) and gas-leveraged Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) to losses of 30 percent-plus for Yellow Pages and GMP Capital Trust (TSX: GMP.UN, OTC: GMPCF). Moreover, even while ARC was surging to new highs the past couple weeks, Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF) was dropping to new lows. (See High Yield of the Month.)

Strength and Weakness

Faced with those kinds of numbers, it’s very tempting to conclude we’d be better off to focus solely on the winning sectors for the second half of 2008. My strong advice, however, is to ignore that impulse and stay diversified. In other words, provided individual trusts’ operating numbers are holding up, stick with them regardless of whether they’re in sectors that are winning or losing now.

There are two major reasons for this. First, the market moves in cycles. More often than not, the prior year’s poorest-performing sectors prove to be the best performers the next. As long as the individual selections you choose maintain their business strength—and, in the case of trusts, their distributions—they’re sure to recover and then some when the cycle turns. In fact, they’re usually your best performers.

We certainly saw this in graphic relief with the oil and gas trusts over the past two years. It’s easy to forget now, but 2007 was one of the worst years imaginable for the group. Natural gas prices languished, and even oil’s gains were in large part offset by the jagged jump in the Canadian dollar versus the US dollar. Moreover, many trusts’ ability to raise capital was virtually shut off by a combination of falling share prices, restrictions on new issues imposed by the Canadian government as part of 2011 taxation and, finally, the credit crunch.

The result: All but a handful of oil and gas producer trusts wound up slashing distributions last year, some several times. The smallest and weakest trusts slid into oblivion, and even the strongest lost ground in the market place.

Of course, that’s now ancient history. Riding a near doubling of natural gas prices in recent months, oil and gas trusts have been the top-performing trust sector by far, and energy services are close behind.

At this point, it’s hard for me to believe the good times will end any time soon. The long-term bull case for energy is extremely solid, as ongoing conservation, switching to alternatives and development of new conventional supplies still look years away from moving the balance of energy market power back to consumers from producers. Even the temporary relief from higher energy prices that a global slowdown may bring seems elusive.

Trusts are still much cheaper than non-trust energy producers. And their policy of locking in selling prices for oil and gas far in advance with hedging guarantees rising cash flows at least through this year. Realized selling prices in the first quarter, for example, were 40 to 50 percent below current levels on the spot and future markets. As old, lower-priced hedges come off and new, higher-priced hedges come aboard, those realized prices are going to rise big time.

The magnitude of energy trusts’ good fortune is only clear when you consider that first quarter realized prices allowed massive increases in capital budgets, rapid reduction of debt and big distribution increases. It’s only going to get better when second and third quarter numbers come out, and that’s even if oil and gas prices back off from their current levels.

ARC Energy’s second blockbuster dividend increase in as many months came with a dramatic increase in planned capital spending. A good chunk of that is for a new natural gas plant for its rapidly developing British Columbia properties. The project will boost ARC’s daily production rate to 70,000 barrels of oil equivalent, up from about 64,000 now. The news substantially increases ARC Energy Trust’s long-term value, earning it an increased buy target of USD32 for those who don’t already own it.

I’ve also increased my buy target this month for Penn West Energy Trust (NYSE: PWE, TSX: PWT.UN). The trust’s takeover of Endev should be consummated soon after the latter’s shareholder vote July 21. More important, however, are indications that management is focused on bringing down debt and getting its existing properties up to speed in coming months and its more-than-expected benefaction from higher energy prices. Penn West Energy Trust is now a buy up to USD36.

I’m not raising my target for Advantage Energy Income Fund (NYSE: AAV, TSX: AVN.UN) at this time. But the 37.9 percent increase in its 2008 capital budget this month and management’s statement that cash flow will completely cover all capital costs plus dividends this year are substantial improvements over Bay Street expectations. They also indicate better-than-expected development results at the promising Glacier Montney property. Buy Advantage Energy Income Fund up to USD14.

Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF), along with Advantage, remains my top portfolio candidate for a takeover in the oil and gas producer sector. But the gas-focused trust also has plenty of opportunity to expand with existing properties as well as acquisitions.

The takeover of Cadence Energy has been delayed by the demand of convertible bond holders for a say but still looks like a go by the end of the summer. A small trust focused on sustainability, Daylight is unlikely to give us much in the way of big distribution increases this year. But there’s no doubt it’s becoming increasingly valuable as an enterprise. Buy Daylight Resources Trust up to USD12.

Enerplus Resources (NYSE: ERF, TSX: ERF.UN) has reached a deal with Occidental Petroleum to sell its 15 percent stake in Total’s Joslyn oil sands project. The CAD510 million in proceeds was more than expected, and the agreement was reached in spite of growing environmental scrutiny of new oil sands projects, which was expected to delay any transaction. In addition, Enerplus doesn’t expect to pay any cash taxes from the sale.

The deal frees up cash for other projects, including the Kirby oil sands project that the trust fully controls. Management also plans to pay off a significant chunk of its current CAD861 million in bank debt, inducing the Dominion Bond Ratings Service to put its stability rating under review for upgrade to STA-4.

Good trusts make for strong returns. Enerplus hasn’t yet increased its distribution this year, but its value is rising. Enerplus Resources is still a buy up to USD50.

Last, Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) expects a payout ratio of just 42 percent for 2008 based on existing hedge positions. It also expects to be able to pay down debt to CAD240 million by year-end, even as it continues to develop the properties acquired in recent months.

These goals are somewhat at odds with boosting distributions meaningfully. But as long as gas prices remain this strong, the trust’s position will only improve, and its value will grow. My buy target for Paramount Energy Trust remains USD10.

For a long time, oil and gas producer trusts have stayed cheap despite these great strengths, largely because of overblown fears about 2011 taxation. Uncertainty remains today even though trusts have gone a long way toward addressing those concerns, particularly illustrating the power of tax pools. But it’s becoming much less of a factor, as investors are increasingly willing to ignore it.

One thing I’ve learned from hard experience, however, is that, the more sure I’m about something in the markets, the more likely something is about to change. And the more people I talk to who are sure they can’t lose money in energy, the more concerned I am about at least a near-term pullback.

I’m not selling any CE positions at this time. And in fact, all of the Portfolio selections remain buys up to my target prices for those who are light on them. But the potential for a pullback is a good reason to take at least some of the recent profits we’ve made in these trusts off the table.

Of course, not every energy patch trust survived the stress tests of 2006-07. And some that did, notably Enterra Energy Trust (NYSE: ENT, TSX: ENT.UN), are still down 80 percent and more from their pre-stress-test highs. But those that held together as businesses during the turmoil—for example, maintained or even increased distributions—were eventually assured full recovery and then some, and they’ve proven it since with their strong performances.

The same should hold true of today’s battered business trusts. As with the stress-tested energy trusts, not all will hold together in the face of the three great challenges bashing them today: the weakening US economy, surging energy costs and strong Canadian dollar. But those that do hold or increase dividends and boost their value are assured of a powerful recovery, no matter how badly they’re battered today.

Even the Losers

Let’s start with the two biggest losers year-to-date in the CE Portfolio: GMP Capital Trust and Yellow Pages Income Fund. Neither has cut their distribution. In fact, both have increased payouts in recent months.

As pointed out in last month’s High Yield of the Month, Yellow’s profit growth actually accelerated last quarter. GMP managed to cover its distribution with cash flow despite, in the words of its CEO, “the worst market conditions in 20 years.”

Both trusts, however, are being heavily sold by investors who are fearful that the slowing North American economy will eventually take its toll on them. Yellow is being lumped in with US directory companies such as Idearc, which have seen profits plunge on falling advertising revenue and competition from Google and other Internet sources. Meanwhile, GMP is being called to task for the sins of US financial institutions, which seem to become worse by the day.

Both comparisons are inherently flawed. Unlike US directory companies, Yellow holds a virtual monopoly in the Canadian print directory business, which it’s augmented by acquiring specialty advertisers such as Auto Trader in recent years. Moreover, it’s rapidly taken its business to the Internet, in part by inking alliances with the Googles of the world. That’s why its first quarter numbers were so good, even while US rivals’ were so abysmal. And it’s why that will almost surely be the case in the second quarter of 2008 and beyond.

That, at least, is now the opinion of substantially all 10 Bay Street analysts who cover Yellow, with the only bearish analyst last month apparently turning positive as well. Corporate insiders have been buyers in the CAD10-to-CAD12 range this year, well above current levels, and shares trade at just 85 percent of book value.

Maybe the pilers on will prove correct and those who study numbers wrong. Maybe deteriorating market and economic conditions really will overwhelm Yellow in the end. That’s why no one should ever keep doubling down on a falling stock, no matter how good it looks. But at this low price, and with this many demonstrated strengths and knowledgeable fans, Yellow Pages Income Fund certainly looks like a potential home run at these prices and a buy for those who don’t yet own it.

As for GMP, it has no subprime exposure or other hidden time bomb ready to demolish its asset base. The executive team remains very strong and continues to expand its reach, both globally and with new products and services. The balance sheet is strong, and earnings are set to rebound when Canadian market activity does.

Unlike Yellow, however, GMP does have vulnerability in the current environment. Deal-making activity remains weak, even in the relatively healthy Canadian market. That’s in part due to tight credit conditions but also to restrictions such as those on the number of shares Canadian trusts can issue. As long as that’s the case, cash flows won’t recover appreciably, and the trust may eventually be forced to cut its distribution.

At this point, I don’t view the latter as likely, and there are signs of improving activity that should lift GMP cash flows. But until we see how second quarter numbers look, I’m downgrading GMP Capital Trust to a hold. And if numbers don’t measure up, I may elect to take my beating and get out.

TransForce (TSX: TFI, OTC: TFIFF) is another holding that’s fared poorly this year, despite a generally favorable market reaction to its decision to convert from an income trust to a corporation. The reason is basically disappointing results at its core transportation business, which has fared poorly in the face of rising energy prices, the weak US dollar and the slumping US economy.

As I’ve pointed out before, rising fuel prices for the company’s trucks are passed along to customers as a surcharge rather than shaved directly off the bottom line. But combined with the slower US economy and the weak US dollar’s impact on Canadian exports here, it’s created yet another burden for customers to bear. Profits have been further crimped by the company’s relentless expansion despite weak market conditions.

Ultimately, volumes will rebound, and today’s growth moves will pay off for TransForce, which has now become one of the largest transport franchises in Canada. To be sure, its core customers have few alternatives but to pay its price. The dividend cut accompanying the conversion has dramatically enhanced financial flexibility. The trust also enjoys ample access to credit, which is almost solely used for expansion.

Unfortunately, second quarter numbers are unlikely to show much, if any, improvement from first quarter tallies. And that’s likely to mean further weakness in the shares in coming months, despite their drop so far. I’m still rating TransForce a buy on value and future growth. But no one should double down, and only the patient should invest.

Climbing Out

Two of my picks have been deep in the red this year but appear to be climbing their way out. Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) has been hit by concerns the weakening US economy would derail its track record of consistent growth in recent years.

Second quarter earnings will provide a more complete picture. But last month’s 2.5 percent dividend increase—the 29th since the fund’s initial public offering in April 2001—is a pretty good sign things are still moving ahead for the trust, if at a slower pace. So is management’s accompanying affirmation of published guidance for 15 percent growth in customer electricity consumption and 5 percent growth in natural gas consumption for fiscal year 2009. Accordingly, I’m sticking with Energy Savings Income Fund, which is still a buy up to USD18 for those who don’t already own it.

The other is Arctic Glacier Income Fund (TSX: AG.UN, OTC: AGUNF), which was hit late in the first quarter of 2008 by the announcement of a US Dept of Justice investigation into the ice industry. There’s still no public word of the progress of this case, and investors seem to be taking the lack of news as good news, sending the shares briefly above USD10 again in late June.

To be sure, Arctic still hasn’t been named a target of the investigation after three months of cooperation providing information. The number of lawsuits against it has grown but with still no major players or customers joining.

The rule with these things tends to be the longer they go on, the more likely they’ll either be favorably resolved or will go away. I’m encouraged by the increase in Arctic’s share price, which has wiped away the bulk of this year’s losses. But until we get hard facts, Arctic Glacier Income Fund still rates a hold. Note that I do expect strong second quarter results for Arctic, despite some challenges from higher fuel costs and the weak US dollar’s impact on US revenue (70 percent-plus of overall cash flow).

Ironically, electric power-generating trusts have been among the worst-performing sectors this year, despite a well-deserved reputation for being recession resistant. There are several possible reasons for this underperformance, including misperceptions about debt and operating risk and a desire by investors to dump all else for oil and gas producer trusts. That’s created some pretty low valuations for strong trusts, including High Yield of the Month Atlantic Power Corp.

Meanwhile, the worst performing of my favorite REITs is also arguably the strongest, most-sustainable business in that sector: RioCan REIT (TSX: REI.UN, OTC: RIOCF). One possible explanation for this is the REIT’s focus on shopping centers, which are often vulnerable to economic slowdowns. Another is possible concerns about the impact on 2008 cash flows from two major transactions: One is the sale of a 50 percent interest in projects in Alberta and Ontario that the REIT is developing in partnership with Trinity Development Group; the other is a newly inked joint venture with US REIT Kimco to acquire a 10 property portfolio in central and eastern Canada.

Ironically, the two transactions should actually reduce RioCan’s financial risks by spreading the burden over a range of what could be very profitable projects. Moreover, the Canadian property market by all accounts remains strong, as is the overall economy. And RioCan’s portfolio focus has always been on the highest-quality centers and tenants, the kind that generally sail through economic downturns.

All that, of course, hasn’t helped RioCan’s share price recently, which has actually dipped to less than USD20 for the first time in a while. Moreover, management has stated it considers current market conditions an opportunity to grow, which means the possibility of more transactions that could hurt the share price near term.

My view is all of this will prove temporary and that the REIT’s actions now are setting the stage for a much-higher share price over the next several years. The fact that it can do deals of this magnitude and attractiveness is a clear testament it has few credit constraints and a lot of financial flexibility, a real limit to downside risk. Again, I’m no fan of doubling down. But if you missed the chance to buy RioCan REIT before, it’s a bargain up to USD25.