Income & Equity Index Participation Fund
TSX : IEP.UN

Income & Equity Index Participation Fund

August 26, 2005 16:15 ET

Income & Equity Index Participation Fund: 2nd Quarter Report 2005

CALGARY, ALBERTA--(CCNMatthews - Aug. 26, 2005) - Income & Equity Index Participation Fund (TSX:IEP.UN):

For the six months ended June 30, 2005 (unaudited)



Investment Highlights

Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30,
2005 2005 2004 2004 2004
------------------------------------------------------------------------
Net Asset Value per
Unit $ 11.04 $ 10.73 $ 10.52 $ 9.54 $ 8.91
Market Price per Unit $ 10.05 $ 9.44 $ 9.88 $ 8.87 $ 9.00
Trading Premium
(Discount) (9.0%) (12.0%) (6.1%) (7.0%) 1.0%
Quarterly
Distributions
per Unit $ 0.21 $ 0.21 $ 0.21 $ 0.21 $ 0.21
12 Month Trailing
Yield 8.4% 8.9% n/a n/a n/a
Market
Capitalization
($ millions) $ 147.6 $ 140.2 $ 150.3 $ 135.3 $ 137.1
------------------------------------------------------------------------
(1) First monthly distribution had a record date of March 31, 2004 and
was paid April 15, 2004


Rebalancing Advisor's Report

At the end of March 2005, rising interest rate and inflation concerns dominated the income trust market which resulted in a sell-off similar to that experienced in the spring of 2004. Like 2004, the sell-off was short lived as positive year over year funds flow and declining bond yields boosted income trust valuations. With continued strength in oil and natural gas prices, the energy trust sector delivered a strong 8.6% total return in the second quarter of 2005, while real estate investment trusts surpassed the energy trusts with a 9.3% total return. As a result, the S&P/TSX Income Trust index produced a total return of 7.7% over the second quarter of 2005, again outperforming the S&P/TSX Composite index's return of 3.6%. The Fund's S&P/TSX 60 capped call option value rose by 4.2% over the quarter. On a net asset value basis, Income & Equity generated a 4.8% total return. On a unit price basis, Income & Equity's improved unit price helped boost its total return to 8.8% in the second quarter of 2005.

During the second quarter, the Fund made a number of partial dispositions in order to fund unit repurchases. Also, Income & Equity disposed of O&Y Reit with its pending sale and acquired positions in Starpoint Energy and Peyto Energy. The semi-annual rebalancing, which was completed on July 6, 2005, produced a diverse portfolio of 118 income trusts up from 84 at inception.

With favorable market sentiment returning to the income trust sector in the second quarter and into the third quarter of 2005, Income & Equity expects to achieve its investment objectives in 2005 with maintenance of its current distribution level.

Management's Discussion & Analysis (August 18, 2005)

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements for the three months ended June 30, 2005 and for the period ended December 31, 2004.

The net asset value of the Fund increased to $11.04 per unit up from $10.73 per unit at March 31, 2005 as both income funds and the S&P/TSX 60 option rose during the second quarter. The market price of the Fund also rose, closing the quarter at $10.05 per unit up from $9.44 per unit at the end of the first quarter of 2005. With the continued trading discount to net asset value, the Fund repurchased the maximum of 185,600 units under its mandatory repurchase program as the market price traded below 95% of the net asset value of the Fund.

Total revenue derived from the income fund portfolio for the second quarter of 2005 was $3.3 million down slightly from $3.4 million in the second quarter of 2004 and the first quarter of 2005. The revenue decline was due to the reduced asset base from unit cancellations under the mandatory repurchase program and issuer bid. Administrative and rebalancing advisor fees and trailer fees, both of which are calculated in reference to the Fund's net asset value, were $0.2 million and $0.1 million respectively during the quarter up slightly from the fees incurred in both the first quarter of 2005 and the second quarter of 2004 due to a higher net asset value. Loan interest on the term facility of $18.75 million was $0.2 million for the quarter. General and administration costs in 2005 were also consistent with 2004 at $0.1 million in both second quarters. After total expenses of $0.6 million, the Fund generated net investment income of $2.7 million or $0.18 per unit for the second quarter of 2005 which was consistent with the first quarter of 2005 and down from $2.8 million and $0.19 per unit in the second quarter of 2004. Monthly distributions for the Fund totaled $0.21 per unit for both the first and second quarter of 2005 as well as the second quarter of 2004.



Portfolio Holdings
------------------------------------------------------------------------
Ongoing Business Trusts (24%)
Cash & Term Deposits (2%)
S&P/TSX 60 Capped Call Option (13%)
Infrastructure/Service (10%)
Power Generation (8%)
Basic Materials (5%)
Oil & Gas Royalty Trusts (22%)
Real Estate Investment Trusts (16%)
------------------------------------------------------------------------


Total results of operations for the quarter ended June 30, 2005 was $7.6 million or $0.51 per unit, with realized losses on the sale of investments of $0.5 million and net unrealized gains on the income trust portfolio and S&P/TSX 60 option of $5.4 million. Comparatively, total results of operations were $6.0 million or $0.40 per unit for the first quarter of 2005 as realized gains on the sale of investments totaled $0.7 million and valuation gains resulted in unrealized gains of $2.6 million for the quarter. The quarter ended June 30, 2004 had total results of operations of a negative $5.2 million or negative $0.34 per unit due to realized losses of $0.4 million and unrealized losses of $7.6 million.



Income & Equity Index Participation Fund
Statement of Net Assets

(Unaudited)

As at June 30, 2005 December 31, 2004
------------------------------------------------------------------------
Assets
Investments, at market $ 177,367,212 $ 177,927,437
Cash and term deposits 2,640,778 550,054
Revenue receivable 1,140,502 1,185,200
Accounts receivable 950,711 329,495
Prepaid expenses 44,824 8,022
------------------------------------------------------------------------
182,144,027 180,000,208
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities
Accounts payable 117,531 121,714
Distributions payable 1,028,406 1,065,007
Loan payable 18,750,000 18,750,000
------------------------------------------------------------------------
19,895,937 19,936,721
------------------------------------------------------------------------
Net Assets $ 162,248,090 $ 160,063,487
------------------------------------------------------------------------
------------------------------------------------------------------------
Units outstanding 14,691,519 15,214,381
------------------------------------------------------------------------
------------------------------------------------------------------------
Net asset value per unit $ 11.04 $ 10.52
------------------------------------------------------------------------
------------------------------------------------------------------------


Income & Equity Index Participation Fund
Statement of Operations

(Unaudited)

Three Months Ended Six Months Ended
June 30 June 30
For the periods ended 2005 2004 2005 2004
------------------------------------------------------------------------
Revenue
Investment income $3,333,938 $ 3,405,396 $ 6,696,092 $ 5,717,742
------------------------------------------------------------------------
3,333,938 3,405,396 6,696,092 5,717,742
------------------------------------------------------------------------
Expenses
Administrative
and rebalancing
advisor fees 230,568 196,912 470,400 301,130
Trailer fees 117,532 106,602 236,340 167,401
General and
administration
costs 89,454 87,618 159,783 115,831
Loan interest 210,360 189,169 418,408 276,113
------------------------------------------------------------------------
647,914 580,301 1,284,931 860,475
------------------------------------------------------------------------
Net investment
income 2,686,024 2,825,095 5,411,161 4,857,267
Net realized gain
(loss) on sale
of investments (506,336) (438,175) 213,350 (438,175)
Net change in
unrealized
gain (loss) on
investments 4,483,417 (8,227,705) 4,165,953 (6,688,916)
Net change in
unrealized gain
(loss) on S&P/TSX
60 Option 948,964 627,728 3,845,179 (1,224,156)
------------------------------------------------------------------------
Total results of
operations $7,612,069 $(5,213,057) $13,635,643 $(3,493,980)
------------------------------------------------------------------------
------------------------------------------------------------------------
Results of
operations
per unit:
Net investment
income $ 0.18 $ 0.19 $ 0.36 $ 0.32
Net realized
gain (loss)
on sale of
investments (0.03) (0.03) 0.01 (0.03)
Net change in
unrealized
gain (loss) on
investments 0.30 (0.54) 0.28 (0.44)
Net change in
unrealized
gain (loss)
on S&P/TSX
60 Option 0.06 0.04 0.26 (0.08)
------------------------------------------------------------------------
$ 0.51 $ (0.34) $ 0.91 $ (0.23)
------------------------------------------------------------------------
------------------------------------------------------------------------


Income & Equity Index Participation Fund
Statement of Changes in Net Assets

(Unaudited)

Three Months Ended Six Months Ended
June 30 June 30
For the periods ended 2005 2004 2005 2004
------------------------------------------------------------------------

Net Assets -
beginning of
period $159,312,519 $144,013,033 $160,063,487 $ -
Operations:
Net investment
income 2,686,024 2,825,095 5,411,161 4,857,267
Net realized
gain (loss)
on sale of
investments (506,336) (438,175) 213,350 (438,175)
Net change in
unrealized
gain (loss) on
investments 4,483,417 (8,227,705) 4,165,953 (6,688,916)
Net change in
unrealized gain
(loss) on S&P/
TSX 60 Option 948,964 627,728 3,845,179 (1,224,156)
------------------------------------------------------------------------
7,612,069 (5,213,057) 13,635,643 (3,493,980)
------------------------------------------------------------------------
Unitholder
Transactions:
Distributions
to unitholders (3,083,390) (3,196,378) (6,216,765) (4,260,727)
Issuance of
trust units,
net 256,542 158,889 579,518 143,517,194
Repurchase of
trust units (1,849,650) - (5,813,793) -
------------------------------------------------------------------------
(4,676,498) (3,037,489) (11,451,040) 139,256,467
------------------------------------------------------------------------
Net Assets -
end of period $162,248,090 $135,762,487 $162,248,090 $135,762,487
------------------------------------------------------------------------
------------------------------------------------------------------------
Distributions
per unit $ 0.21 $ 0.21 $ 0.42 $ 0.28
------------------------------------------------------------------------
------------------------------------------------------------------------


Income & Equity Index Participation Fund
Statement of Investments

(Unaudited)

As at June 30, 2005
------------------------------------------------------------------------
% of
Cost Market Market
------------------------------------------------------------------------
Ongoing Business Trusts
ACS Media Income Fund $ 1,706,734 $ 1,576,571
Arctic Glacier Income Fund 1,454,131 1,360,471
BFI Canada Income Fund 1,088,150 1,628,172
Bell Nordiq Income Fund 1,313,730 1,628,190
The Brick Group Income Fund 1,493,718 1,307,084
CML Healthcare Income Fund 1,168,666 1,490,426
Chemtrade Logistics Income Fund 1,452,611 1,165,390
Cineplex Galaxy Income Fund 1,136,857 1,594,688
Clearwater Seafoods Income Fund 1,797,838 987,310
Connors Brothers Income Fund 1,362,329 1,187,721
Consumers' Waterheater Income Fund 1,330,223 1,474,187
Contrans Income Fund 1,214,848 1,473,699
Custom Direct Income Fund 1,331,504 1,765,690
Davis + Henderson Income Fund 1,225,506 1,353,691
Entertainment One Income Fund
(formerly ROW Entertainment) 873,071 685,732
Gateway Casinos Income Fund 1,261,068 1,345,232
KCP Income Fund 1,267,275 1,487,646
Keyera Facilities Income Fund 1,297,841 1,673,494
Livingston International Income Fund 1,147,262 1,404,523
Menu Foods Income Fund - -
Movie Distribution Income Fund 1,219,673 1,182,736
North West Company Fund 1,283,973 1,703,863
Osprey Media Income Fund 1,497,594 1,380,671
Prizm Canadian Income Fund 1,490,386 1,351,746
Rogers Sugar Income Fund 1,367,372 1,491,460
Sleep Country Canada Income Fund 723,781 577,811
TransForce Income Fund 1,038,672 1,590,922
Tree Island Wire Income Fund 1,170,774 1,476,601
UE Waterheater Income Fund 1,393,702 1,541,305
Versacold Income Fund 1,660,815 1,520,656
Westshore Terminals Income Fund 938,121 1,462,848
Yellow Pages Income Fund 1,354,863 1,634,106
------------------------------------------------------------------------
40,063,088 43,504,642 24.2%
------------------------------------------------------------------------
Oil & Gas Royalty Trusts
APF Energy Trust - -
ARC Energy Trust 1,257,637 1,675,817
Acclaim Energy Trust 1,213,843 1,562,456
Advantage Energy Trust 1,175,373 1,123,396
Baytex Energy Trust 894,289 1,152,648
Bonavista Energy Trust 1,120,863 1,649,217
Bonterra Energy Trust 1,485,086 1,200,021
Calpine Natural Gas Trust - -
Canadian Oil Sands Trust 851,109 1,611,979
Crescent Point Energy Trust 1,020,252 1,346,176
Enerplus Resources Fund 1,302,595 1,583,150
Enterra Energy Trust 1,093,613 1,866,698
Esprit Energy Trust 1,499,847 1,415,666
Focus Energy Trust 1,018,839 1,549,606
Freehold Royalty Trust 1,247,542 1,330,304
Harvest Energy Trust 1,494,853 1,773,371
NAL Oil & Gas Trust 1,186,742 1,541,294
Paramount Energy Trust 1,018,860 1,567,040
Pengrowth Energy Trust 718,168 719,569
Petrofund Energy Trust 1,294,912 1,540,266
Peyto Energy Trust 836,630 1,806,129
PrimeWest Energy Trust 1,330,204 1,680,137
Progress Energy Trust 1,492,631 1,415,501
Provident Energy Trust 1,377,249 1,636,999
Rockyview Energy Trust 115,100 120,469
Shiningbank Energy Income Fund 1,180,131 1,453,354
Starpoint Energy Trust 1,345,237 1,459,801
Vermilion Energy Trust 1,055,241 1,464,672
Viking Energy Royalty Trust 1,268,954 1,538,958
Zargon Energy Trust 1,481,485 1,500,041
------------------------------------------------------------------------
32,377,285 40,284,735 22.4%
------------------------------------------------------------------------
Real Estate Investment Trusts
Alexis Nihon Reit 1,399,927 1,478,148
Boardwalk Reit 1,267,875 1,564,884
Calloway Reit 1,176,741 1,666,204
Canadian Reit 1,372,588 1,558,491
Canadian Apartment Reit 1,461,271 1,488,057
Canadian Hotel Income Properties Reit 1,549,179 1,594,327
Chartwell Seniors Housing Reit 1,488,089 1,523,237
Cominar Reit 1,389,191 1,605,894
Dundee Reit 1,440,582 1,548,166
H&R Reit 1,375,884 1,554,319
IPC U.S. Reit 1,540,271 1,551,931
InnVest Reit 1,486,559 1,512,548
Legacy Hotels Reit 1,461,993 1,522,234
Morguard Reit 1,406,788 1,551,118
O&Y Reit - -
Primaris Retail Reit
(formerly Borealis Retail Reit) 1,347,835 1,529,360
Retirement Residence Reit 1,878,169 1,308,624
RioCan Reit 1,334,947 1,617,700
Summit Reit 1,575,868 1,668,940
------------------------------------------------------------------------
25,953,757 27,844,182 15.4%
------------------------------------------------------------------------
Infrastructure / Service Investments
AltaGas Income Trust 1,327,116 1,639,723
CCS Income Trust 878,169 1,616,808
Enbridge Income Fund 1,363,967 1,515,075
Energy Savings Income Fund 1,304,656 1,397,217
Fort Chicago Energy Partners L.P. 1,436,781 1,672,761
Gaz Metro 1,461,363 1,415,240
Inter Pipeline Fund 1,369,148 1,561,690
Newalta Income Fund 1,165,721 1,430,694
Pembina Pipeline Income Fund 1,455,748 1,496,891
Superior Plus Income Fund 1,367,304 1,568,772
Taylor NGL L.P. 1,487,800 1,744,445
Trinidad Energy Services Income Trust 1,163,621 1,759,538
------------------------------------------------------------------------
15,781,394 18,818,854 10.4%
------------------------------------------------------------------------
Power Generation Investments
Algonquin Power Income Fund 1,592,733 1,461,047
Boralex Power Income Fund 1,444,434 1,459,948
Calpine Power Income Fund 1,593,004 1,360,746
Clean Power Income Fund 1,744,174 1,224,542
Great Lakes Hydro Income Fund 1,377,976 1,544,294
Innergex Power Income Fund 1,383,201 1,587,140
MacQuarie Power Income Fund 1,486,548 1,521,399
Northland Power Income Fund 1,400,387 1,589,115
TransCanada Power, L.P. 1,556,431 1,509,787
TransAlta Power, L.P. 1,481,242 1,441,153
------------------------------------------------------------------------
15,060,131 14,699,171 8.2%
------------------------------------------------------------------------
Basic Materials Trusts
Fording Canadian Coal Trust 669,731 1,531,818
Great Lakes Carbon Income Fund 1,721,816 1,752,672
Labrador Iron Ore Royalty Income Fund 1,015,290 1,209,842
Noranda Income Fund 1,329,875 1,442,183
SFK Pulp Fund 1,606,268 1,009,267
TimberWest Forest Corp. 1,289,103 1,468,110
------------------------------------------------------------------------
7,632,083 8,413,892 4.7%
------------------------------------------------------------------------
Income Funds 136,867,738 153,565,476 85.3%
S&P/TSX 60 Capped Call Option 17,693,875 23,801,736 13.2%
------------------------------------------------------------------------
154,561,613 177,367,212 98.5%
Cash and Term Deposits 2,640,778 2,640,778 1.5%
------------------------------------------------------------------------
Total $ 157,202,391 $ 180,007,990 100.0%
------------------------------------------------------------------------
------------------------------------------------------------------------


Income & Equity Index Participation Fund
Notes to the Financial Statements
(Unaudited)


THE TRUST

Income and Equity Index Participation Fund (the "Fund" or "Income and Equity") is a closed-end investment trust, established under the laws of Alberta pursuant to a Declaration of Trust dated December 17, 2003. The Fund commenced operations on February 18, 2004 with the completion of its initial public offering. The term of the Fund continues until June 30, 2009, or such earlier or later date as the unitholders may determine in accordance with the Declaration of Trust.

The Fund's investment objectives are to provide unitholders with monthly cash distributions derived from an equal weighted diversified portfolio of Canadian income funds and to provide an opportunity to participate in gains in the broader Canadian equity market as represented by the S&P/TSX 60 Index through a 5 year capped call option on the Index. Income and Equity initial distribution level has been set at $0.07 per unit per month.

SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include estimates and assumptions by management. Actual results may differ from these estimates. Significant accounting policies employed include:

a) Cash and cash equivalents consists of cash on hand and short term bankers' acceptances with maturities of less than 90 days on acquisition.

b) Investments are stated at market values based on closing market quotations. Average cost is used to compute realized and unrealized gains or losses on investments. Transactions are recorded on the trade date.

c) The Fund qualifies as a unit trust within the meaning of the Income Tax Act (Canada). Provided the Fund distributes to its unitholders its income for tax purposes, the Fund will not generally be liable for income tax under Part I of the Canadian Income Tax Act.

d) Dividend income is recorded on the ex-dividend date, distribution income is recognized on the ex-distribution date and interest is recognized as earned.

UNITHOLDERS' CONTRIBUTION

The authorized capital of the Fund consists of an unlimited number of trust units which are transferable non-redeemable units of beneficial interest.

The Fund issued 22,253 units for administrative and investment manager fees and 3,889 units under its distribution reinvestment plan during the second quarter of 2005.

The Fund has a mandatory repurchase program whereby units offered for sale at a discount to the Fund's net asset value per unit of greater than 5% are repurchased for cancellation. This program is subject to a maximum of 1.25% of the total number of units outstanding at the beginning of each calendar quarter. During the quarter ended June 30, 2005, 185,600 units were repurchased for cancellation (June 30, 2004 - no units).

On February 11, 2005, the Fund entered into a normal course issuer bid whereby a total of 1,521,438 units may be repurchased for cancellation over a period of twelve months. For the quarter ended June 30, 2005, the Fund repurchased no units pursuant to this bid. The total units repurchased to date under the bid is 205,300.

CAPPED CALL OPTION

Upon closing of its initial public offering, the Fund purchased an "at the money" five year capped call option on the S&P/TSX 60 index from two chartered banks. The option is a European option which means it can only be exercised on its expiry date of February 18, 2009. The option is capped at the first 30% increase in the S&P/TSX 60 index, representing an additional $3.00 per unit to unitholders.

ADMINISTRATIVE AND REBALANCING ADVISOR FEES

Equity Lift Management Ltd. is the administrator of the Fund and Shaunessy & Company Ltd. is the rebalancing advisor of the Fund. The administrator and the rebalancing advisor are entitled to fees totaling 0.55% of the average weekly net asset value of the Fund, payable in units monthly in arrears. During the quarter ended June 30, 2005, the Fund recorded an expense of $230,568 in respect of these fees (June 30, 2004 - $196,912).

TRAILER FEES

A trailer fee is paid to investment dealers calculated and payable quarterly in arrears at an annual rate of 0.3% of the net asset value of the Fund held by unitholders in accounts with investment dealers. During the quarter ended June 30, 2005, the Fund recorded an expense of $117,532 in respect of the trailer fee (June 30, 2004 - $106,602).



CORPORATE INFORMATION

Administrator
Equity Lift Management Ltd.
Suite 3500, 350 - 7th Avenue S.W.
Calgary, Alberta T2P 3N9
Telephone: (403) 261-9674
Fax: (403) 261-8670
Website: www.citadelfunds.com

Rebalancing Advisor
Shaunessy & Company Ltd.
Suite 308, 980 - 17th Avenue S.W.
Calgary, Alberta T2T 0A8

Trustee
Computershare Trust
Company of Canada
6th Floor, 530 - 8th Avenue S.W.
Calgary, Alberta T2P 3S8

Stock Exchange Listing
Toronto Stock Exchange
Trust units: IEP.un



Contact Information

  • Income & Equity Index Participation Fund
    Joe MacDonald
    Executive Vice President, Sales and Marketing
    1-877-261-9674
    Website: www.citadelfunds.com