Toronto - Sentry Select Capital Corp., the Trustee and Manager of Mortgage-Backed Securities Trust, MBS Adjustable Rate Income Fund and Sentry Select MBS Adjustable Rate Income Fund II (the “Trusts”) announces that the Mortgage-Backed Securities Trust is changing its monthly distribution from $0.035 per unit to $0.02 per unit, and MBS Adjustable Rate Income Fund and Sentry Select MBS Adjustable Rate Income Fund II are changing their monthly distributions from $0.06 per unit to $0.03 per unit, effective with the February distributions. For those unitholders of Mortgage-Backed Securities Trust who have elected to receive their distributions in U.S. currency, the distribution amount will be based on the Bank of Canada noon exchange rate on the distribution declaration date. The February distributions are payable on March 15, 2006 to unitholders of record on February 28, 2006. Distribution reduction - The principal reason for the change in the monthly distribution is the flattening of the U.S. yield curve, which has compressed the interest-rate spread used to generate income for the units.
"Since June 30, 2004, the Federal Reserve has raised the Federal Funds rate 13 times and 325 basis points," said Michael A.J. Farrell, Chairman of FIDAC, the investment manager to Mortgage-Backed Securities LP. "At the same time, long-term rates have stayed in a tight trading range. As investors are aware, during the tightening phase of an interest-rate cycle, our cost of financing will rise faster than the yield on our assets. Our results will reflect these conditions while they persist through spread compression, which reduces the amount of income available for distribution, and through pressure on asset values. Our experience in managing through a complete interest-rate cycle tells us that the trough in our returns typically occurs at the end of a Fed tightening regimen. Looking ahead, as the tightening phase of monetary policy comes to an end, investors should expect to see the benefits of our barbell strategy through a complete interest-rate cycle. In this strategy, over time the coupons on our assets - Agency mortgage-backed securities that are primarily adjustable-rate in nature - will continue to reset upwards into the new interest-rate environment. Our cost of funds stops rising and the pressure on asset values abates. In addition, investment opportunities today are attractive as this prolonged and sizeable tightening phase has also created better value in mortgage-backed securities."
The decision to reduce the monthly distributions was based on the reduced level of earnings of the Trusts. The Trusts - The Trusts invest, through a limited partnership, in a portfolio consisting primarily of mortgage-backed securities with actual or implied AAA rating, issued by the U.S. agencies commonly known as Ginnie Mae, Fannie Mae and Freddie Mac. Future Distributions - The Manager expects to continue to pay the current monthly distribution based on current market conditions. However, if market conditions change, future distributions may differ. Forward looking statements - This news release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, the future performance of the Trust, including the potential for future distributions. When used in this news release, the words “in the future” and “believe” and the use of the future tense generally identify forward-looking statements. These statements reflect Sentry Select’s current expectations, but are subject to a number of risks and uncertainties. Due to the many risks and uncertainties, Sentry Select cannot give assurances that the forward-looking statements contained in this news release will be realized. Investment Manager - Fixed Income Discount Advisory Company (FIDAC) is the investment manager of the Trusts. FIDAC is a one of the leading fixed-income management companies specializing in U.S. agency mortgage-backed and Treasury securities. FIDAC and its related companies are responsible for the management of approximately US$46 billion in gross assets. The Manager - Sentry Select Capital Corp. provides investment, administrative and marketing services to 22 exchange-listed closed-end funds, 16 of which have exposure to the income trust sector, 11 mutual funds, 8 principal-protected notes and 4 limited partnerships. Sentry Select is one of the largest Canadian investment managers in the income trust sector. As of December 31, 2005, the firm had approximately $8.5 billion in gross assets under management.
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