Income trusts have suffered the perfect storm. Interest rates edged up at the same time that oil and oil securities were weakening and at the same time the trust universe was under attack from the federal government.
Five years ago trusts were very obscure financial instruments. Today they are discussed in the media more often than almost any other type of security. No less a paper than this one devoted four successive days to a first-class analytical review of the topic. Dundee Corp.'s Ned Goodman believes the press has consistently failed to comprehend the merits of trusts, whereas I believe that the media was no smarter or dumber than the average member of the financial community in appreciating their merits.
Trusts should be thought of as very high-yielding common stocks. The businesses of the trusts tend to be less risky than stocks. Trusts do not operate in high-technology fields and in general they are not making risky capital expenditure decisions. Just like common stocks, there are good trusts and bad trusts and the job of the investor is to identify which are which.
There is now quite a body of recent material on the trusts. Legitimate data on whether there is really a loss to our federal coffers from trusts are hard to find. My belief is that tax revenues have gained from trusts. Many investors who own trusts are paying huge taxes, whereas in years past they would have frittered away their disposable income and left us other taxpayers footing the bill. I am not expecting that the finance department experts are going to quickly accept this subjective conclusion.
But don't kid yourself. The facts are only a minor relevancy in the whole issue. Political experts (including our firm's own high-powered consultant) all claim that a federal election is imminent and that no perverse tax legislation will pass before this.
Are trusts going to become a legitimate electoral issue and how will it all play out?
Normally you never hear me say anything that has any political sensitivity. I am not disinterested. Two of the most enjoyable golf games I played this year were with Toronto Mayor David Miller and with former Ontario Premier Bob Rae. Senator Hugh Segal even worked for us decades ago. I do care about politics but I recognize when I am outmatched. But on the topic of trusts and the electorate, I believe that I have a head start.
Investors who own trusts are much more passionate about their securities than investors who own regular stocks and bonds. Stock and bond investors typically have only moderate historical success at best. Unfortunately they have the habit of buying high and selling low.
Trust investors have been very successful for a long time. Business trusts may have become prominent in the last five years, but real estate investment trusts have been around for 15 years and oil royalty trusts even longer. Trust investors are much more informed than investors who own stocks, as are the brokers they deal with. Even the mutual funds dedicated to trusts seem to have a closer rapport with their customers than the average mutual fund.
Experts today say that political contribution rules have changed politics. One cannot utilize the ability to write cheques to influence the course of legislation. I cannot tell you what goes through the minds of politicians, but I know one thing.
There is going to be a backlash against adverse trust legislation that is a combination of spontaneous and induced. It will send a very strong message to our electoral officials who will either listen or subsequently find themselves no longer living in Ottawa.
You are entitled to ask how I gain such strong opinions considering the lack of time that I spend in the hinterlands of our country and the fact that our clientele deliberately excludes all but the well-heeled. You do not often find me on the subway asking people what they think of trusts.
However, I have spent the last five years talking to investors about trusts and in previous years, taking to people about REIT's. I watch Report on Business Television and make the odd appearance. This column provides a modest spot for communications.
The various trust indexes have become quite volatile, which means they have gone down a lot and are fluctuating daily. While pronouncements from Ottawa have caused most of the damage, there have been other factors. The Alberta government suggested an interest in taxing trusts, while oil securities around the world have been getting beaten up. At the same time interest rates and interest related equities have suffered. This is the proverbial perfect storm.
If trusts decline another 10 per cent, based on noises from Ottawa, you watch the backlash.
By the way, don't waste your time sending me e-mails. Send them to your local MPs and ask them to get off their duff. Remember this simple fact of life: Trusts are a great form of corporate enterprise.
Ira Gluskin is president and chief investment officer of Gluskin Sheff + Associates.
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