It's time to dispense with a pointless sideshow in the debate over the future of income trusts.
For weeks now, blame has been heaped on Finance Minister Ralph Goodale for causing trusts to lose billions in value last month. We're bound to hear more grumbling in the next week or so as investors open their October account statements and see in black and white how much less their trusts were worth at month's end.
It's not just individual investors who are on Mr. Goodale's case. Investment dealer Canaccord Capital Inc. issued a report recently that blamed his review of the government's trust policy for shaving $23-billion off the value of the trust market between late September and late October. Last week, Mr. Goodale responded by instructing Liberal members of Parliament to say that trusts fell because of falling oil prices and concern about rising rates.
Who's right? All of the above. What should you do about the decline in trust prices? Get over it. Trusts were so richly deserving of a whack on the backside that the best word to describe October's pullback is "overdue."
Obsessing over the value of the trust market is a counterproductive distraction. For one thing, it tells the government that anger over trusts is more about the possible derailing of a gravy train than about the preservation of an investment that helps seniors and others generate income at a time when bonds and guaranteed investment certificates offer just crumbs.
For another thing, it diverts attention from more pressing matters, like how investors can work the federal political situation to their advantage. With NDP Leader Jack Layton opening the door yesterday to a Christmas election, Mr. Goodale's trust review could conceivably be pre-empted by a debate involving all the major political parties on the future of income trusts.
Much as it's a waste of time to play the blame game for the current volatility in the trust market, let's do it quickly. Of course, Mr. Goodale is partly responsible. How could it be otherwise when the minister has, first, issued a discussion paper with policy options that include taxing trusts and, second, left investors to simmer for a period of months while he makes up his mind?
The IncomeTrustResearch.com website issued a report yesterday comparing the performance of the trust market recently with the broader stock market, which has also been rocky. As of Nov. 4, the S&P/TSX capped income trust index was down 11 per cent from its Sept. 8 peak, whereas the S&P/TSX capped 60 index had recovered from a parallel slump to the extent that it was down just 4 per cent.
"The reason [the trust index] had not recovered as fast as the broader index has to be the uncertainty regard income trust taxation," wrote IncomeTrustResearch.com proprietor Harry Levant.
Mr. Goodale is correct, too, in saying that rising interest rates and falling energy prices have weighed down trust prices. Oil and gas royalty trusts live and die by the prices of the two commodities, while power-generating and pipeline trusts are especially vulnerable to higher rates. These are basic facts and if they come as a surprise to you as an investor, then you didn't do your homework.
The same applies if you're grinding your teeth over the big drop in the price of many income trusts and Toronto Stock Exchange-listed closed-end funds that hold diversified portfolios of trusts. Before the recent pullback, trusts rallied for five successive years, which was as amazing as it was unsustainable.
Anyway, it's speculative investors who should be angry about declines in trust prices. Income-seeking investors care more about monthly trust distributions of cash and these haven't been affected one iota by Mr. Goodale.
Those income seekers should be at the heart of the trust debate. If it's all about speculators being denied a chance to make a fast buck in the trust market, then it's hard to expect much sympathy from a government looking to plug tax loopholes and increase economic productivity.
Investors who care about trusts should consider ways to make the issue part of the next election campaign. A Liberal Party that is weak in the polls and under heavy criticism on ethics might decide that trusts aren't such a big problem after all, or that any concerns about trusts can be addressed unobtrusively. If investors make the government seem vulnerable on trusts, then maybe the Conservatives will treat the issue with more than the current pro forma sputtering about the evil Liberals.
The future of trusts is still up in the air, which means investors can still have a say. Let's hope they use the opportunity to do more than curse Mr. Goodale for being one of several factors that nudged the trust market into a well-deserved correction.
© The Globe and Mail
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