A weekly examination of the thinking behind a specific trade in the stock, bond or currency markets.
Here's a piece of advice many income trust unitholders haven't heard lately: Don't panic.
A fund manager we spoke to recently took a look at the October income trust selloff that many blamed on Ottawa and believes it's largely the result of institutional, not retail, investors. The best trade right now is no trade, he said.
"[The institutional investors'] view is that retail investors are going to open their November statements, vomit, and start selling," he said.
About $23-billion in trust market capitalization disappeared between late September and late October. The selloff coincided with Ottawa's "consultation process" on income trusts.
However, the fund manager said the selloff was triggered by big investors who thought they could buy back cheap once retail investors started following suit.
But that's not likely to happen, he adds.
"The retail investors aren't stupid. They know these things yield more than anything else."
Finance Minister Ralph Goodale has indicated a decision on income trusts will come early next year, but the timeline has been put in jeopardy with the possibility of early federal elections.
Even if the timeline remains, Mr. Goodale isn't likely to propose anything drastic, the fund manager said.
"Goodale has already said he's going to be sensitive to the market." he said.
A number of theories have been floating around about what Ottawa will do to the sector. The government may reduce the tax on corporate dividends and make up the difference by taxing trusts. However, the fund manager said Ottawa may simply restrict the amount of cash big non-taxable entities such as pension funds can put in trusts.
A Finance Department spokesman would only say Mr. Goodale wants to deal with the issue quickly, but would not disclose any information about what will likely be announced early next year.
Whatever decision the government makes, the fund manager said, it won't rock the boat too much. For one thing, some influential Liberals -- including Onex Corp. CEO Gerald Schwartz and the Asper family -- have interests at stake. A complete overhaul of the system would take much longer than the current timeline, he added, so the changes next year shouldn't amount to much more than a little bit of tinkering.
"I don't think Goodale is stupid," he said. "The Liberals are good at grabbing the middle ground. They're going to do that again."
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
