Truly pathetic journalism. Aimed to mislead and not to inform.
Jim Flaherty, trust investors' best friend. Seriously
By: DEREK DeCLOET
Globe and Mail
July 29, 2008
Leslie Lundquist has been an Albertan since birth, a Calgarian since the age of two and a Conservative for as long as she can remember. Or at least she was until the Tories put a chokehold on income trusts. Would she ever vote for them again? "Not as long as Harper and Flaherty are there," says Ms. Lundquist, who runs the Bissett Income Fund, one of the largest mutual funds devoted to - you guessed it - Canadian income trusts.
We say "largest," but in the shrinking trust sector that isn't saying much any more. Money has been pouring out of all kinds of assets since the credit crunch began - hedge funds, emerging markets, U.S. stocks - but for trusts, it merely opened the wound a bit wider. Investors have pulled more than $2-billion out of trust-related funds since the end of 2006, and that's just what we see from the industry's public data.
In Ms. Lundquist's case, what was a $1.1-billion fund two years ago was down to $810-million by the end of March, through no fault of her own, because the returns have still been good. So, yeah, it's no wonder she's still furious. But even angry people can see the silver lining, and it's this: At a time when no politician wants to talk about them and few investors want to touch them, income trusts are - dare we say it? - due for a comeback.
Actually, while the investing public has been running from trusts, in fear of the Terrible Mr. Flaherty and his new tax, most trusts have been doing just fine all along. True, they got absolutely crushed on Nov. 1, 2006, after his shock announcement. But what if you'd invested at the close of business that day? The S&P/TSX income trust index has returned 26 per cent, including all distributions. That beat the TSX composite (up 15.3 per cent), the Dow Jones industrials (down 13 per cent in Canadian dollars) and just about any other stock index that matters.
That's right. When the grinning Finance gnome was on CBC Newsworld justifying his decision, that was the moment to buy. Of course, it's partly a matter of rising oil prices, because the trust index is even more heavily exposed to energy than the TSX composite. Leaving that aside, though, the feds' crackdown did have some useful, albeit unintended, consequences, Ms. Lundquist says. It also served to flush out some of the low-quality junk (and, as importantly, prevented investment bankers from flogging more of it).
There were about 40 takeover offers for trusts in the year after the Halloween surprise but not very many of the targets will be missed, despite all the gnashing of teeth. Is it really a tragedy that Spinrite Income Fund, a yarn factory, is no longer publicly traded? Granby Industries? Associated Brands? Osprey Media? Some of these companies were wealth-destruction machines almost from the day they went public. Now they're in private hands, where they belong.
A few crazy ones still linger - the income trust that's based on a hydroponic vegetable-growing operation comes to mind - and a few others are too toxic for even private equity to touch. But for the most part, the trust market now looks much more like it was always intended to: a place for real estate, energy, and a small number of decent businesses like Yellow Pages whose need for capital reinvestment is small.
Come 2011, the roster will shrink some more, but maybe not as much as you think. In the oil patch, there's still lots of talk about finding ways to slide around, or at least soften the impact of, the trust tax. "I wouldn't be surprised if they're the last to say die. They're the most angry and they probably feel the most betrayed," Ms. Lundquist says. (Mike Tims, chairman of Peters & Co., a Calgary investment bank, confirms this: "I think we're going to see a bunch of innovations between now and 2011.")
And here's the kicker: Many trusts are far cheaper now than when everybody loved them and Bay Street was pumping them out as fast as it could. Take Yellow Pages. Pre-2006, it was an acquisition-mad company that issued billions of dollars in new units to buy stuff, and investors just couldn't get enough, even if it traded at 13 times EBITDA (earnings before interest, taxes, depreciation and amortization). Now it doesn't make the front page any more; all it does is make money and the multiple has shrunk to 8∏ times, using Bloomberg data. Yet nobody cares.
Who'd have thunk it? By attacking income trusts, Jim Flaherty may have created a once-in-a-generation investment opportunity in ... income trusts.
Tuesday, July 29, 2008
Posted by Fillibluster at 8:30 AM