Wednesday, April 8, 2009

Why we get basket cases like BCE, by Dennis Hinschberger

Dennis Hinschberger posted comment at:

Just an observation for Mr. Ignatieff to address with the current government.

What analysis has the government generated to ascertain the value to the older investor of the income trust structure vis-a-vis traditional equity?

My observation, as a Portfolio Manager, is that the vast majority of todays investors are baby boomers or older - as a result they have a decreasing need to expose themselves to long duration, growth oriented assets - in fact what they desire is to accept limited risk in order to attain something in the order of 7-10% annual returns.

Government guaranteed fixed income investments are an important component of the aging Canadain voters' current asset mix, however, at current interest rates very few investors can afford to survive on the performance/cashflow from these assets. Investment grade corporate bonds also do not provide adequate return - Canada has a limited high yield market so the aged are forced to accept long duration equity risk in the HOPE that growth in this portfolio will "make up the difference" in performance - unfortunately they no longer have the capacity to accept the downside of this risk. Ironically it is the aging population that will, over time, limit the ability of the economy to perform adequately (much the same as Japan these last 20 years or so) - and in turn equity market performance promises to be muted and volatile.

The advantage with income trusts is that they are in fact LOW DURATION equity assets with high cashflow - if we are going to force the aged or aging to accept equity risk then this structure is far better suited to their risk profile . . .

Relative to inflation - adequate protection can be had through government guaranteed inflation indexed exposure as well as gold and possible smaller broad based commodity exposures via ETFs.

If the government does not open up the aged/aging to the real possibility of garnering 7-10% annual investment performance then governments will be forced to widen the socail safety net in the future which will seriously impact dependancy ratios - the young workers of the future already are in a precarious position to finance the elderly baby boomers over time!

Reltive to the comments from Mr.Rosen disparaging the income trust structure - I would say this - there are just as many Ponzi schemes in conventional equity underwritings as there might be in the income trust sector - probably substantially more. It would be far more beneficial for governments to oversee ADEQUATELY the quality of underwriting of either equities or income trusts rather than eliminate a structure altogether. Many mature businesses with relatively stable cashflows but limited growth opportunities would suit the trust structure better. Instead we force mature companies to attempt to conjure growth to compete with other equities in the market ( and for the benefit of the financial compensation of management). The result is that we get basket cases like BCE! What might have happened if it was simply allowed to roll into a trust and pay out cashflows instead of trying to compete in markets where it had no core competencies?!?

I have no idea why the conservatives did the about face on income trusts but it has destroyed my fragile faith in government. And Carney gets rewarded with a Bank of Canada posting for his contribution to this larceny? - the quicker we recognize the true moral limitations of this young lad - the better.


Dr Mike said...

Why is it that when you read pieces written by income trust investors you get the overwhelming feeling that they are not only a passionate crew , but they also know what the hell they are talking about.

All you have to do is to go to any site that is discussing the trust issue on a public forum & you will see what I mean--comments by those owning trusts are factual , to the point & actually have substance--the Kool-Aid crowd will say nothing of substance & will try to harass & intimidate supplying nothing but nonsense & name calling.

We know we are right & we can be confident in that fact.

The supporters of the trust tax just sip away on their Kool-Aid & spout the party line.

Dr Mike.

Hinsch said...

Just further to my commentary on income trusts, I would encourage readers to listen to this commentary from Nassim Taleb - Investors and citizens need to be vocal with their outrage. Governments/ regulators are exacerbating our economic predicament. Current and ex-Goldman execs are not fixing the problem - as Nassim describes - you do not hand the keys of the school bus back to the same driver who drove the last school bus off the cliff blindfolded . . . we need new drivers . . .and we need them yesterday!