Saturday, October 31, 2009

New study reveals income trusts expand the “efficient frontier” of capital markets

This new comprehensive academic study (email for a copy) comes to the same conclusion that Bank of Canada Governor David Dodge had reached, albeit in a more comprehensive way, when David Dodge stated at a press conference on October 19 , 2006 (i.e. before he was muzzled by Flaherty) that: "The work we have done in terms of capital markets per se is that probably, on balance, income trusts make capital markets somewhat more complete and somewhat more efficient.”

So why would the Minister of Finance want to make Canada’s capital markets less efficient by destroying income trusts, unless of course the purpose of doing so was to allow those who were exploiting the market’s inefficiency to continue to reap these unjust rewards inherent in an inefficient market?

Much like the market was inefficient when stocks were traded in eighths and quarters, thereby allowing a few hundred traders to extract huge unearned profits, but was made efficient for all participants when stocks were traded in cents. Was the move to stocks quoted in cents rather than eighths and quarters something that Flaherty would have opposed? So why is Flaherty acting as an agent for narrow interests to kill income trusts using the false premise of tax leakage? The role of the Minister of Finance is not to perpetuate market inefficiencies, so a handful of powerful persons can reap extraordinary gains at the expense of the broad populace. Or maybe it is?


This study has several important findings that indicate the intent of Flaherty’s income trust tax was to destroy the emergence of a new and distinct asset class (premised on the falsehood of tax leakage) and in so doing reduce the efficiency and effectiveness of the Canadian capital markets, as indicated by the following quotes from the attached study:

On creating more efficient markets, this from page 112:

“As it may be seen by figure 2.24. above, stock of flow-though investment vehicles significantly expand the efficient set when added to the mix over the period of January 1999 to July 2007. The exstimation window is chosen as to minimize the
effects of the global financial crisis of 2007-2008”

On the distinct nature of income trusts as a unique investment “asset class”, this from page 113:

“Overall, our evidence would suggest that flow-through stocks comprise a distinct asset class from bonds and equities. In the meantime, using co-integration analysis, we document varying levels of stock and bond cointegration, which suggest
the risk-return profile of flow-through stocks may in fact be replicated by a combination of bonds and equities. Still, there remains a large enough portion of flow-through stock variability not accounted for by common market risk factors to
justify the diversification benefits of Income trusts, MLPs and REITs”

Why are pension funds like OMERs CPP, PSP. Caisse, Teachers’ etc. exempt from Flaherty’s 31.5% tax, whereas RRSPs are not, given this finding on page 114?

“To the extent that stocks of flow-through investment vehicles are considered as an alternative class, our results would be of interest to investors and portfolio managers alike.”

1 comment:

Anonymous said...

Just out right excellent Brent, I remember Dodge making that statement live and also he said that as corporate taxes decrease do to recessions etc... income trust maintain a tax to the government because of thew continuous distributions paid out.
distribution maybe decreased because of market conditions but are still paid out.

It took an Italian study, we piasane have a good understanding of cashflow !!!!