Demise of trusts overstated

The income trust sector is still down 9% from Oct. 31, the night investors shuddered as Ottawa announced its intention to tax trusts. But Ken Manget, a managing director at BMO Capital Markets, says it was only a matter of time before a correction hit.

Most of the trusts that have been taken out of the market since that ill-fated night were businesses in trouble, he says. Case in point: in 2006, there were no fewer than 14 income trusts taken out of the market — with a combined market cap of $8 billion — 10 of which happened after the Oct. 31 announcement.

On closer inspection, Manget says, the proposed legislation forced trusts to review their strategic options. In other words, they put out the “for sale” sign.

Of the 10 trusts to be taken out after the government said it will treat existing trusts like corporations by 2011, all but one of them was bought by a foreign buyer. “Value is still there in terms of relative trading for multinational companies,” Manget told attendees of the Canadian Institute’s Securities Superconference in Toronto. “Trusts aren’t that big yet.”

Trusts shouldn’t be completely ruled out of the Canadian market either. Even after the correction is factored in, the total returns for trusts as a group are up over 155% in the past five years, versus the TSX’s 91% gain over the same period.

Despite the stigma attached to trusts since the fall, money is still flowing into the structure — if for no other reason than there is no place else for it to go, says Manget.

In fact, the market has been quite receptive to income trust equity issuance since December 15, 2006. Over the three-month period, Manget found there has been close to $1.7 billion in new issuance, including new trust units, convertible debentures and income-participating securities.

Filed by Mark Brown, Advisor.ca, Mark.Brown@advisor.rogers.com