Edward Jones issues trust guidance

Despite the mass media coverage income trusts have received over the past three years, there remains some confusion about their structure and suitability, according to a research report from Edward Jones Investments.

Far from their traditional place as income generators for widows and orphans, most income trusts are not suitable for conservative investors, the report argues.

“While the structure is designed to return tax advantaged distributions to unitholders, we believe it also increases their risk,” the research note reads. “These are equity investments, not fixed income. Distributions are neither fixed nor guaranteed and can be changed at any time.”

The report points out that income trust returns have been inflated by roaring earnings in the oil patch and goes on to say that any decline in the price of energy would quickly remind investors how volatile distributions can be.

Even if investors are savvy enough to realize that trusts are equity investments, they may be unaware that distributions are not quite the same as common stock dividends.

“The high apparent yield of income trusts has made them attractive over the past few years,” the report says. “However, investors need to be aware that part of the yield could be a return of their initial investment. If this is the case, investors need to adjust this yield, excluding the return of principal, to get a more accurate picture of the true yield of the trust.”

Given the uncertainties around income trusts, Edward Jones has issued suitability guidance for its sales force, classifying trusts as either aggressive or growth-and-income investments.

“Most are considered aggressive investments due to their high apparent yields, potential for variable distributions, and modest growth opportunities,” the report says. “Investors should consider the possible volatility of the distributions before investing in income trusts.”

Those which have the top two stability ratings, market caps over $1 billion and investment grade debt may be considered growth-and-income investments, although “they share the risks common to all income trusts,” the report concludes.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com