Key to trusts: Be selective

(July 25, 2005) The income trust market has produced some of the hottest financial products in the past three years, but it is starting to show signs of over development. Initial public offerings of new trusts are largely languishing, not only in the face of potentially higher interest rates, but also as some question the suitability of the structure for a given business.

In the recent past, making money seemed as simple as throwing a dart at a list of trusts. Going forward, investors will need to be far savvier in their choices.

“Looking at the income trust market, we really had the stars aligned,” says Leslie Lundquist, manager of the Bissett Income Trust Fund. “The rate environment has been supportive, the commodity price environment has been supportive, we’ve seen strong real estate prices, and businesses have had a nice environment to grow. I think people are wondering how much longer this could go on.”

She admits that even she has been underestimating the trust market, expecting a significant shake out of the weaker trusts which is yet to materialize.

“Trusts are going into the S&P TSX Composite Index — this appears to be supporting trust prices and large cap trusts in particular are doing quite well,” she said. “This is supportive of the REITs and some of the oil and gas trusts. That’s something that appears to lend strength to the market and will probably be there for the rest of the year.”

The higher quality income trusts are already largely recognized by the market and speculators have driven their prices higher in advance of index inclusion. Lundquist said those smaller, less stable trusts may offer better value because of the relative lack of speculation.

The key is to look beyond the market as a whole and focus on how each industry sector behaves in relation to the economic environment.

“Oil and gas has been incredibly strong, and rightfully so given that we have oil at $55 and $60 a barrel,” she says. “The thinking today is that current oil prices are not sustainable, but we’re probably not going to go back down to $20 or $25 either.”

“The oil and gas trusts are likely to remain strong for as long as oil prices do. We’re trying to not get caught up in the hype. Half of the market is oil and gas — we don’t want half of our portfolio in oil and gas.”

Real estate has had a “bumpy” first quarter, but has performed better in the second quarter, as foreign investors bought up Canadian properties which are undervalued relative to the markets of other industrialized nations.

“Beyond the distribution, is there anything left for investors going forward?” she asks. “I think there is. First of all, you do get that distribution yield and if you choose your REITs wisely, that’s a pretty stable stream of income.

“What we’re focusing on is the distribution. We don’t think there’s much of a danger to the distributions we’re getting off of our REITs today.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.