Trader’s Narrative

Canadian income trusts are the Rodney Dangerfield of investments. They don’t get no respect! They are derided by TV talking heads as investments that give you your own money back and call it yield; they are attacked by ignorant government beaurocrats that fear tax ‘leakage’; they are vilified by brokers and money managers who don’t want their clients to invest in them for fear of losing commissions and fees; and they are generally misunderstood by the novice investor.

But some of the criticism is legitimate. The most damning is about trusts that have cut or suspended their distributions. For example, take a look at Spinrite:

The critics say this shows that companies are being packaged by VC’s as trusts to satiate yield hungry (and ignorant) investors. It is always obvious when this happens because soon after the IPO, the trust starts to cut back on their distributions or eliminates them entirely. The result is catastrophic for their unit price.

While this sort of criticism is valid, a recent report by Dirk Lever of RBC Capital shows that the whole trust market is being smeared by it unfairly.

He points out that since the beginning of 2005, 214 distribution increases have come from 123 different trusts. During the same time period, only 37 distributions cuts were effected by 27 different trusts. The average distribution increase was 13%, causing an average 2% rise in the price of the units. The average distribution decrease was 42%, causing an average 16% fall in unit price.

When you consider that the whole trust sector contains about 250 individual securities, you realize that the distribution cuts are a small minority. Also interesting is that the distribution cuts tend to have a much more intense effect to the downside than the increases to the upside.

But as you’d expect, the media reports the distribution cuts much more than the distribution increases. And a few bombastic examples like Spinrite (above) skew the image of the whole trust universe in people’s minds.