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Weekly Insight

Can we trust trusts?

TORONTO (GlobeinvestorGOLD) — It’s been a week since the federal government backed off on making changes to the income trust tax structure and the fury appears to have died down for now – at least as far as Bay Street is concerned. For retail investors, especially retirees who rely on income investments as a financial lifeline, the entire episode is a wakeup call.

Bay Street’s reward for all that uncertainty was a hike to the dividend tax credit. It’s possible the reward was even greater for a small group of traders. Federal opposition parties are calling on the Ontario Securities Commission and the RCMP to launch a probe into stock trading ahead of the news. The OSC acknowledges the S&P/TSX Capped Income Trust Index rose 1.5 per cent prior to the November 23rd announcement and soared 4.4 per cent the following day, but will not respond to suggestions that details of the announcement were leaked ahead of time.

The mere suggestion that income trusts would lose their favorable tax status caused a sell-off in the sector earlier this fall. In October alone, the Globe Canadian Income Trust Peer Index plunged 7.6 per cent. Savvy institutional investors with the financial resources to whether out that risk, had a tremendous opportunity to pick up quality income trusts at bargain basement prices. The trust sector is on the road to recovery since last week’s announcement and most income trust funds are reaping the benefits.

Over the past seven days the Montrusco Bolton Income Trust fund has shot up faster than any other income trust fund – gaining eight per cent in a week after losing nine per cent in October. In the last quarterly report on the fund, manager Peter Harrison held large positions on a wide range of trusts including North West Company – a provider of food and supplies to Northern Canada, and recycler, Newalta Income Fund.

The fund went into the dark days of the income trust plunge well diversified between energy, consumer products, financials and utilities – and has managed an annual average return of 18 per cent over the past three years.

The two-year old Sentry Select Focused 50 Income fund is a close second on the road to recovery – running up nearly six percent in the past week after plunging nine per cent in October. Manager Sandy McIntyre holds 55 per cent of the fund’s assets in Energy and Utilities but has large weightings in other sectors including RioCan Real Estate Investment Trust.

Many nervous retail investors, on the other hand, found themselves selling their income trusts into the broader market sell-off. Just the thought of having their nest eggs diminish before their eyes must have caused a few sleepless nights. For obvious reasons, income investments are a way of life for retirees and even dividend stocks were taking a beating on concern their ambitions to become income trusts would be thwarted.

And those sleepless nights may not be over. Ira Gluskin, president of Gluskin Sheff & Associates and a major investor in income trusts told a real estate conference in Toronto this week that the government could take another stab at changing the tax status on income trusts after the January election.

There’s a lesson in all this for the retail investor: If the government can giveth, the government can always taketh away. That’s one risk the investment industry has underplayed since the onset of income trust mania. Income trusts are on stable ground for now and it may be the perfect time to trim some from your portfolio.

We all need income in a well balanced portfolio but the payout is modest and not worth the risk that is present in income trusts. Perhaps it’s time to go back to bonds.

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© 2007 The Globe and Mail. All rights reserved.

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