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moneysense.ca, 3/11/06
Diversify, Diversify, Diversify
It happens every single time some sector of the market crashes and burns: investors lose their shirt on the latest fad. It is especially sad when the losses occur late in life when it is very difficult to make up the depleted capital.
Take the current fiasco involving income trusts. One investor (aged 51 years) told The Globe and Mail that he lost 10% of his life savings. I am guessing that almost his entire portfolio was invested in trusts. Should he really have no exposure to bonds, the big banks, resource and energy stocks, US equities, international equities, emerging markets or even the money market?
The National Post profiled a retired, 69-year old, truck driver who estimates his losses at $100,000 should he sell his investments. From his visceral comments it seems to me that his entire portfolio was invested in income trusts.
The diversification mantra is probably too late to be of use to income trust investors but this episode is yet again a reminder for the rest of us to be properly diversified. It wouldn’t hurt to examine your portfolio for any excessive risks you might be taking.
moneysense.ca, 3/11/06
I have to say that it was pretty nice to see my financial stocks take off yesterday. I have a higher precentage in financials (around 30%) than I do in trusts so seeing a 2% gain or so in that sector was nice. It looks like the money is rotating into dividend paying stocks and out of income trusts.
I still think this is a bit of an over-reaction in the market though. You can now buy some utilities that are yielding more than 10%. Nothing is really going to change for these companies for 4 years… Maybe they start shifting some things around in aobut 2 years but I don’t think there is too much that they will have to shift around, they could just keep the same pool of funds available for distributions but take the tax they have to pay off the top. From the sounds of things if you hold these trusts in a non-registered account the net amount of cash you will be able to keep after paying taxes should be the same.
On The National last night they interviewed a couple of investors who heavily leveraged themselves, over six figures, to invest in income trusts. They believed that the distributions from the trusts would be enough to cover their interest costs. Their paper losses were huge. Frankly, I don’t have a lot of sympathy for these folks. It wasn’t investing they were engaged in, but rather a very risky form of gambling. As mentioned by others here, goes to show how important mitigating your risk is by diversifying your portfolio.
0xcc: I am betting that the market overreacted as well, so I picked up a few trusts. But I fully realize I could be wrong and they make up less than 5% of my portfolio in total. Yeah, the dividend payers just took off yesterday.
Anjo: I do feel sorry for people who endured horrible losses but seriously what were they thinking? We just went through a tech crash barely five years back. Nortel could never go down, right?
I do think the market over-reacted to the news, as most trusts were just pummeled.
However, I disagree with the comparison of this fiasco to the tech crash.
The techs died because people finally woke up to the fact that nobody was making any money.
The income trust news was direct government intervention, which is probably why so many people are ticked off.
It also gives people a rather large target to vent their anger.
I have to agree with above comment that you can’t compare the income trust issue with the dot-com crash.
Income trusts = tax panic
Dot-com crash = the result of young and inexperienced managers wearing polo shirts and sitting in Aeron chairs playing foosball in the office
I think there is point in common between the Tech crash and the Income trust crash: “when it’s too good to be true, it is too good to be true! and something will spoil the party sooner or later”.
This is now my new secret investing technique
I will actually apply it right to METALS right after this blog! (Maybe sell off all Teck Cominco and XGD for example).
What do you guys think about bank stocks? Is that another party that will blow up? Could it melt down if there is a real estate bust? What sank the banks in the past?
Look at a long-term chart of almost any bank, not much sinks the banks. There should be a blip in October, 1987 and there are some spans of 1-3 years where they are flat to slightly down but they are fairly steady performers. Will the banks get a shock like the trusts did this past week? Any government that does that will suffer the same fate that the NDP has sufferred in Ontario for the last what, 15+ years? This trust uproar will look like a two year old’s temper tantrum compared to what would happen if the banks faced the same level of tax change.
The tech crash happened not only to many dot-coms that were bad businesses to begin with. It also happened in many big corporations with real revenues and real profits that are still way off the highs they set six years back. I’m comparing them to income trusts because investors were blinded by the fact that they kept going up and up and some of them got carried away and overweighted the sector.
Re Banks. Yes, they do fall and all of them fell sharply in the tech bubble aftermath and wrote down huge loans to the telecom sector. The credit cycle has been improving ever since and the banks have benefited nicely. Historically, banks have been good performers and they are likely to do well in the future too. But just in case, make sure you are invested in other sectors and other asset classes.
I’m one of the “idiots” who was heavily leveraged and invested in income trusts and I lost about 10% of my net worth in this crash on the first day (it’s started to recover a bit now) – and James is correct, I’m mainly pissed because it was government intervention that caused it.
On the taxation issue, I’m even worse off than most as I just recently incurred a massive capital gains hit when CI Financial converted to an income trust. Now their trust unit value has taken a massive hit, so I’m sitting on a sizeable unrealized net loss.
What most people don’t know is that the conversion to trusts generates massive tax revenues to the government as people like me incur huge capital gains. And don’t for one minute believe that trusts don’t pay any tax. For example, my REITs all pay property taxes and they show up on the cash flow statements. Also, my personal income rate is much higher than any corporate tax rate – so why do you think with all the trusts out there the government budget surplus is ballooning to those lofty levels? It’s all the media blowing things out of proportion and the idiot politicians are buying into the hype.
By the way, the Forbes website down stateside said that some Private Equity firms have been making inquiries about some of our income trusts. If they buy them up and take them private, the government will lose most of their cherished tax revenue anyways. And since misery loves company, I would get some perverse satisfaction if that started happening!!! The government is just getting greedy and bringing back double taxation.
Bill Holland of CI Financial is right when he says that investing in Canada is like investing in some third world banana republic in the way that investors keep getting blindsided by the government. I suspect that I will shift my future investment activities to my US$ account, as the last couple of governments have pissed me off to no end. As much of a moron that Bush is, at least he knows who butters his bread and doesn’t screw with capital markets.
I can say I like the move. Tax avoidance and cheap profits for foreign investors notwithstanding, I like dividend stocks and was getting annoyed that my watch list was dwindling as companies converted.
Besides, the change isn’t a problem, it’s a opportunity. My one trust dropped so far that instead of selling, I bought more. +12% later it’s still creeping up and will pay an averaged 14+% while it does so. (Yes, it’s stable. It’s the dominant paper in my city but small on a national scale.)
Phil: I am very sorry to hear about your losses. I also totally agree that Mr. Harper broke a promise he made before the election. The government could have given more of a grace period for existing trusts instead of the current 4 years. If you have high quality trusts you might still come out ahead. CIX.UN was up almost 4% on Friday.
Hi CC. Although I initially lost 10% of my net worth, I’m still above water with respect to my original cost basis and you are all right, it has been rebounding a bit since the Nightmare On Halloween. So, I certainly don’t need any pity, but the fact remains that I’m still pissed off about the flip-flopping and I’m not soon to forget it.
Unfortunately, all of the political parties seem to support the legislation, so I can’t even throw in a protest vote at the next election. Maybe I can convince the leader of the Marijuana Party to get rid of the recent income trust taxation legislation. I’m sure they won’t be hard to convince, I’ll just hold a bunch of snacks in front of them after they’ve been toking up. You want this? Then get rid of the tax on income trusts! Hahaha!!!
It’s really hard to agree with the comment that Mr. Harper broke a promise. The entire picture has changed since BCE and Telus announced their intentions. It has also become a distinct possibility that big oil and even the banks could be looking to convert.
Bob
Hi Bob. As an environmentalist, I have to strip away my personal feelings about the oil and gas industry (the more we spend on alternative energy sources the better, in my opinion). But the tax incentives that they provide through the limited partnerships and income trusts is the only way that they are able to attract private capital to exploration and development. The government receives so much in royalties and other taxes that applying corporate tax on top to these businesses will kill all future incentive to explore and develop. Most exploration is a total crapshoot and why would you risk losing 100% of your investment if the government is going to grab 35% of your profits afterwards?
I know environmentalists are all painted as socialists and commies by the media, but I strongly believe that the less government intervention in capital markets the better. I feel personally insulted each time when the government thinks they know how to make better investments than me (eg. by giving handouts to Ford Motor Company), and the same goes as far as charitable giving as well. They only give us a measly 17% or 29% tax credit on charitable giving and meanwhile they invest billions of tax dollars on social programs which are usually eaten up by salaries to government bureaucrats! I believe that the government should stop all of their social program spending and give us taxpayers a 100% tax deduction for charitable giving. I think Canadians have bigger hearts than most people think – it’s just our tax laws that keep us from loosening our purse strings. But nobody listens to me (sigh).
I still think investment in real estate tops any in the stock market. I was not in shock of the anouncement of the income trust changes. This is a reminder that diversification is key but since I am under 30 and have a lot of room for mistakes it is easier to do.
[...] Canadian Income Trusts Tax Melt-down Let’s face it, most investing decisions are made as easily as throwing a dice. I’vebeen told that I have a pretty hot temper, so I make it a point not to jump into things when it comes to investment decisions. This explains why I haven’t covered the recent Canadian Income Trusts melt-down like some of my peers have. There’s been some excellent discussions brewing. Almost a week has past, so here’s my perspective. [...]
Hey Everybody. This morning’s Globe & Mail website just published an article which contains excerpts of the same stuff I read about with the US private equity firms being interested in the beaten down income trusts. Check it out!
http://www.globeinvestor.com/servlet/story/RTGAM.20061104.wxr-cover04/GIStory/
As I talked about in an earlier post, if these income trusts are taken private, it will eliminate the tax revenue that the greedy hands of our politicians were trying to grab anyways. For me, misery loves company.
Sorry to hear about your losses….BUT…..
#1 – It’s no surprise that politicians break promises. Yes, even the Conservatives do.
#2 – People buying these trusts were just chasing a yield without doing any research.
#3 – Income trust cash flow just isn’t sustainable nor are the yields.
#4 – The valuations on some of these income trusts were just crazy – I mean c’mon!
Yes, quite right…but some of the trusts are now higher than they were before the flip-flop, because the fundamentals were solid and remain solid even with the tax changes (even a boob like me can figure out from the available information which of the trusts are dealing in vapour rather than distributing reasonably).
People have the right to be angry about the policy flip-flop but it is their own fault if their losses (or the majority of their losses) have to do with buying based on yield only rather than fundamentals.