Income Trust Talk

Happy Boxing Day to those income trust traders who aren’t out there storming the malls for bargains!

It hasn’t been the greatest year for making capital gains from income trusts; and even those who concentrate primarily on income have seen payments cut on quite a number of them. And, on top of that there has been mergers & acquisitions activity which has reduced our pool of choices. But, that’s not to say there there aren’t new ones coming onboard, in spite of the fact that new trusts don’t have that tax advantage window to 2011 that “grandfathered” trusts have.

We’ve added roughly 45 of them to our database this year! Now does that sound like income trusts are dead?

First, a bit more context..

As we move into 2008, we’re going to keep our web site format pretty much the same, until such time as we get sufficient requests for new features.

As indicated in earlier posts and in the Visitor Guide, we’re using a simpler and more experimental data presentation format here. In our other sites, including TSX TrendWatch and Canadian ETF Review , we present trend and consistency ratings based on our relative trend analysis™ (RTA) approach. Behind the scenes we do the same thing here, but we leap-frog the trend/analysis presentation and go directly to a projected total return (PTR) figure for the following 52 weeks. Essentially we annualize the weekly trend values and add in our best estimate of what the distributions will add to our return over 52 weeks. Then we simply chart the Top 20 from that database. From that point onward, it’s up to you to evaluate the most promising candidates within the perspective of your own investment objectives.

The commonest question we get is something like “If the chart says that the projected total return for XYZ.UN is 100% or more, does that really mean that I’ll double my money in a year?” The simple answer, of course, is “We haven’t got a clue!”. All we’re providing is our best estimate now for what could happen over the course of the year given current price trends and current distribution information. You have to keep coming back regularly to see how that “current view” might be changing.

The second most common type of feedback we get is “I don’t believe that gains like those in your Top 20 PTR chart are possible with income trusts. They’re intended for conservative investors more interested in steady payments than capital gains. You’re misleading people by even offering a chart that implies that such gains are possible.”

Are we? Well, in specific cases, maybe, because no one can ultimately predict every company’s future. In general, though, I think we can convince you that such gains are possible. But first let’s recap our view on the other part of that comment. We believe that income trusts are not appropriate for conservative investors looking for steady income. The risks are far higher than most realize. A cut in distributions for whatever reason (and there have been lots of them for lots of reasons) has most unit holders pressing the SELL button without any further analysis. That means that in addition to reduced income, there is a whopping capital loss to go along with it. That’s not the sort of thing that keeps widows and orphans sleeping soundly at night!

No, we continue to believe that income trusts are for traders… people who can spend some time at least once a week to review developments that could either accelerate or reduce their capital gains. We like to think of the monthly or quarterly dividends as nothing more than loose change to cover the trading commissions.

So, with all that in mind, let’s look at the Top 20 actual total returns for 2007 (as of December 21).

Now, as you read through the rest of this, remember that the S&P/TSX Composite Index is up just 5% for the year.

Are you still skeptical now?

Obviously, we don’t know how 2008 will unfold, but given the results in the chart above, is there really any reason to not have an occasional look at the Top 20 PTR estimates provided here? We expect you to do your own due diligence anyway, but wouldn’t you rather have a few performers like these in your portfolio at the end of next year, instead of looking for high-yielding trusts that are most likely to big your big losers in 2008 when distributions are cut?

Meanwhile, we know that a “Top 20″ like ours is a great place to start, but you hard-core income trust traders (and investors) probably want more. For that reason, we’ll soon have a subscriber service offering our entire Canadian income trust database. Standby for more details and rates, or send an empty email with “Income Trust Trader” in the subject field, and we’ll let you know more the minute the service goes live.