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By: Ray Turchansky
The Vancouver Sun
Monday, December 23, 2002
Investors who were devastated last week when West Fraser
Timber decided to delay its new income trust fund can
take heart.
They can instead soon put their money into the Consumers’
Waterheater Income Fund, which starts trading Tuesday
on the Toronto Stock Exchange. According to a Friday
news release, it will invest in “the origination,
holding, servicing or management of portfolios of water
heaters and gas fired equipment.”
The downfall of stock markets during the past 30 months
has caused many investors to flee equities and mutual
funds for the perceived safety of income trust funds
— labelled income funds by Standard & Poor’s.
Adrian Mastracci, investment
counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says,
“The values of income trust fluctuate like bonds.
They rise when
interest rates fall and vice versa. The vice versa will
be
the cause of a very sorry day.”
There are now more than 150 income trusts on the TSE,
57 of them created this year, worth $57.2 billion in
market capitalization as of Oct. 31. But when fast-food
restaurant chain A&W formed an income trust in mid-year,
it was a signal that the trust fad was getting carried
away. -
Investment advisors well remember how royalty trusts
became the rage in 1995 and 1996, when oil and gas prices
spiked, only to plunge in 1998 after those commodity
prices collapsed.
Income trusts are structured to invest in income-producing
assets, such as resource properties, or businesses where
the revenues, after paying expenses, distributed to
unitholders instead of being plowed back into a company
as capital expenditures.
On the other hand, if the companies they derive revenues
from lose money, the income trust don’t pay dividends.
In MoneySense magazine, Stephen Maclnnes, points out
there is “real risk” in income trusts.
“They’re called income trusts, but they’re
really equities and there is nothing fixed about the
income at all,” said Maclnnes, “Cash flow
is completely vulnerable to interruption.”
Leo de Bever, senior vice-president, said the income
trust market may be “an accident waiting to happen.”
To which Adrian Mastracci,
of Vancouver-based KCM Wealth Management
Inc., adds, “If protection of capital and
reliable income is the focus of the portfolio, income
trusts don’t make the grade.”
“The values of income trust fluctuate like bonds.
They rise when interest rates fall and vice versa. The
vice versa will be the cause of a very sorry day.”
Peter Hodson echoed the sentiment in Investor’s
Digest.
“As soon as the economy surges, then safety will
be last year’s fashion,” said Hodson.
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