Originally published in October 2002

The income trust segment of Canadian capital markets is here to stay and will continue to grow, says Seymour Temkin, Senior Business Advisor at Goodmans. The segment will continue to challenge equities and bonds for investor attention for two main reasons:

  • We live in an age of low interest rates and low inflation. This return to 1960’s-style economics is likely to prevail for the next ten to fifteen years. At points of time along the way interest rates, and for that matter inflation, will spike up, but those spikes will not be sustainable. In this environment, income trust will remain attractive.
  • A large and growing segment of investors have shifted their criteria…permanently. Many retirees and the first wave of baby boomers no longer wish to – and can no longer afford to – invest significant sums in volatile equity markets and bond yields are simply too low for this group to maintain their present style of living. Income trusts are positioned to meet their needs.

Equity market turbulence and the subsequent mistrust of investors will not last forever. Over time, markets will settle, investors will return, and capital will flow back into equities. However, the retiree/baby boomer segment will continue to prefer income trusts over equities and bonds.

Future trends and predictions for the income trust market

Funds will become more efficient and enhance their distributions: Funds will lean toward lower cost of capital, upgraded workforces, and lower corporate compliance costs.

Investors will question management: Trust management will have to demonstrate: a) that management interests are aligned with investor interests; b) adoption of good government; and, c) transparent financial reporting and disclosure. To boost market acceptance, larger funds will internalize their management, and smaller funds will use a shared-platform management.

Barriers will rise: The growth of existing funds and the launch of newer, larger, more sophisticated, and geographically diverse funds is raising barriers for funds with less than $200 million. Smaller funds must become niche players or grow rapidly to survive.

Distributions will fall: Distributions will fall and likely stabilize at approximately 70%-75% of the current levels – i.e. less distributable income will make it back to investors. Lower distributions will reduce the need to return to public markets for working capital and help boost unit prices.

Liquidity will rise: The indexing of income trust funds will make the sector more attractive to institutional investors.

There will be winners and losers: Many existing income trusts and many of those scheduled for issue will fail. The industry has – and will continue to have – predictable winners and losers.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.