Angry in the Great White North

Update: Garth Turner has posted a response. I encourage you to visit the post and read it after reading this post. Unfortunately he has provided no link to this post, so his readership is getting just one side of the argument. Weigh the evidence and judge the arguments against the material being presented by people like USCO that I've quoted below. Come to your own decision on the issue of income trusts and whether Jim Flaherty did the right thing. If you are still not sure, hey, join the club. Finance is the trickiest portfolio in the business. Go out there, follow the links, do some googling, listen to smart people on both sides (including Garth Turner, of course, who was always cautious about income trusts), get a read on their true motivations that might be spinning their message, and become an educated voter.

Garth Turner is on his western speaking tour, where he will speaking a great deal about income trusts.

How do I know this? It's really simple, actually. If the Canadian Association of Income Trust Investors, or CAITI, is heavily promoting the tour, then it is about income trusts. Brent Fullard and his backers are interested in one thing only -- getting the tax-free status of income trusts back.

So is Garth Turner the savior of the retiree who took the advice of a "professional" investment advisor and put all his money in the single basket of income trusts even as the talk for months and months was on just when the ride was going to end?

Or is he helping out these investment advisors who are looking pretty foolish right now? What's wrong? Never heard of a diversified portfolio?

But setting up a diversified portfolio is hard work. Wasn't it nice to just burp out "income trust fund" and then collect your fee for giving out that wise advice?

But was that advice really all that good even before the October 31, 2006 announcement by Finance Minister Jim Flaherty that income trusts would be losing their tax free status? Maybe not, and that's something that hasn't gotten a lot of airplay.

In August 2007, at a meeting of the United Senior Citizens of Ontario, Diane Urquart gave a presentation entitled "No Investor Protection for Seniors". Here is her opening slide:

• Investor losses from white collar securities crime and excessive mutual fund fees are:
• About $20 billion annually
• About 1% less annual investment return on individual RRSP's, RRIF's, pension plans and investment assets held outside of retirement plans
• About 15% of expected investment return.
• Seniors suffering catastrophic losses are exposed to the second abuse of stonewalling by the investment industry Self Regulatory Organizations, provincial securities commissions and the RCMP, who address less than 5% of the complaints received.

Well, that sets the tone, doesn't it?

I've included the full presentation if you want to study it. It's rather sobering, but I'm going to focus in on income trusts.

The title of that subsection: Financial Advisors on Income Trusts -- Wolves in Sheep's Clothing.

Ouch.

The following slides are full of numbers, and I'll get to those in a moment, but slide #10 is amusing. It is entitled "Wrong on Income Trusts" and you'll find pictures of CAITI president Brent Fullard, and Liberal MPs John McCallum and Garth Turner.

CARP -- Canada's Association for the 50 Plus -- comes in for some special scorn as being in a severe conflict of interest, being too cozy with the investment industry to properly advise retired Canadians on how treat the advice of the investment specialists responsibly. Study the presentation and come to your own conclusion, but I will remind you of this. Back in December 2005, in the middle of the election, when the bombshell was dropped that Ralph Goodale's finance ministry had leaked the decision not to tax income trusts after three months of speculation that a tax would be applied, and as a result of the leak it appeared that professional investors in the know made a killing on the market (not retirees, of course), CARP was in the centre of that scandal:

"The day they made the announcement they phoned us and said something is going to be said," the associate executive director of Canada's Association for the Fifty Plus, William Gleberzon, told CTV News.

Gleberzon said the call came from a senior policy advisor in the finance minister's office.

When asked what exactly he was told, Gleberzon indicated the specifics were vague, but the underlying message was clear.

"They said something was going to be announced later in the day. And we assumed that if they told us that ... it would probably be something we'd be happy with."

So when it comes to CARP and allegations of being too involved in the interests of those whose business is to promote income trusts, this is old news.

Now back to those numbers. There's a few of them, but you can tease out these interesting and disturbing facts. Income trusts were supposed to be sustainable investment oportunities with good cash yields. But already 24% of all income trusts have had distribution suspensions and significant cuts. And there are over $11 billion of capital losses in 62 income trusts, whose prices are now down more than 20% since their IPO or latest secondary offering to the public (one third of the business income trust offerings are now down an average of -48%).

Now you might wonder if the poor performance is solely because of the taxation announcement on October 31, 2006. Fair question. I direct you to the comments made by a professional investment advisor on October 30, 2006, one day before the taxation announcement:

Q Is the underperformance of the trust index year-to-date relative to S&P/TSX composite index mainly the result of the income trust universe's large energy exposure?

A My REITs are up, I have made money on power and utilities trusts. Business trusts are down and oil and gas is down. If you were to compare the performance of the Sentry Select Canadian Income Fund to the Barclays iUnits, which track the S&P/TSX trust index, year to recent close, the Sentry Select Canadian Income Fund's total return is 8.24% versus 4.76% for the iUnits. The defensive approach in that we overweighted REITs and underweighted energy has delivered almost double the return.

Underperformance? But his income trusts are up, so the problem was with having the wrong advisor, and not with income trusts. Of course, the next day Jim Flaherty levelled the field tax-wise, and people began to wonder just why investment advisors weren't more cautious about income trusts after the craziness in December 2005. Well that, and the fact that tax-free or not, income trusts didn't seem to be such amazing investments.

Unless you listen to certain investment advisors, of course.

To be fair, not all investment advisors were cheerleaders for income trusts. Some sounded the warning on income trusts:

The appeal for investors is (of course) income. Once you buy units, you are assured of a steady stream of distributions. For people who used to get systematic payments from their high-yielding mutual funds, this has turned out to be a fine replacement.

And that's why the news out of Legacy Hotels Real Estate Investment Trust last week was such a shock. This trust holds luxury hotel properties, including the Fairmont chain -- the former CP Hotels which have a global reputation for quality and excellence. But with a simple press release, Legacy told unitholders they could forget about receiving any income for the foreseeable future, because of a lousy cash flow.

Is Legacy an isolated case? Apparently not. As a Globe and Mail investigation showed, some income trusts are using bank lines of credit to keep up with their distributions. Other trusts, based on everything from growing peat moss to running harbours, have been forced to cut or eliminate their distributions, because doing business can often be unpredictable.

That should hardly come as a surprise to anyone. But it will probably stun a lot of people who never bothered to actually look at the business behind the trust they were purchasing. Blinded by the big, shiny rate of return posted in the window, they thought these trusts were bullet-proof babies well suited to the rarified atmosphere of their RRSPs. Unfortunately, more than a few trusts are literally burning the furniture to make their distribution targets, which means the underlying value of the trust units is also going up in smoke.

As with any investment, make sure you get the right advice before you write that cheque. And, ironically, you might want to buy a mutual fund instead. Ninety-two out of a hundred made money last month, many of them giving tax-preferred capital gains.

Who gave this sobering review of income trusts? Garth Turner in 2003.

So why with advisors like Garth Turner in 2003 warning investors to be careful and to express some healthy doubts about too-good-to-be-true income trusts did USCO present a brutal report to its members just last week that investment dealers are still taking advantage of its members, especially on income trusts?

Obviously Garth Turner's warning was drowned out by the heavy promotion from other dealers like the one quoted the day before the taxation announcement. But even the OSC called income trusts risky:

Income trusts are not conservative or fixed-income investments. They are equity-like investments that carry varying degrees of risk. Income trust distributions are not assured, and depend almost entirely on the financial performance of the underlying business. Just like any security, the quality of income trust investments can vary. Before you invest, make sure you look at a range of factors such as any business risks specific to the industry involved, and the management structure that is in place.

Despite this, retirees were affected out of proportion to their numbers by the hit to income trust value when the announcement was made to tax them. But if income trusts are so risky, then why were they putting their money into them in the first place? The OSC doesn't even classify them as fixed-income investments despite the marketing as investments with regular payouts.

And now Garth Turner thinks Stephen Harper's government ought to be thrown out of office because of the taxation announcement, instead of delivering the message that investment in income trusts was being made with poor knowledge of the risks, including the blindingly obvious risk that the tax-free status was under constant threat. From the Small Investor Protection Association:

Most Canadians trust their advisors and also do not have the knowledge or the time to conduct their own due diligence. That fact coupled with the failure of the industry to properly disclose the risks associated with income trusts and particularly business trusts has led to many seniors being invested in products that are not suitable for them.

No wonder the USCO is steamed.

But to listen to Garth Turner, the worst thing to happen to seniors in this country was Jim Flaherty. Of course, the investment advisors want that to be the message. Indeed, they want the clock turned back, to have the tax regime restored to what it was on October 30, 2006, to when income trusts were still a favoured investment vehicle for investment professionals to offer to seniors. Don't take my word for it. The CAITI website is quite clear about this:

Canadian seniors and those saving for retirement are the very Canadians who have been responsible for the growth in the income trust market over the last ten years to its present level of $200 billion. These are the very people who have sustained a combined loss in their hard earned savings of $35 billion. This $35 billion loss is a permanent loss and it is the sole consequence of Mr. Flaherty's so called Tax Fairness Plan.

It is these very people, and Canadians like them in years to come who will soon be denied this important investment choice by Mr. Flaherty. It is truly shameful that Mr. Flaherty twists the truth about the impact of his policy on these very people, seniors and those saving for retirement, when the exact opposite is plain for anyone to see.

And Garth Turner who once wrote about the dangers of income trusts wants to bring back that tax-free status that helped drive seniors into income trusts (or at least use that argument as a political attack).

We know investment dealers want Garth Turner to succeed. That's why CAITA is helping fill the halls where Garth Turner will be speaking. But are seniors eager to erase October 31, 2006?

Some are, of course. Money is money, and no description of the risks inherent in income trusts is going to distract them from being bitter about the effect of the taxation announcement on income trust valuation. Of course, those are the seniors with large income trust exposure in their portfolios, thanks in no small part to the advice given to them by those investment dealers.

But other seniors are not sure that Jim Flaherty is their enemy. First consider that at that USCO convention, the Brampton chapter offered up a resolution that USCO adopt as policy a standing demand that the federal government withdraw the new income trust taxes announced by Jim Flaherty.

The attendees voted that resolution down.

And if that wasn't enough, on March 30, 2007, the National Pensioners & Senior Citizens Federation threw down the gauntlet and demanded that the RCMP begin an investigation into deception marketing aimed at seniors to promote income trusts.

The RCMP response makes interesting reading:

The RCMP has in fact received correspondence from other complainants requesting a criminal investigation into the activities of those involved in the marketing and sale of Income Trusts.

I wonder just how many more complaints the RCMP has gotten on this. In any case, the issue was refered to Integrated Market Enforcement Branch (and to show the RCMP was serious, they provided a contact at the IMEB for the NPSCF to bug about progress).

So consider this post to be everything you won't hear at one of Garth Turner's stops on his speaking tour. What you will hear is how the income trust tax announcement hurt seniors, but it seems that investment dealers, like Garth Turner's friends at CAITA, are complaining more. But I doubt that will get mentioned. Nor will the concerns about trusts, their suitability for seniors as investment vehicles, the behaviour of many investment dealers in recommending them, or the multiple formal requests for criminal investigations into that whole income trust fan club.

Or maybe Garth Turner will be covering all these points. Since I don't live near any of his planned stops, I won't be able to attend and see for myself.