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Vol. 10, No. 6 Week of February 06, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Trusts go big time

Lobbying campaign pays off with inclusion in Toronto Stock Exchange’s benchmark index; concern over future governance, management of trusts

Gary Park

Petroleum News Calgary Correspondent

Canada’s royalty and income trusts have come of age, with word that Standard & Poor’s has included them in the benchmark S&P/TSX composite index — successfully ending three years of lobbying by the trust sector for the ultimate status on Canada’s largest stock exchange.

Carrying a combined market capitalization of C$118 billion, the trusts will represent 8 percent of the total value of companies listed on the Toronto Stock Exchange, although only about 56 of the 175 publicly traded trusts will meet the size threshold to gain admission to the new index.

Many observers thought there was an inevitability about the elevation of the trusts, especially after the Ontario and Alberta governments passed legislation a year ago limiting the liability of the trust unit holders and the Canadian government indicated it might back away from plans to impose a 15 percent withholding tax on cash distributions to unit holders outside Canada to offset claims of lost tax revenue.

Trusts have outperformed the broad exchange index for almost a decade and delivered a drubbing last year by making total returns of 27 percent to investors, compared with 14.5 percent for the S&P/TSX index, according to BMO Nesbitt Burns.

With pension funds now able to invest in trusts, there’s an assumption that the sector will enjoy even greater popularity as institutional money starts flowing into their coffers.

For the energy trusts, which account for six of the 10 largest trusts by market-cap, there is the added bonus of being able to attract more of the capital needed to replace declining reserves.

Michael Brooks, executive director of the Canadian Institute for Public and Private Real Estate Companies, said the milestone “finally gives us some legitimacy with institutional investors.”

Marcel Coutu, chief executive officer of Canadian Oil Sands Trust, the largest stakeholder in the giant Syncrude Canada oil sands consortium, said the S&P announcement “is the final step of a long ladder.”

In fact, the trusts have not quite wrapped up their entry to the S&P/TSX index.

Details still not settled

S&P has yet to settle on the details of when and how trusts will be included in the index — although Steve Rive, vice president of Canadian Indexing Service for S&P, told a conference call that as many as 56 trusts could be listed.

It is not yet clear, in Rive’s words, whether the changes will be made with “one big bang (or in) a phased approach.”

In the meantime, there are plenty of voices of caution.

Leslie Lundquist, manager of the Bissett Income Fund, that includes 39 trusts in its C$925 million fund, said an already expensive trust market could see another surge in valuations, putting heat on the trusts to maintain their yields.

David Beatty, managing director of Canadian Coalition for Good Governance, representing many of Canada’s largest institutional investors with C$550 billion in assets under management, warned against premature conclusions that many large trusts will be added to the S&P/TSX index.

He told the Globe and Mail that regulatory guidelines must first be developed to ensure fundamental investor rights are protected at all trusts, given that those priorities have received little or no attention in the trust sector before now.

Beatty said there are “huge governance challenges” to overcome.

Brian Gibson, senior vice president of public equities at the C$80 billion Ontario Teachers’ Pension Plan, echoed those worries, suggesting the large institutional investors will pay much closer attention to the governance and management of trusts once they gain admission to the index.

Yin Luo, executive director of quantitative strategy at CIBC World Markets, said some of the C$35 billion of institutional money tied up in the TSX benchmark index will be redirected into trusts.

Facing that kind of upheaval, he said changes should be made in two stages, adding 30 trusts initially and the balance later.



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