Bull Market: Taking Stock
Has the bull market run its course? Does the recent tax legislation mean it’s time to dump
income trusts? Investors enter this RRSP season with more than the usual dose of nerves as they ponder their investment options.
For advice, BCBusiness met with two experts who spend their days making investment decisions. Carl Hoyt is managing partner at Cypress Capital Management Ltd., a Vancouver firm owned by AGF that oversees $4 billion in assets. Hoyt manages the AGF Diversified Dividend Income Fund and the AGF Monthly High Income Fund. Patrick Reddy is an analyst at Leith Wheeler Investment Counsel Ltd., which has more than $6 billion under management. Reddy specializes in energy investments.
The consensus from the experts? Stay the course. Trying to time the markets is futile – even for seasoned experts, much less amateur investors. Yes, stock markets fluctuate and the TSX and Dow are at historic highs. But trying to guess the timing of the next correction is a fool’s game. Over the long run, you’ll do better by choosing the asset mix that’s best for you and sticking with it.
As for income trusts, the tax hit in 2011 has already been factored into unit prices, and most will probably convert back to a corporate structure. There may even be some windfall profits thanks to buyouts from private investors.
BCBusiness: A lot of investors feel we’ve reached a turning point, with stock markets at historic highs and income trusts dealt a major blow by the federal government. Are they justified in feeling under pressure to make some investment decisions?
Carl Hoyt: That’s a common question and it illustrates a potential error that a lot of investors make in trying to change their asset mix in response to short-term expectations. Very few investors, and investment counsellors for that matter, are very good at market timing. It serves investors much better to set an asset mix that meets their long-term objectives and constraints, and stick with it.
I’ve always believed that equities will give you the best long-term performance. I think we’re in a relatively low-inflation, slow-growth environment, and equities in the long term are likely to give you returns in the high single digits.
BCB: Patrick, you cover the energy sector; what sorts of options are you looking at and what kind of decisions are you making?
Patrick Reddy: My view of the energy sector is rather unique compared to the consensus that’s out there. On a long-term basis, I use lower-than-consensus oil-and-gas price expectations, and that does limit the range of investment opportunities. I see oil prices in ’07 probably in the low fifties and I see gas prices pretty much where they are right now.
From there, some of the opportunities we’re looking at are Nexen and EnCana. We like EnCana because of the management team, and it has a tremendous portfolio of opportunities in North America.
BCB: Carl, what in the small-cap sector looks interesting to you today?
CH: At various times in history, small-cap equities will trade at discounts to large-cap equities, but right now they’re pretty closely valued, so small-cap stocks are essentially valued appropriately relative to large-cap stocks. Where we do think there’s an opportunity is in the income-trust sector, where small-cap and mid-cap income trusts tend to trade at fairly significant discounts compared to their large-cap counterparts.
BCB: But what about the new legislation that will start taxing income trusts at the source as of 2011? Does that mean income trusts have a lifespan of four years?
CH: We’re likely to see some income trusts choosing to convert to corporations and some, because of their compelling valuations, subject to takeover bids either by private-equity investors or by corporations. And some will choose to remain income trusts, perhaps even beyond 2011.
BCB: In the case of either a conversion to a corporation or a takeover, would that mean a windfall for investors?
CH: It’s an opportunity to the extent that there are takeovers. We just recently saw a hedge-fund investor indicating an interest in acquiring Calpine Power Income Fund, and as a result the shares rose 30 per cent. The possibility of takeovers represents an opportunity for capital appreciation in the income-trust sector that I think has been absent for some time.
BCB: If a trust is neither acquired nor converted to a corporation, what happens if you’re left holding an income trust in 2011?
PR: I don’t foresee a situation where an income trust would prefer to stay a trust beyond 2011, rather than convert to a corporate structure.
Throughout the next four years, depending on the trust, some will stay right to the end and some will likely convert over the next few years.
BCB: Even in the energy sector, where trusts have been longer established, will companies be thinking of converting to a corporate structure?
PR: It’s tough to generalize within the royalty space, because it depends on the firm’s strategy and how much they want to grow. Some firms may want to convert back to being a corporation that focuses on production growth, or they may just focus on playing out their assets and paying as much back as they possibly can to the unit holders.
CH: It’s interesting that the income trust space really began in the oil-and-gas sector and it continues to be dominated by oil-and-gas royalty trusts, because most oil-and-gas royalty trusts really have very few of the attributes one would think of as ideal for an income trust: things like long-life assets, stable cash flow that is not dependent on commodity prices and a defined level of capital expenditures that are sufficient to sustain the business.
- Tags
Save over 50% off the newsstand price with a subscription to BCBusiness Magazine
