TORONTO (GlobeinvestorGOLD) Last week, we got a rare inside look at how markets can be driven and investment decisions influenced by a few phone calls.
The story was revealed by Paul Bloom, who manages the Citadel funds, in a conference call with analysts and media on Nov. 26. His company, Bloom Investment Counsel Inc., is regarded as one of Canada’s leading experts on income trusts. It invests tens of millions of dollars in them every year through several closed-end portfolios.
In the call, Bloom said the income-trusts market has been depressed by a spate of recent IPOs (initial public offerings) at attractive yields. Some $5 billion in new income-trust offerings has been put forward in recent weeks, in what Bloom referred to as “an avalanche of IPOs.” He added: “It is far too much in a short period of time. It has caused us all to have indigestion.”
He said the flood of new issues prompted some investors to sell existing trust units with lower yields in order to free up cash to buy IPOs with higher yields. “That puts pressure on existing issues and weakens markets.”
So serious did he feel the situation had become that he took the initiative to place calls to the heads of several underwriting syndicates to advise them that Citadel is staging a “buyer’s strike” and will not take positions in any new IPOs for the next month or more. According to my information, managers of some other income trusts funds took similar action.
“We want to protect the existing market,” Bloom said. “The result has been that a number of deals have been delayed or perhaps even cancelled. Our telephone calls helped to bring some sanity back to the market.”
It appears that Bloom’s assessment is correct. One broker who does a lot of income-trust business confirmed to me recently that “at least five” new deals have either been pulled or delayed in recent days.
Bloom says his company won’t be taking positions in any new income trust IPOs “until we see some semblance of order in the market”.
The “buyer’s strike” comes at a time when some market watchers are fretting about the possibility of an income-trust bubble, similar to the high-tech bubble of the 1990s, the dramatic collapse of which ushered in the long bear market.
Income-oriented investors have been pouring money into high-yielding trusts, seeking to offset the impact of low interest rates on their cash flow. Retirees, who are often heavily dependent on investment income, have been at the forefront of this trend.
Such a collapse would not be without precedent. We saw a similar phenomenon in 1998, after the first income-trust craze. When oil prices tumbled to the $11 range, the bottom fell out of the trust market, and many investors were left with big capital losses.
The difference between 1998 and today is that the income-trust marketplace is less resource-centred. While a big drop in oil prices would certainly hit some of the energy trusts, there is enough diversification in the marketplace to allow a careful investor to cushion the potential shock.
Bloom himself is bullish about the prospects for the income trusts market, but likes some sectors much more than others. For instance, he’s selling some positions in what he calls the “oily” trusts right now, because he’s concerned about what will happen to the price of crude once the Iraq situation is resolved. But he’s buying “gassy” trusts because of what he sees as pricing strength in the natural gas area.
Among his top holdings are Shiningbank Energy Trust, with 75 per cent of its assets in gas, PrimeWest, with 64 per cent of reserves in gas, and Enerplus, which has 56 per cent of its production in natural gas.
He sees REITs (real estate investment trusts) as being “a little overvalued” at current prices and says power trusts are “a little vulnerable”. But he likes some of the business trusts because they offer moderate growth potential as well as good income.
Citadel Diversified Investment Trust, which Bloom manages, is rated as a Buy by my Internet Wealth Builder newsletter. It trades on the TSX under the symbol CTD.UN. It closed on Friday at $8.94.
Gordon Pape is one of Canada's best respected financial authors and the nation's leading expert on mutual funds.
--------------------------------------------------------------------------------
Copyright © 2002 Bell Globemedia Interactive
Terms of Service | Privacy Policy | Internet Security | Legal Disclaimer |
