The inclusion of income trusts in the S&P/TSX Composite IndexLinkedIn
There, in black and white
NB Bulletin Vol. 8 N. 2, Febuary 2005
In our June 2004 bulletin (Vol. 7, No. 6), we informed you about income trusts and the suspension of special measures proposed in the 2004 federal budget to limit pension funds’ investment in this investment vehicle. Upon writing that June bulletin, two main factors reduced the attractiveness of income trusts for the majority of pension funds. These were:
Since then, the governments of Alberta and Ontario have announced legislative changes whereby income trust unitholders would have limited liability protection similar to that of shareholders of a corporation. Quebec law already included this protection.
These legislative changes by the Alberta and Ontario governments are clearly related to the Standard & Poor’s announcement made on January 26, 2005 of its intention to include income trusts in the S&P/TSX Composite Index in the near future. Although no timetable was given, some market players expect these trusts to be added to the Index gradually, with the process being completed within six to eight months. It is important to note that income trusts will be directly included in the S&P/TSX Composite Index. However, Standard & Poor’s also indicated that a parallel index that does not contain any income trusts (and is therefore identical to the current index) will be published under a new name. Furthermore, no income trusts will be included in the S&P/TSX 60 Index.
At the present time, there are 175 income trusts listed on the Toronto Stock Exchange, with a market capitalization of nearly $120 billions. The majority have their place of business in Ontario or Alberta. According to a study done by TD Securities, 53 of these 175 trusts could qualify to be included in the Index under Standard & Poor’s current eligibility criteria, excluding those issued in provinces (like British Columbia) that do not have any liability protection for unitholders. With these 53 issues, income trusts could represent about 8% of the Index, and more than half would be in the Energy sector.
For pension funds and other institutional investors, the main implications of this change in the benchmark index for Canadian large caps would be:
It would also be recommended to follow the developments regarding the federal government’s special measures to limit pension funds’ investment in income trusts (see Bulletin, Vol. 7, No. 6).
Please feel free to contact us for additional information.
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