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Normandin Beaudry

The inclusion of income trusts in the S&P/TSX Composite Index


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:

  • The unlimited liability of income trust unitholders in some provinces (unlike the shareholders of a corporation, whose liability is limited to their initial investment);
  • The fact that there were no income trusts in the S&P/TSX Composite Index.

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:

  • To reach an agreement with investment managers regarding which benchmark index to use for Canadian Equities mandates.
    • The majority of managers in active management should opt for the index that includes income trusts since this index will be more representative of the Canadian stock market and will allow them to take advantage of a larger pool of securities.
    • For passive management, it is expected that products based on the two indices will be offered to investors, the default option being the product that includes income trusts.
  • If the current index is maintained as the benchmark for Large Cap Canadian Equities, it will be necessary to amend the investment policy to allow income trust issues to be purchased, if desired.

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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Montreal, Quebec, H3B 1S6