As hired guns go, the Canadian Association of Income Funds (CAIF) looks as if it shouldn't be able to afford a pea shooter or nab the attention of a dozy backbench MP. Its budget is only about half a million bucks a year. Only about 40 of the 175 listed trusts have bothered to join it. Its chairman, Stephen Probyn, is an affable, mild-mannered Bay Street dweller whose obsession is renewable energy. Yet CAIF has emerged as one of the most powerful lobby groups in the land, perhaps the most powerful.
Since CAIF was formed three years ago, it has more or less won every battle it chose to take on. Politicians buckle in its presence. Success has been so swift that Mr. Probyn, whose paying job is CEO of the Clean Power Income Fund, doesn't know what CAIF will do next. "Maybe corporate governance or something," he says.
CAIF scored a big victory yesterday, when Standard & Poor's announced it would include income trusts in the S&P/TSX composite, Canada's benchmark equity index. The trusts are to be added in the summer. Inclusion in the index is a huge vote of confidence for the trust industry, which never thought it got the respect it deserved given its spectacular growth.
At last count, there were 175 trusts on the TSX. Their collective value is about $120-billion, equal to 8 per cent of the market's total value. At various times in the past two years, trusts have accounted for 80 per cent or more of Canada's initial public offerings. Inclusion can also translate into better performance and liquidity, as index funds will have no choice but to buy trusts.
As a lobby group, CAIF is the envy of the almost every other lobby group, especially the Gucci-clad bank lobbyists. They never get what they want (banker mergers, for instance) and fill their time making cheesy grins at charity events.
Bank lobbyists lack an asset that CAIF has, and that's an ally in the form of Canada's most formidable investors, the pension funds. While the Ontario Municipal Employees Retirement Board, Ontario Teachers and their kind have their own lobby group, the Pension Investment Association of Canada (PIAC), the two lobby groups have common interests. Another sympathetic lobby group is the Canadian Association of Public and Private Real Estate Companies, whose members include real estate investment trusts, known as REITS. Put the three lobbyists in the same ring and the results can be devastating for the opposition.
An early CAIF victory was persuading Ontario, Quebec and Alberta to introduce limited-liability legislation for trusts. The other provinces will probably do the same. Another big success came from the CAIF-PIAC assault on Finance Minister Ralph Goodale, who revealed in his March, 2004, budget that he planned to put limits on the pension plans' ownership of income trusts. Tax leakage was the feds' worry. The trusts themselves are structured to avoid paying tax. The government feared the tax it collected from trust unitholders would be far less than the tax it would have received from the business had it not converted into a trust.
Various studies showed the tax loss would be somewhere between small and irrelevant, although the leakage debate continues. The government backed down. If it hadn't, the pension funds could have cost the government a lot of votes. The burgeoning ranks of pensioners are more attracted to income than capital gains. In that sense, trusts are the perfect investment for them. With the pension plans back in the trust market, the growth of the trust industry is all but assured (assuming rising interest rates don't wreck the party).
CAIF and pension funds also got their way on foreign ownership restrictions. Trusts, with the exception of timber and resource trusts, could not be owned more than 50 per cent by non-residents (again, tax leakage was the issue). The restriction is technically gone. In its place is a requirement that foreign investors get hit with a 15-per-cent withholding tax on their trust payouts. The trust industry loves to have foreign owners. Their presence boosts market liquidity.
CAIF's rapid success won't make all investors happy. Those attracted to growth companies do not cheer the proliferation of trusts, which are less concerned with growth than paying out their cash flow to unitholders. As more and more businesses convert into trusts, investors looking for capital gains or the excitement of watching the next Cott or First Calgary Petroleums take shape will see their options diminish. It might be time for them to start an anti-trust lobby.
Eric Reguly