Sunday, April 30, 2006

Why Income Trusts Fail

Sure they make huge payouts to their investors and managers but because of this they are suseptible to becoming a ponzi scheme, whereby their payouts are more than their earnings as we find with the recent collapse of one of the oldest Income Trusts in Canada; Superior Propane. As the old saying goes it its too good to be is.

Superior is one of the earliest business trusts, having traded publicly since 1996. It became one of the blue-chip names in a hot investment sector that since 1999 has seen 31 business trusts, or 22% of the sector, cut or suspended distributions. DISTRIBUTIONS: Have exceeded more than 90% of available cash in each of past five years. Superior units drop 25%
And this is why Income Trusts ran into trouble in the last two years, not because of the Federal government but the 'gold-rush' mentality to invest and get quick payouts encouraged by managers who were dipping into the till in these Trusts.

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