Income Trusts An Introduction

More of this feature • Oil and Gas Trusts • Energy Trusts Table • More to follow  Join The Discussion "The market for income trusts is heating up. Do you have any? What do you think of them?" Yours Truly Income Trusts - More • Income Trust Links  From Other Guides • REITs (Bonds Guide) • REITs (Stocks Guide)  Also On The Web • List of Canadian Trusts • Royalty Flush • Royalty Trusts & REITs • Royalty & Income Trusts • NCE Resources Group

Income trusts are becoming increasingly popular, especially the energy, oil and gas trusts. They have been consistently hitting new highs for the latter half of 2000 and into 2001. Part of the reason, no doubt, is that oil and gas prices have soared and so has the yield on many of these trusts.

But what exactly is an income trust? Simply put, an income trust is an investment syndicate that pools its money to buy a cash flow generating asset with the cash flow after expenses distributed back to the unit holders. The trust does not engage in exploration, development, construction or manufacturing. It focuses on ownership and management with a view to generating income.

There are many different kinds of income trusts, depending on what they invest in. There are oil and gas income trusts (sometimes called royalty trusts), real estate investment trusts (REITs), stock market sectoral investment trusts and many specialty trusts.

An example of the latter would be the ACS Freezers Income Trust (ACS.UN - TSE) which owns Atlas Cold Storage. It is Canada's largest and North America's fourth largest refrigerated warehousing company with 60% of its operations in the U.S. The purpose of the trust is to provide unitholders with steady income and the opportunity to participate in the growth of the company.

How, one might ask, is this different than a common stock? The difference is that the trust is not the company itself, but rather the owner of the company with the purpose of receiving and distributing the company's income.

A stock market trust may invest in a specific sector or group of stocks such as the Sixty Plus Income Trust which invests in the stocks making up the S&P/TSE 60. Or it could focus on debt issues such as the First Asia Income Trust (FAI.UN - TSE), which invests in debt securities in Australia, New Zealand and other selected Asian countries. Sometimes they are closed end mutual funds. And sometimes they invest in the redemption charges associated with certain mutual funds.

The distinguishing features of all income trusts are

• that they are closed-end funds and publicly traded on a stock exchange. In Canada, they all trade on the TSE with the suffix UN.
• they are focused on income distribution to unitholders

Real estate investment trusts invest in income producing properties and can be diversified - owning a variety of different properties, or focused - investing in office buildings, or shopping centers or hotels or apartment buildings. REITs afford individuals the opportunity to invest in commercial real estate that would be unaffordable individually. It also assures liquidity through stock market traded units, even though the large properties invested in might themselves be relatively illiquid.

Next we take a closer look at Oil and Gas Income Trusts.

Next page > Oil and Gas Income Trusts> Page 1, 2, 3

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