Archive for the 'Finance' Category

The Tarik.ca Capped Global Renewable Power Generation Index™, is a capitalization-weighted equity benchmark. The index tracks the performance of Global Utilities and Independent Power Producers (IPP) who generate greater than 50% of their electricity production from Hydro-Electric, Wind, Geothermal and Solar Power. Component companies are not adjusted for available float. Index components are capped at a maximum of 20% of the index.

The Tarik.ca Capped Global Renewable Power Generation Index™ is unique and the first of it’s kind.

Unlike all of the new wind, solar and clean energy ETFs. The index does not hold industrial companies involved in the construction of solar wafer, wind turbines and gear boxes. The Tarik.ca Capped Global Renewable Power Generation in contrast is a pure play on a secular growth in renewable power generation.

Strong Coal and Natural Gas costs will continue to put upward pressure on spot electricity prices globally as fossil fuels continue to generate 65% of global electricity supplies. Because Wind and Hydro electricity have high fixed costs and very low variable costs the index is also poised to benefit from a secular increase in electricity prices as margins expand while most Utilities will experience flat or declining margins.

The maturing of large conventional oil fields will continue to pose a challenge to the world’s liquid fuel needs. In light of recent breakthroughs in battery and electric engine technologies, Electric Vehicles and Compressed Natural Gas Vehicles (CNG) will grow to become an ever larger portion of the global vehicle fleet. This will put even more pressure on electricity prices in the future as costs of convention electricity increases, while the demand for electricity grows significantly.

Index Constituents (% Weighting) : Click below to Enlarge

Question

I would be interested in what you think of preferred shares currently – the yields are very high! My concern is about inflation in the longer term and higher interest rates. In your article you mentioned the “large risk” of the shares never being redeemed. I would be interested in your opinion on that risk today?

Thanks,
Sharron

Answer

Hello,

Because preferred shares (most of the time) are structured as perpetuals there is no obligation for the corporation issuing preferred shares to redeem them in the future.

If we ever enter a secular bull market in interest rates, preferred shares will be hit the hardest out of all debt-based instruments, due to the fact that they have an infinite maturity date (Hence they have to be re-discounted to infinity).

Consider the following example: From the highs in the late 1960’s to the lows in January 1980, long term corporate bonds fell by over 60% as interest rates rose from 3% to 18%. As the prices and yields of preferred shares closely follow long-term corporate bonds, we should expect preferred shares to perform similarly to long-term corporate bonds in the future.

In such a scenario, preferred shares would be hit even harder than long-term corporate bonds because there would be no intensive for firms to redeem preferred shares, as they would have to roll over the debt to higher interest rates.  This will cause the Present Value of principal amount of the share to go to zero, unlike bonds.

If your goal is to protect your money while investing in preferred shares, you should look into floating cumulative preferred shares of Investment Grade companies, these preferred shares will move with interest rates, hence protecting your initial principal of your investment.  While you might be getting a smaller yield, your principal is better protected whether we enter a deflationary of inflationary environment.

Go to http://www.prefinfo.com/
Search for “Floating” Preferred shares which and you will find a couple dozens of them. Note most listed floating preferred shares are currently not floating but have dates in the future where they will start floating.

Cheers,
Tarik

Coinciding with the recent release of new Beta-Pro ETFs I have updated the Canadian ETF Sheet to include these new leveraged ETFs which track the MSCI Emerging Market Index, S&P 500 Index, Nasdaq 100 Index, 30 year US Bond, USD Index.

The Tarik.ca Canadian ETF Sheet lists all the Exchange Traded Funds which currently trade on the Toronto Stock Exchange (excluding funds of funds) including plain vanilla equity funds, fixed income products and leveraged ETF’s.

Click to download the Tarik.ca Canadian ETF Sheet

Question
“Can trusts go broke or dissipate or do they go on for years like General Electric ?”

Answer
Income Trusts are businesses just like any other vanilla corporation. And like any other business, they can go broke or dissipate, however this is rare occurrence. Income Trusts were created to avoid the double taxation system, wherein the same corporate income is taxed twice, once at the corporate and once at the shareholder’s level. Income Trusts do not pay taxes at the corporate level but instead taxes are levied on the unitholders income from the company. In order to attain this tax status, income trusts must pay out a majority of their cash flow in order to maintain their trust status.

Income Trusts are as safe as their underling business. In order to be able to pay their large distributions, (which are 9% on average) Income Trusts typically operate in mature and stable industries which deliver strong and consistent cash flows.

However, there are some disadvantages as well to the income trust model. Unlike a regular corporation, earnings are not reinvested into the business. For unitholders this translates into lower opportunities for future growth and ultimately capital gains, with most gains coming from distribution income.

In Canada the average Oil & Gas Income Trust sits on 11 years of reserves. If the average Oil & Gas Trust did not expand reserves they would have to dissolve in a decade. Hence the average Oil & Gas trust spends about 20% of cash flow on capex (Capital Expenditures) for exploration and development, allowing the trust to achieve modest growth in production over the long term. In contrast a company like CI Financial Income Trust (A well established asset management firm) has a very small capex (Capital Expenditures) requirement and can grow organically as assets under management grows with time.

Because distributions are the main attraction to trusts, distribution stability and safety should be an investor’s principal concern. Trusts which cut their distributions have their share often plunge. Hence commodity producing companies are usually considered the “riskiest” of all trusts as commodity price fluctuations can put them in a situation where they might cut their distributions. This is also reflected in the DBRS’s (Dominion Bond Rating Service) policy of always rating commodity trusts lower than their non-commodity peers.

In order to avoid being stuck in a situation where a trust cuts their distribution one should look at the distribution payout ratio. As a rule of thumbs one should not invest in a commodity based Income Trust with a payout greater than 75% and one should not invest in a business/real estate trust with a payout greater than 95%. One should also screen for businesses with a high profitability as indicated with an ROE (Return on Equity) greater than 15%. And since cash flow is king one should look for stability and predictability in the cash flow statement in recent years.

Ultimately, when investing in Income Trusts one should expect small capital gains of 0 to 2% yearly on top of the 9% distribution yield yearly as income is paid out instead of being aggressively reinvested in the business. For these reasons Income Trusts have historically been a great retirement vehicle by providing current income with growth potential. Unfortunately the Canadian Government’s decision to start taxing trusts in 2011 will ultimately result in many trusts converting to corporations in 2011. Since this news has already been priced in, this development poses no threat to investors and is instead an opportunity to pick up great businesses at fair prices.

Since Dec 18th, 2007, the Tarik.ca Fundamentals Canadian Equity Fund has returned 26.89 %

The Performance of Market Indices since inception:

S&P/TSX Composite Index : 12.80 %
S&P/TSX SmallCap Index : 7.57 %
S&P/TSX Income Trust Index : 20.83%
Dow Jones Industrial (USD) : -1.28%
Nasdaq (USD) : -1.41 %
FTSE All World ex-US (USD) : 1.83 %

The Tarik.ca Canadian Fundamental Fund has preformed remarkably well since inception on December 18th 2007. These are some of the significant highlights

ARC Energy Trust has increased distributions by 20%, making it the only Natural Gas weighted trust to increase distribution since late 2006.
Canadian Oil Sands Trust has increased distributions twice since December, up a total 50%, due to it’s unhedged exposure to crude oil.
Royal Utilities a Saskatchewan coal producer was bough out at a 25% premium, by Sherritt.
Potash Corp of Saskatchewan has experienced strong performance due to strong potash prices.
Macquarie Power & Infrastucture and Great Lakes Hydro are experiencing strong water flow in their Hydro facilities and strong cash flow.
Capvest the closed end fund, has preformed very well as the discount to NAV has shrunk while the underlining NAV has performed well as income trusts have outperformed the TSX Index.
Fording Coal Trust has performed extremely well as metallurgical coal prices have doubled in the last year as global steel production grow at above trend and as mine disruptions have been experienced in China and Australia.

Tarik.ca Canadian Equity Fund : Performance Graph (As of May 8, 2008)
Click below to enlarge

Tarik.ca Canadian Equity Fund : Investment Weightings (As of May 8, 2008)
Click below to enlarge