In This Issue
Welcome! Freehold Royalty Trust
Dear Member,
Section 1 - Welcome! Hi. Welcome to the Internet Wealth Builder, preview edition. I'm delighted that you've decided to join us, and I hope that you'll find this new electronic newsletter interesting, at times exciting, and, most important, profitable to you personally. If you do, please tell any interested friends and encourage them to become a member before the list is full. If the letter doesn't live up to your expectations, please tell me. My personal e-mail address is gp@gordonpape.com and I will try to answer communications from subscribers as quickly as possible. However, I will be away on holiday during the last two weeks of November so if there's an urgent matter, send the message to our circulation director, Kim (kim@gordonpape.com). This is the first test of the Internet Wealth Builder, in preparation for our formal launch on Dec. 2. I expect there will be at least one more preview issue before that time. Since you have received this transmission, it means that you are on the official subscription list. No other confirmation will be sent. Because we are still in the beta phase, we would appreciate hearing about any transmission problems you experience. Please send them to Kim at the above e-mail address. As I've been preparing for the launch of this letter, one huge advantage of this form of communication has become apparent. Right now, brokerage houses are awash with new issues of all types. Some are lousy, but a few look very promising. The problem is that the best ones are usually snapped up before the general public has a chance to hear about them. In some cases, the issue is very small, so broker allocations are tiny. If it appears to be a good deal, who do you think they'll call? Their best clients, of course. No one else will ever know. This letter will enable you to short-circuit that cosy arrangement. I will be keeping my eyes open for promising new issues, and advising you of them regularly. If you read about something you think sounds interesting, get on the phone to your broker the next day. Even if you're not on his/her favoured client list, the broker will have a hard time putting you off if the firm is involved in the underwriting and there is still supply available. This preview letter features one such new issue. I won't be tracking its performance because only a relatively small portion of our members will be seeing this. But if you think this offer may interest you, go ahead and make a call. Just be sure you understand the risks involved. The other article today deals with the Veronika Hirsch case and what you should do if you own units of the Fidelity True North Fund. Hope you enjoy this bonus issue. Cheers for now. Gordon Pape Section 2 - Freehold Royalty Trust Resource royalty trusts have become one of the investment world's hottest items over the past year. There are two good reasons for that: 1) They offer attractive income flows at a time when interest rates are falling like a stone. 2) Many of them have some terrific tax advantages. One of the resource royalty trusts I recommended in The MoneyLetter, Pengrowth Gas Income Fund, has increased in value by almost 27% in less than 18 months, while paying income of better than 10% annually based on the original recommended price - all of which was tax sheltered! There are a lot more stories like that. This is a hot area for investors. Now there's a new royalty trust issue available, one that I think has tremendous promise. I am buying some for myself and I have recommended it to other people in my family. It is not without risk - this isn't some exotic form of GIC. But if you're looking for tax-deferred income and capital gains potential, here it is. It's called the Freehold Royalty Trust. The history is colourful - the origins of this trust can be traced all the way back to 1670, when Charles II granted the Hudson's Bay Company the sole trade and commerce rights to huge chunks of land in western Canada. Over the years, the company retained the rights to about 4.5 million acres in the three prairie provinces. It is the mineral rights from those lands that form the basis of this trust. When you buy into Freehold, you are buying a stake in the royalty income from these lands. Most of this is generated by producing oil and gas wells, although there is a small amount of revenue from potash mining as well. This trust offers several advantages that similar royalty trusts don't have: 1) Ownership is held in perpetuity. There's no date when the rights revert to the Crown or anyone else. 2) Payments are based on a percentage of production. In most other trusts, they are a percentage of profits, which are clearly more vulnerable to changes in economic conditions. 3) All the mineral titles are owned directly by Freehold. In most other cases, the trust just owns a royalty right on the property. 4) Costs are very low. Freehold does not pay any operating costs or drilling costs. These are paid for by the companies working the sites. All these factors, and some others I don't have space for here, add up to potentially more distributable cash for unit holders. The illustration used by the promoter is that if Freehold receives $19.50 for a barrel of oil, distributable cash from that would be $18.75. For a conventional royalty trust, distributable cash from that amount would be about $8.50. Of course, Freehold takes that into account in the pricing of the units, which at $10 represent a substantial premium of about 70% over the actual valuation of the assets. So the price isn't cheap. Having said that, even at a $10 price the first year cash on cash distribution will be 9.75% to 10.75%, depending on the final size of the issue. And all distributions will be received on a tax sheltered basis until the year 2000, at least. That doesn't mean you won't ever have to pay tax. The complex tax arrangements for these trusts result in your cost base being adjusted downward for every penny of tax-sheltered income you receive. So if you receive a $1 distribution in 1997, your $10 original price will be reduced to $9 for purposes of calculating tax on any capital gain when you sell. Of course if you never sell, it won't matter. The risks involved include a possible decline in oil and gas prices, wells drying up (although the reserves here are unusually high), and the like. So just because you get 9.75% - 10.75% in year one doesn't mean you always will. Distributions could be higher in the future - but they could be lower too. Space doesn't permit me to provide all the details. If you're interested, call your broker and ask for a prospectus. Some of the houses involved in the distribution are RBC Dominion, Nesbitt Burns, CIBC Wood Gundy, Midland Walwyn, and TD Securities. Act fast. This deal is flying out the door. Allocations have been severely rationed. It's not something you can wait on. Remember that if you place an order now, you can always change your mind before the closing date (expected to be in early December). Section 3 - True North Fund Poor Veronika! I mean that sincerely. I think she's been hung out to dry for doing something that many other fund managers have done before. They just didn't get caught. That said, if the allegations in the media are true, she appears to have acted imprudently. It's just one more example of why we need a code of ethics for the industry. But all this is being dissected in the media. If you're a True North investor, your concern is what to do now. Fidelity has offered to redeem units without any sales charge until Nov. 13 (Wednesday). However, this may not be as good a deal as it sounds. I've already received a message from one subscriber who tried to take advantage of the offer through Green Line. They told him he could not sell his units without charge since their 90-day penalty rule was still in effect (this is a common rule with many discount brokers and no load fund companies who want to discourage quick flips). He would have to pay the penalty for getting out early, and he would not get back the 2% commission he had paid to acquire the units in September. When he called Fidelity, he was told there was nothing they could do since they count on their sales agents, like Green Line, to implement the policy. Needless to say, he was miffed - and still owns the fund. Anyone else had a similar experience? Of course, continuing to own True North won't be a disaster. The replacement manager is perfectly competent (as most Fidelity managers are). But he won't bring the flair that Hirsch has shown with her funds in the past. And he's based in Boston. One of the advantages of bringing Hirsch on board was that Fidelity, for the first time, was going to set up an all-Canadian research and investment team. No more! If you can get out of True North for free, I suggest you do it since this is no longer the fund you bought. You'll probably exit with a small profit, thanks to the recent market strength. If it's going to cost money to say goodbye, then hang in. See how Radlo (the new manager) performs. If things don't go well, you can always switch to another Fidelity fund (hopefully without charge). There are plenty of good ones. That's it for this week. Be back soon.