Be wary of exchange offers

Zoomer | January 1st, 2006

Several people have asked about a recent offer from EnerVest Diversified Income Trust (EIT.UN) to exchange shares in certain royalty trusts for their units.

EverVest and similar operations make offers like this periodically. We generally don’t recommend them.

What company claims
EnerVest claims that the advantages of taking their offer include the following:

  • Greater diversification and hence lower risk.

This is true. You are trading your units in a specific trust for units in a portfolio that includes many trusts. It’s like buying units in an income trusts mutual fund.

Of course, you can do that directly if you want to. There are all kinds of them available. There’s nothing unique about EnerVest in that regard.

  • High yield.

EnerVest says it manages the trust so as to maximize yield. All trusts are managed that way. Whether you will get a higher yield from EnerVest than from the units you are holding depends on what you have now.

  • Experienced fund management.

Sure, EnerVest has that. It doesn’t mean their managers are better than the onesunning the trust you now own. Also, remember that in EnerVest’s case, we’re talking about portfolio managers, not operating managers, as you have with the royalty trusts. So it’s an apples and oranges comparison.

  • Enhanced liquidity.

A questionable benefit. There is nothing wrong with the liquidity of any of the widely-held trusts.

  • No direct cost or commission.

EnerVest makes a big deal out of the fact it won’t cost you anything to switch to them. That’s true. But you’ll still pay a sales commission when you sell your EnerVest units into the market, just as you will with any other trust.

Look at downside
On the down side, there’s an additional layer of costs. The EnerVest portfolio (and other funds like it) holds shares in many trusts, each of which charges its own management fees. On top of that, you’ll be paying EnerVest’s managers as well.

As I said, we’ve looked at these swap offers several times. We’ve yet to find any compelling reason to take them.