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So far, Crocus fallout appears limited

Repercussions felt in Manitoba: survey


One-quarter of Manitobans would be reluctant to invest in labour-sponsored funds, a June survey of 1,002 investors in the province shows.

The survey by Winnipeg's Ensis Management Inc. shows 26 per cent were wary of the sector in Manitoba following the Crocus Investment Fund scandal.

Investors who were "sold Crocus got burnt and wouldn't touch the category. They were still in shock," said Bill Watchorn, president and chief executive officer of the seven-year-old Ensis, which commissioned the survey.

Ensis, now Manitoba's sole operating labour-sponsored fund, felt the pain acutely this past registered retirement savings plan season. Net sales to investors totalled $10-million, down 33 per cent from the $15-million raised in 2004.

Crocus was put into receivership last month by the Manitoba Securities Commission amid a flurry of investigations, including a criminal probe by the RCMP. The 15-year-old fund, once one of the largest labour-sponsored funds in Canada, had about 34,000 shareholders.

The immediate fallout from Crocus appears to be largely limited to Ensis. Labour-sponsored funds operate largely province by province and no other fund interviewed reported a rash of Crocus-fuelled inquiries.

Nevertheless, the fund debacle is another blow for an asset class that's struggling to gain respectability. Poor returns and weak demand from investors have left a deep crisis of confidence. "Performance is lagging, there is no question," said Dale Patterson, executive director of the Association of Labour Sponsored Investment Funds in Toronto. "From an industry perspective, it's a matter of us hunkering down and all of the funds looking at performance."

While mutual funds speculate on stock prices, labour-sponsored funds invest directly in early stage private companies. Investors are essentially buying a stake in a venture capital pool; risk is high and investment has a time frame that can last up to eight years.

A hefty tax break is a key incentive for investors. Federal and provincial tax incentives of 30 per cent helped push the asset class into the mainstream about 10 years ago.

Today, there are about 45 labour-sponsored funds in Canada, a number that balloons to more than 100 when fund clones and different classes are included. About 80 per cent of the asset class invests in high-tech companies. Since 2000, initial public offerings and deal making in the tech sector have dried up, a severe blow to the exit strategies of labour-sponsored fund managers.

"The returns . . . have traditionally not been very high so that's been a challenge," said Hakan Telenius, vice-president of Vancouver's B.C. Medical Innovations Fund. The fund is down about 5 per cent in value in 2005.

Investment flowing into venture capital has been on a steep decline since 2001. About $1.1-billion of new monies was sunk into retail funds last year, the bulk destined for labour-sponsored funds, reports financial research firm Thomson MacDonald. That's down from about $1.5-billion in 2003.

It's the rate of return -- rather than the Crocus scandal -- that dominates discussions with investors, fund executives said. Poor performance is causing a shakeup in the sector. Last year, the Ontario government placed a moratorium on new funds and amended legislation to permit fund mergers.

The asset class is cyclical in nature and "I would say we have turned the corner," said David Levi, president and chief executive officer of GrowthWorks Capital Ltd., a leading consolidator that operates in eight provinces, managing $850-million in four funds. "It's like gold or its like oil . . . If you pick a certain time frame, you will always find in a specialty fund there will be ups and downs. The tax break has mitigated that cyclical risk," Mr. Levi said, adding that more and more Canadian tech firms with fund partners are attracting interest from U.S. venture capital firms.

Indeed, there are signs the sector is on the rebound. On June 22, the VenGrowth Traditional Industries Fund unloaded its $9-million stake in Lakeport Brewing Corp. for more than $20-million, an 18-month gain of about 120 per cent.

"We have done a vastly superior job protecting shareholder value in a pretty difficult market niche," said David Ferguson, managing general partner of VenGrowth Capital Partners Inc. of Toronto.

For example, the tech-heavy VenGrowth II Investment Fund Inc. has lost about 3 per cent annually since inception in 2000, less than the tech indexes of Nasdaq Stock Market or Toronto Stock Exchange.

Nevertheless, labour-sponsored funds have some tough slogging ahead. Dan Hallett, an independent fund analyst, urges investors to approach the asset class with skepticism and hard questions. In a post-Crocus world, he expects savvy financial advisers will be asking labour-sponsored funds for greater disclosure, especially the value of specific assets in their portfolio.

Ensis welcomes due diligence. Manitoba investors who know and understand the fund have stuck with it, Mr. Watchorn said. The firm's survey found 43 per cent of Manitobans think Crocus had company-specific problems. "Half the people believe it's a management issue and we shouldn't be clobbered with the same stick," he said.

Labour fund woes

Ensis Management president and Ceo Bill Watchorn commissioned a survey that shows many Manitobians are wary of the labour-sponsored fund category since the Crocus fund scandal. A heavy weighting in the depressed technology and biotech sectors has meant dismal returns in recent years for Canada's largest labour-sponsored funds.

Net assets ($million)1-year return3-year return5-year return
VenGrowth II Investment Fund$487.40-2.3%- 5.7%-3.7%
VenGrowth I Investment Fund289.9- 11.1- 9.7- 12.6
Canadian Medical Discoveries253.8- 17.4- 6.5- 7.0
VenGrowth Advanced Life Sciences214.5+5.5+0.6--
Covington Fund II127.6- 4.6- 6.5- 5.1
Ensis Growth Fund 105.5- 2.4- 1.4- 1.8
Triax Growth-I79.8- 5.5- 14.5- 23.6
Covington Fund I76.9- 0.5- 6.1- 14.6
New Generation Biotech Equity-I69.2-6.1-1.2--
VentureLink Financial Serv. Innov. I60.2+1.6+3.0--


© 2007 The Globe and Mail. All rights reserved.

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