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ROI finds stability in high-risk labour funds

Firm's investments in established businesses produce surprising returns in troubled sector, KEITH DAMSELL writes


ROI Management Ltd. hopes to inject some new life into the ailing labour-sponsored funds (LSF) sector.

The three-year-old Toronto company's mezzanine financing strategy is trying to shake off the asset class's bad rap of weak returns and high risk.

"All of the criticism of the asset class is actually strengthening our story," said Fernando Cipriano, ROI's chief operating officer and co-founder. "You have had investors whose sole objective is to earn a tax credit, yet the underlying investments were taking big risks."

LSFs have had a tough time of late. A hefty weighting in science and tech startups have meant weak returns and the Ontario government has served notice it will kill its tax credit in 2011. Meanwhile in Winnipeg, the assets of the troubled Crocus Investment Fund are slated to be sold off to the higher bidder.

LSFs "have been in demand from a lot of investors probably for the wrong reasons," said Adrian Mastracci, a Vancouver financial adviser. "If I strip away a lot of the tax stuff would I still buy this thing? The trouble is too many of them fail that first test for me."

ROI argues its approach mitigates many of the risks associated with typical LSFs. First, it invests in mature businesses and uses debt rather than equity to provide greater liquidity. An ROI loan is similar in structure to a mortgage, said John Sterling, co-founder and chief executive officer.

"The real big advantage is there is downside protection. We are structuring our investments as loans. Loans come with security. If things happen to go badly, we have some recourse," he said.

Investments are made in well-established companies with existing bank relationships. To date, ROI has made a total of 12 investments in Ontario. The bulk of companies have a 20-year history with revenue of $10-million to $20-million.

The $69.2-million Return on Innovation Fund has returned about 1.24 per cent since its inception, an above-average gain for the tough asset class. Fund investors receive a hefty 30-per-cent tax break but must own the fund for eight years.

Early indications are the ROI strategy is working. The company has exited two investments with a handsome return. The board of directors is scheduled to soon debate the merits of a dividend for ROI's 13,000 unit holders, income distribution that's unheard of in the LSF sector. Assets under management are expected to surpass $100-million after next registered retirement savings plan season.

IFIC names new president

The Investment Funds Institute of Canada is expected to name its new president and chief executive officer today.

The fund association's board of directors will meet at noon and is expected to give the thumbs up to the winning candidate. IFIC's selection committee narrowed the prospective list of candidates to three earlier this month -- reportedly an accountant, a regulatory executive and a fund industry veteran -- and picked their favourite only last week.

The new CEO will be burning the midnight oil in the months to come. In September, IFIC's new chairwoman Brenda Vince detailed an ambitious agenda, including a review of the troubled group's mandate, membership and regulatory environment.

Tom Hockin, IFIC's outgoing president and CEO, announced his plans to retire in April this year.

Saxons makes cut to fees

Saxon Funds Management Ltd. is trimming its management fees, the latest fund company to cut the expenses paid by unit holders.

Effective Dec. 1, the annual management fee of the Saxon Money Market Fund will fall from 0.64 per cent to 0.54 per cent. Fees of the Saxon Bond Fund will slip from 1.23 per cent to 0.95 per cent.

The cuts put the Saxon funds well below the industry's average management expense ratios (MER) for the two fund classes. Co-operators General Insurance Co. has the dubious distinction of the highest fees in both asset classes: 3.26 per cent for its bond fund and 2.56 per cent for its money market fund.

Increasing awareness of fund fees has prompted a number of fund companies to trim costs paid by the investor. Companies that have recently cut MERs or plan to cut MERs include CI Fund Management Inc., AGF Management Ltd. and Fidelity Investments Canada Ltd.

© 2007 The Globe and Mail. All rights reserved.

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