Unitholders in struggling Canadian Medical Discoveries Fund, which suspended redemptions last June, will vote on merging with GrowthWorks Canadian Fund on Feb. 26.
But unitholders, who have been in the life sciences venture capital fund for the required eight-year holding period, won't be able to redeem all their money without a penalty right after the proposed merger.
An information circular will be mailed to unitholders of Canadian Medical Discoveries next week. They will be able to redeem up to 45 per cent of their monies in two years, but must leave the rest in the GrowthWorks fund for three years.
"If we don't effect this merger, they [unitholders] won't be able to redeem their shares in any case for some prolonged time, and nobody knew what that was," David Levi, president and chief executive officer of Vancouver-based GrowthWorks Ltd., said yesterday. "What their directors have opted for is certainty rather than uncertainty."
The $110-million Canadian Medical Discoveries Fund halted redemptions because it would not have the cash to give back to investors who want to redeem because their investments are in illiquid, private securities that are difficult to sell in the current market, Mr. Levi said.
If their investments were sold, it would have to be done at a "substantial discount," but the problem was that close to 75 per cent of the money was eligible for redemptions by this March, he added.
Retail venture capital funds, better known as labour-sponsored investment funds, require an eight-year hold period to keep their juicy tax credits. Ottawa provides a 15-per-cent tax credit, and participating provinces currently add at least another 15 per cent.
Mr. Levi said unitholders of Canadian Medical Discoveries now can benefit from being in a more diversified fund with a stronger track record. Unitholders of GrowthWorks Canadian would benefit because its goal has been to increase its life science investments to about 30 per cent from the current 11 per cent.
If the merger is completed by the end of April, the GrowthWorks fund will have about $550-million in assets. Investors who redeem early would pay a penalty equal to 35 per cent of the net asset value of the merger shares.
Canadian Medical Discoveries, which was launched in 1994 and caught investors' attention when biotechnology stocks were hot, has posted dismal returns. It has had an average annual loss of 5.6 per cent since inception. Although management of the fund has gone through several hands, it is now run by Toronto-based JovFunds Management Inc.
Steve Hawkins, president and CEO of Canadian Medical Discoveries, said the Ontario government's decision in 2005 to reduce tax credits for retail venture capital funds has reduced sales so that redemptions must be funded by exiting investments.
Ontario plans to chop its tax credit to 10 per cent by 2011, and 5 per cent by 2012.
"The current market in the biotechnology venture industry hasn't provided sufficient liquidity and exits of our investments so that we have the necessary cash and reserves on hand to fund redemptions," Mr. Hawkins said.
Independent fund analyst Dan Hallett said the unitholders in Canadian Medical Discoveries are caught "between a rock and hard place."
It's a bad time to try to exit investments in the hard-hit biotechnology sector, but "the silver lining is that they are not stuck in the fund any more," Mr. Hallett said. "There is some safety in size, and that is why I think so many funds have gone to GrowthWorks."
Cdn. Medical Discoveries to merge with GrowthWorks Canadian
GrowthWorks Canadian was formerly Working Ventures Canadian Fund. GrowthWorks Canadian also has different series of funds whereby 30 per cent of the assets can be invested in different securities ranging from treasury bills to financial and resource stocks.
|Fund||Assets* ($million)||MER||Returns* 1-year||Returns* 3-year||Returns* 5-year||Returns* Inception|
|Cdn. Medical Discoveries series I||$115.7||5.6%||- 21.3%||- 17.4%||- 7.9%||- 5.6%|
|Cdn. Medical Discoveries series II||$0.8||7.3%||- 22.5%||-||-||- 20.7%|
|GrowthWorks Cdn.||$181.9||5.5%||- 6.2%||- 1.2%||- 3.7%||- 0.2%|
|GrowthWorks Cdn. Balanced I||$4.2||8.2%||- 6.6%||- 1.6%||-||1.7%|
|GrowthWorks Cdn. Financial I||$1.7||-||- 16.5%||- 4.4%||-||1.0%|
|GrowthWorks Cdn. Growth I||$7.5||8.1%||- 17.3%||- 3.5%||-||1.7%|
|GrowthWorks Cdn. Income I||$2.6||7.8%||- 14.2%||- 4.6%||-||1.7%|
|GrowthWorks Cdn. Resource I||$1.9||-||- 12.8%||- 3.2%||-||2.5%|
*As of Dec. 31
Sample of fund
THE GLOBE AND MAIL
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