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Labour-sponsored funds: A look beyond the tax credits

swon@globeandmail.com

What are we looking for?

How retail venture capital funds - better known as labour-sponsored investment funds - have fared. Investors typically get both federal and provincial tax credits but must stay in the fund for eight years.

The search

We screened retail venture capital funds with an eight-year track record to Sept. 30 to see which ones made investors money beyond tax credits. Duplicate versions of the funds were excluded.

What did we find?

Only six out of 17 funds emerged in the black.

Covington Venture Fund IV (also known as New Millennium Venture Fund - Balanced) posted the best return with an average annual gain of 7.6 per cent. The wrinkle to this play is that only half of its assets were in venture investments. The balance was in a zero-coupon bond.

This fund, which is closed to new investors, has outperformed its peers largely because of a fortuitous investment in software maker PlateSpin Ltd., which was bought in 2008 by Novell Inc. "That is the fundamental holding which drove the returns," said Scott Clark, managing director of Covington Capital Corp.

Covington acquired that fund from Triax Capital Management in 2005. Covington also did a deal recently to acquire five struggling funds run by Vengrowth Asset Management Inc. All will be merged with its Covington Fund II, including three that have lost between 7.8 per cent and 14 per cent annually over eight years.

Front Street Energy Growth Fund came second with an average annual gain of 6.6 per cent. Unlike most peers, it can invest anywhere in Canada rather than being limited to a particular province, but its investors only get federal tax credits. The fund invests in emerging energy companies through private placements, and three-quarters of them are public.

Laricina Energy Ltd., a private company that is expected to go public in the next two years, and publicly traded stocks such as Whitecap Resources Inc., Wild Stream Exploration Inc. and Midway Energy Ltd. have been contributors to performance, said manager Normand Lamarche of Front Street Capital Corp. "I own the four companies in my other funds because I like the companies. So it's smart for clients to get a little bit of tax credit at the same time while getting exposure to similar names."

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HOW RETAIL VENTURE CAPITAL FUNDS HAVE FARED OVER EIGHT YEARS

Latest(Sept. 30)Sept. 30 2010Sept. 3020092008200720062005200420032002
Fund nameMERAssets ($-mil)8-yr % rtnYTD % rtn% rtn% rtn% rtn% rtn% rtn% rtn% rtn% rtn
Covington Venture Fund IV-New Mille4.287.07.5912.593.3639.825.274.010.430.07-0.77-0.30
Front Street Energy Gwth Fund Ser-I7.1943.46.5822.718.79-41.26-13.507.9029.4025.0618.09N/A
SaskWorks Venture Fund Inc.5.03153.13.762.402.928.2613.012.67-1.080.142.13-0.84
Golden Opportunities Fund Inc.4.4160.01.472.79-1.37-10.528.390.374.474.674.630.51
Dynamic Venture Opport Series I3.99106.31.320.2722.03-28.90-6.5221.753.99-3.3212.73-7.22
Covington Fund II5.7365.00.28-3.5728.64-6.34-10.952.018.45-6.69-1.30-15.87
Working Opportunity Growth Ser 12.5629.9-1.260.742.11-16.06-1.2510.48-1.09-3.0411.83-30.31
GrowthWorks Canadian5.574.9-2.26-11.12-11.89-6.17-0.192.915.965.864.35-22.52
ENSIS Growth Fund Inc.4.9545.8-3.60-13.07-13.8514.222.15-7.48-3.82-2.521.33-6.24
Working Opportunity Balanced Ser 12.6365.5-3.711.03-4.10-6.23-2.843.47-7.75-6.444.70-22.93
Advantage Venture5.18N/A-5.59-17.418.22-24.098.39-5.92-8.800.000.00N/A
Lawrence Enterprise I6.4N/A-7.644.98-21.17-25.548.24-13.95-9.43-5.371.562.60
VenGrowth Adv Life Sciences ClA SrA5.51N/A-7.75-29.95-13.23-7.50-6.59-0.511.351.16-1.04N/A
VenGrowth Invst Fund Inc. Cl A SrE4.17N/A-9.2638.26-32.11-36.95-9.576.06-3.94-10.49-2.90-16.46
New Generation Biotech Equity-I7.18N/A-10.03-34.36-7.59-10.66-5.06-20.02-5.75-3.0713.36-16.24
VenGrowth II Investment Fund Inc.4.79N/A-14.03-28.18-22.04-24.12-12.60-2.38-3.98-5.14-8.28-4.89
Axis Investment Funds Inc. Ser. I6.780.4-34.02-74.45-55.08-61.05-18.52-13.03-5.96-5.621.97N/A
BMO Nesbitt Burns Cdn Small Cap Index13.2715.6875.10-46.612.0116.6419.6814.1242.74-0.93
NASDAQ Composite ($ Cdn)3.462.7122.97-26.31-6.899.46-1.801.1322.73-32.09
Source: Globe Investors, companies

© 2007 The Globe and Mail. All rights reserved.

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