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VentureLink investors upset as fund shifts objectives

INVESTMENT FUNDS REPORTER

Investors who thought they had a money-back guarantee from a labour-sponsored investment fund are out of luck.

When Toronto-based venture capital firm VentureLink LP merged its VentureLink Balanced Fund with three others to create a larger fund in September, the rules governing the fund changed. Gone is an understanding that investors will get back at least their original investment by 2014; the goal of the fund is now long-term capital appreciation.

VentureLink argues the 100-per-cent capital-repayment feature was always an investment objective and not a guarantee, but the move has irked some investors who feel the fund is walking away from its original intention.

"I am upset they [VentureLink] are not keeping their word in the prospectus," said Michael Hill, a financial adviser with De Thomas Financial Corp., who owns units of VentureLink Balanced along with some clients. "It was also in all the marketing material [to advisers]."

In early 2000, VentureLink and other firms began selling a new breed of labour-sponsored fund that offered investors protection from losing money. To get the protection, investors typically needed to stay in the fund for several years beyond the eight-year holding period required to get federal and provincial tax credits.

The VentureLink funds were launched by Skylon Capital Corp., one of several investment firms founded by entrepreneur Gordon MacMillan. In 2003, the firm was acquired by CI Financial Corp., which later spun off the labour-sponsored funds to VentureLink, a newly created company.

In 2003, Mr. Hill invested in VentureLink Diversity Balanced Fund. Its prospectus said that, in 2014, holders of the fund "will receive a return of the capital attributed to the Class A shares of the Balanced Fund at the time of their issuance." That fund merged with another similar one in 2006 to create VentureLink Balanced, which kept the capital-repayment feature. After the September merger, that feature was dropped.

Mr. Hill, who has about a 30-per-cent paper loss on his $5,000-investment, argues that VentureLink should be bound by the previous prospectuses. But VentureLink managing director James Whitaker disputes the notion that the fund's investors have a right to get back their original investment back because the prospectus noted there were risks and a "speculative nature" to the companies in the portfolio.

The capital-repayment feature is also a moot point now that the investment objective has changed with unitholder approval in September, he said.

Mr. Hill did not take part in that unitholder vote because he figured that the capital-repayment feature would remain intact as it had during previous fund mergers. When unitholders voted, it was for a motion calling for "adoption of the investment objective of the amalgamated fund as described in the accompanying circular," he said. Even if investors plowed through the 116-page document, it does not explicitly state that investors would lose their right to get their original investment back, he said.

Dan Hallett, a fund analyst and director, asset management, at HighView Financial Group, said he never recommended the new breed of labour funds because they seemed to be a "marketing gimmick" compared with traditional labour funds.

Many of the funds, such as VentureLink Balanced, were riskier than conventional labour-sponsored funds because they invested in early-stage companies. That made a return-of-principal guarantee vital to attracting investors, he said.

"I can't imagine that anyone would have invested in those types of funds without expecting that, in the worse case, that they would get their money back."

VentureLink's decision contrasts with that of Covington Capital Corp., which plans to dip into its corporate coffers to help investors in its money-losing New Generation Biotech Balanced Fund, another labour-sponsored fund, get back their original capital next year.

"We take that objective seriously," said Covington managing partner Scott Clark. "We are willing to go as far as to forgive management fees to make it work."

© 2007 The Globe and Mail. All rights reserved.

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