Labour-sponsored venture capital funds

[uhoh]

From Globe June 20:

http://www.globefund.com/servlet/story/ ... GFWIStory/

I have a few left - they were "sold" to us and I am not sure of the implications now if I were to sell them (one 6 mos early, the other 18 mos early)? Seems to me from this article that either you pay to get out while there's still a bit of value, or you pay if you wait when the herds cash out at the date they are due?

How would I figure out what the best path would be? I know at the time we were grateful for the tax credit - it came at a good time in our business life - I guess we lose all that if we sell early?

thanks...

[brucecohen]

I guess we lose all that if we sell early?

Yes.

[smelly]

1) The "scheduled" reduction/elimination of Ontario's credits is far enough off to likely to be forgotten by the government of the day.
2) If you believe they will recover, hang onto them. If you don't, sell. Pretty simple, no?

[uhoh]

2) If you believe they will recover, hang onto them. If you don't, sell. Pretty simple, no?

No. I don't think so. Not if we lose the tax credit. I have no clue what that amounted to or what years these were purchased. We are no longer with the original broker - that was two brokers ago. So no, I don't think it's simple. Bruce's answer OTOH seems clear to me

[smelly]

I have no clue what that amounted to or what years these were purchased. We are no longer with the original broker - that was two brokers ago.

I'll try to say this as nicely as possible. Unless you have recently become a DIY (after the original broker), it sounds to me that based on your lack of information you should reconsider DIY and perhaps rely on the advice of a professional.

You asked two questions:

Would you pay back the tax credits if you sold now, and;

How do you figure out what the best path would be in terms of selling now or holding?

Bruce answered the first question (BTW you pay a DSC too) but not the second one. I answered the second one but not the first one because it was already answered. So like I said, as far as the question of what to do, it's a simple decision. One that a DIY should be able to make and one that a professional should be able to advise you on.

[smelly]

BTW, recent history on the tax credits is that they were 40% on a maximum purchase of $5,000 up to March '96 when it dropped to 30% on a max of $3,500, back up to a max of $5,000 but still 30% a year later. Check your tax returns for the amount purchased and tax credits applied for (on the return and/or the tax credit slip you received). Verify you received the credits by checking your NOA (NOA will only mention the Prov credit so multiply by 2 for you total credit).

[uhoh]

I have no clue what that amounted to or what years these were purchased. We are no longer with the original broker - that was two brokers ago.

I'll try to say this as nicely as possible. Unless you have recently become a DIY (after the original broker), it sounds to me that based on your lack of information you should reconsider DIY and perhaps rely on the advice of a professional.

Thank you for taking care to say it so nicely. I switched to DIY just over 4 months ago. The venture funds were two brokers ago (she retired and passed me on to someone else).

You asked two questions:

Would you pay back the tax credits if you sold now, and;

How do you figure out what the best path would be in terms of selling now or holding?

Bruce answered the first question (BTW you pay a DSC too) but not the second one. I answered the second one but not the first one because it was already answered. So like I said, as far as the question of what to do, it's a simple decision. One that a DIY should be able to make and one that a professional should be able to advise you on.

Ok, thank you.

[DavidR]

Got a letter today re Covington Fund 1 - they are winding up the fund. No more purchase or redemption requests will be accepted. Windup to take 18-24 months and capital returned to the shareholders at completion of wind up.

Good new here though: "Regardless of when you purchased shares of the Fund, you will not be subject to any tax clawbacks. This means that all investors will be able to keep the tax credit benefits they received upon purchase."

I think I had about 2 yrs to go for my 8 year hold. Worried whether there would be anything left in 2 yrs if everyone rushed for the exits. Wondered briefly whether I should bite the bullet and cash out early.

So I guess it is good news that there will be an orderly windup, and no tax credit 'penalties' to boot.

David

[uhoh]

Got a letter today re Covington Fund 1 - they are winding up the fund. No more purchase or redemption requests will be accepted. Windup to take 18-24 months and capital returned to the shareholders at completion of wind up.

Good new here though: "Regardless of when you purchased shares of the Fund, you will not be subject to any tax clawbacks. This means that all investors will be able to keep the tax credit benefits they received upon purchase."

I think I had about 2 yrs to go for my 8 year hold. Worried whether there would be anything left in 2 yrs if everyone rushed for the exits. Wondered briefly whether I should bite the bullet and cash out early.

So I guess it is good news that there will be an orderly windup, and no tax credit 'penalties' to boot.

David

thank you for posting this - I too had 2 more years to go - however from the sounds of it, it could be 24 months until it's done, and it's only then that they will be giving out the cash.

[brucecohen]

From advisor.ca

Covington wind-up questioned
October 25, 2006 | Mark Brown

Covington Group of Funds once described its Covington Fund I as being "the most mature, stable LSIF in Canada." But as the fund begins an orderly wind-up of operations, most investors who held the labour-sponsored investment fund might question that description.

An analysis of the fund shows that if not for the 30% worth of federal and provincial tax credits that reduced the net cost of the investment, a majority of investors would not have made any money off Covington Fund I.

Still, if the fund hasn't wowed investors during its 11-year run, Covington Group of Funds hopes it can in its wind-up. Covington Fund I is the first LSIF to wind up operations. [I assume he means voluntarily]

"In that respect, we are leaders in the asset class and we've come up with what we really feel is a strong solution on how to wind up the fund and return capital to shareholders," says Fiona Robertson, Covington's vice-president of marketing communications.

In June, Covington announced its decision to wind up the fund by selling its private venture portfolio holdings to Toronto-based Birch Hill Equity Partners for $41 million. The firm will sell off the fund's public holdings at current market prices.

If everything goes as planned, shareholders should receive $7.14 to $7.20 per share by May 2007. The current NAV of the fund is about $7.40.

Covington Fund I invested in venture capital, and it is known that such funds at have a finite lifespan, says Robertson. The LSIF wrapper doesn't change that, she adds.

The decision to wind down the fund primarily responds to most shareholders' eligibility to redeem their units. Covington also wasn't making any new investments in the fund.

Chip Vallis, CEO of Covington Capital Corp. and manager of Covington Fund I, said in June that the fund had reached the end of its lifecycle. "The maturity of the portfolio, coupled with the strong position of a number of investments in the portfolio, makes this the optimal time to execute our wind-up strategy."

Fund analyst Dan Hallett of Dan Hallett & Associates, however, doesn't buy Covington's explanation. "Clearly this is more of a forced wind-up," he writes in a recent research bulletin.

Hallett also isn't overly impressed by the price Covington is getting for its private assets. "The sale price of $41 million is 4% below Covington I's carrying value and 7% above its cost," he writes. "The portfolio's age of 11 years makes the sale price seem quite modest relative to what investors and advisors expect from one of the better LSIF managers."

He adds: "This deal does not instill a great deal of confidence in the asset class."

The phase-out of the Ontario tax credit for LISF has been suggested as another factor decreasing confidence in LSIFs, but Robertson thinks that was less of an issue with Covington Fund I.

The performance of this fund hasn't been anything to get excited about. According to Globefund, the Covington Fund I has lost almost 4% in the past 10 years. The loss in the last five years is even greater, down about 9%. Since inception, the fund has lost about 2.5%. These are hardly the returns investors likely expected from an investment that aimed to provide long-term capital appreciation.

Indeed, the fund's heady days were between 1999 and 2001, although few investors would have enjoyed those gains, as few made redemptions through this period.

According to the fund's 2001 annual report, 1.5 million of the more than 14 million outstanding units were redeemed in 2001 for approximately $17 million. In 2000, which was Covington Fund I's best performing year, less than 400,000 units were redeemed for approximately $4 million.

Perhaps investors can't be faulted for holding on to their units. By 1999, the fund was a mere four years old. Investors who tried to sell their position in the fund within eight years of the date of issue were charged an early redemption fee. As such, the earliest investors would have been able to redeem their units without penalty would have been 2003.

Unfortunately, by 2002 almost all of the gains in the fund had been wiped out as the unit's NAV slipped from $20.39 in 2000 down to $11.30.

Investors can take solace knowing that the wind-up of the fund will likely minimize transaction costs and avoid tax credit clawbacks.

The new Ontario LSIF provisions introduced last November to phase out the 15% tax credit for these investment vehicles also contained provisions permitting LSIFs to wind up without triggering any clawbacks, writes Hallett in a recent research bulletin.

He adds the federal credits shouldn't pose much of a problem either. On October 17, Covington I applied to have its status as an LSIF under the federal Income Tax Act voluntarily revoked. "That way," Hallett notes, "upon wind-up, it would no longer be a federal LSIF and, as such, should not be subject to tax credit clawbacks."

The issue of tax credit clawbacks affects only investors who purchased the fund when it was reopened, specifically, those purchasing between February 2005 and June 16, 2006. If the federal government doesn't revoke Covington Fund I's status as an LSIF, Robertson says the company will investigate other options to try to ensure their clients' returns are not eroded by clawbacks.

[DavidR]

Got a letter today re Covington Fund 1 - they are winding up the fund.

Got some Money today from Covington Fund - my RBCDI account showed a "sale" of just less than 75% of my Covington I units. This appears to be the first of two or more Liquidating distributions.
Will wonders never cease. David

[uhoh]

Got a letter today re Covington Fund 1 - they are winding up the fund.

Got some Money today from Covington Fund - my RBCDI account showed a "sale" of just less than 75% of my Covington I units. This appears to be the first of two or more Liquidating distributions.
Will wonders never cease. David

ahhhh I've been wondering about this - I've not received anything yet. Maybe it's on the way

[mikester]

I just noticed this thread today because of a new post.

This isn't exactly on topic but yesterday I tried to roughly calculate how much my investment in LSIFs would be worth today had I forsaken the "magic" tax credits and just invested in a plain old Canadian equity fund.

My total investments from I think 1996 to 2000 were $15,500 - now worth $5426. By my rough calculation had I invested in a normal fund I would have purchased $10,300 worth of units over five years. I arbitrarily picked a Canadian fund I used to own and concluded that my investment would be worth around $25k.

Some lessons have to be learned the hard way I guess.

[adrian2]

Lately, I've seen a lot of ads for the Canadian Medical Discoveries Fund, so I've thought it might be time to revisit the possibility of making an investment.

I had a look at the annual report.

How can things go so horribly wrong, consistently? After all, it should be comparable with a micro-cap growth fund, with a higher expected gross return than the large caps.

The MER is bad enough, between 4% and 5%, but actually not so bad for the LSIF sector.

Annual compounded returns (ending Aug. 2006):

Code: Select all

          1 year  3 year  5 year  10 year
CMDF      -13.5%  -12.6%   -9.6%   -3.3%
LSIF avg.  -0.9%    0.2%   -4.0%    0.5%

The much trumpeted changes in manager and objectives include a switch from 15% cash to a target of 40% cash. Pay 5% MER for 40% in cash - I guess it will bring the negative returns closer to zero.

Again, my lingering question is "How can things go so horribly wrong, consistently?". Are these guys retarded / always unlucky / crooks / overpaying their buddies in private placements / what ?

[Scanman]

Hard to believe 8 yrs have past but they have and my wife and I were finally able to sell our LSIFs (turkeys) without penalty. Got rid of them this week. Ah, free at last

Now have to figure out where to invest whats left and like mikester's it's no where near the original amount

[brucecohen]

I just noticed this thread today because of a new post.

This isn't exactly on topic but yesterday I tried to roughly calculate how much my investment in LSIFs would be worth today had I forsaken the "magic" tax credits and just invested in a plain old Canadian equity fund.

My total investments from I think 1996 to 2000 were $15,500 - now worth $5426. By my rough calculation had I invested in a normal fund I would have purchased $10,300 worth of units over five years. I arbitrarily picked a Canadian fund I used to own and concluded that my investment would be worth around $25k.

Some lessons have to be learned the hard way I guess.

I did that exercise at least two times while writing for The Financial Post in the late '80s/early '90s. The Canadian equity fund without tax credits won both times. But few, if any, paid attention to those articles.

[William]

Again, my lingering question is "How can things go so horribly wrong, consistently?". Are these guys retarded / always unlucky / crooks / overpaying their buddies in private placements / what ?

Yes, and I wish we had a “Eliot Spitzer” in Ontario to nail these swine(s).

William

[uhoh]

still nothing in my account - I was thinking of this last night - I'm sure that at one point the Covington was actually on the PLUS side! Now I have three funds and they are all well, turkeys, is the only polite thing I can think of to call them.

[andrew]

Didn't this class gain big around 1999? It didn't win the comparison then?

Doesn't this selected logic lead to just investing in one asset class, the 'best' asset class? How is a loser defined? 1Y, 5Y, 10Y comparisons? How many % points? Would the same logic be valid if it were used to compare US to international funds? Or bonds to stocks?

[uhoh]

Update re CI Covington: Still no sign of my Covington money so I phoned BMO who in turned phoned CI. Apparently the 75% switchout has been processed but BMO just has not received the info and their back office was unaware of this.

The remaining 25% is "frozen" until after the summer when CI will re-visit the issue and may release the remaining funds. The 75% that was released has been placed in to a CI Money Market fund.

[brucecohen]

Didn't this class gain big around 1999? It didn't win the comparison then?

LSIFs did well in '99 but not as well as straight Canadian equity funds. Unfortunately PALTrak no longer benchmarks LSIFs, but the un-asset-weighted median return was 20.5%. That overstates performance, though, because many LSIFs that were in existence then are no longer around. So there's considerable survivorship bias. In any event, as good as 20.5% looks, the median return for Cdn equity funds in '99 was 30.4%.

The LSIF group performance was also heavily skewed by the near 100% return for Dynamic Venture Opportunities. This was an aberration, though, as it reflected recovery in the near-worthless Integrated Growth Fund that Dynamic took over in '98.

[dakota]

Bruce Cohen wrote

Triax isn't listed. A quick google indicates it got absorbed by Covington, so its name and performance have now been lost

Then how come I own the TRIAX NEW GENERATION BIOTECH TRX401?

[brucecohen]

Then how come I own the TRIAX NEW GENERATION BIOTECH TRX401?

Neither PALTrak nor Globefund lists this fund. But there is a Covington New Generation Biotech. PALTrak shows 3 series of this fund. The first was launched in March/01 and the other two in Jan/04. The manager is Genesys Capital, which apparently also managed the fund under Triax.

[dakota]

Well Bruce I'm mystified. I thought that my portfolio on TDW may have been wrong but I checked the "Holdings" and it says "TRIAX NEW GENERATION BIOTECH TRX401" as well and I would have thought that TDW would have changed it as they have control over that area.

[DanH]

Triax and Covington merged some time ago. (They were purchased separately by First International, a consolidator, they merged a few years back. First International has since sold out to AMG Canada.)

A couple of years ago, many Triax funds were consolidated into funds sporting the Covington moniker, including the original Triax Growth Fund. That fund is what started this industry down the warped path it followed.

Triax exploited the regulations and set out originally to invest only in publicly traded companies that met the 'eligible business' criteria. They also were the first LSIF to offer a trailer fee. And they did a good sales job (using an external sales force and Altamira as the manager) - so good in fact that they raised $125 million in its first year (1996). This success prompted other funds to follow suit on a couple of initiatives.

Triax did well at first but eventually blew up, with its record now having vanished. When it disappeared, it "boasted" a compound annualized return in the range of -9% per year.

(dakota: It's not unusual for discount brokers to list outdated fund names. It's the code that counts.)

As for CMDF, it pretty much admitted that its investment skills sucked when they revamped their fee structure and, and this is a doozie, reset the high watermark on its performance fee structure. What this meant was that despite the fact that MDS Capital basically provided flat investment performance over a ten year period, they felt it would be impossible to ever collect a performance fee on the CMDF fund.

So, rather than abandon shareholders, they decided to change the rules (with the help of passive shareholders who did not oppose the fee changes). In hindsight, this was probably a step toward selling the management contract of the fund, which they did last year (to Impax Capital). Incidentally, Impax was launched by none other than one of the co-founders of Triax Capital.

And so it goes...