The broker made money and the firm made money - and two out of three ain’t bad. - Old Wall Street joke
I have been highly negative on labour-sponsored funds or venture capital mutual funds before. Partly, it has to do with my personal experience: my very first investment was a venture capital fund that I bought on the recommendation of a financial advisor that is down 60% from my buying price (not taking the tax refunds into account). I cannot even sell the fund and move on because I purchased it inside my RRSP and selling it now would mean a total write-off (after paying back the tax refund).
Jonathan Chevreau writes in The Financial Post today that he sold some of his labour funds despite having to pay back tax credits (fortunately, he bought them outside his RRSPs). The article and an accompanying table of returns make a devastating case against these funds for most average investors:
- Out of 21 funds listed in the table, fully 16 have a MER higher than 3%. Four funds sport a MER of more than 5% and astonishingly two funds charge fees of 11.69% and 13.35%. The fund I own, Growthworks Canadian Fund, has a MER of 4.9%.
- Out of 14 funds with a 5-year track record, only 3 have a positive return. Three funds have lost more than 10% annually for five years.
- Only 6 funds have a 10-year record, out of which three have negative annual returns. The best record is a 10-year annual return of 5.95%, compared to the BMO Canadian Small Cap Index’s annualized gains of 10.67%.
- If you think the results are dismal, here is the really shocking news: the results table do not include funds that were merged with others to hide even worse performance. For instance, the labour fund that I actually purchased was called Capital Alliance Ventures and it was merged with Growthworks fund. The true dogs don’t even show up in the data.
- It turns out that average investors aren’t the only ones who drank the Kool-Aid served by the labour funds industry. Mr. Chevreau writes: I still recall the amusing candour of one executive who had sunk $50,000 of his own money into his own labour fund and lost a substantial chunk of it. Worse, he had to face the ire of friends and family who had also invested in his fund. “I believed my own B.S.”, was his memorable confession to me.
In two years, the day when my eight-year holding period expires on the venture capital fund, I will be dumping it and moving on. I don’t see how investors can possibly profit in investments with an ongoing expenses to the tune of 5% per year and long-term results that suggest difficulty getting a return of your capital, let alone any return on it.
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6 responses so far ↓
1 Investorial // May 15, 2006 at 9:32 pm
I first looked at LSFs, not as a investment vehicle but as a taxation strategy. But after crunching the numbers, I thought better of it.
2 0xcc // May 16, 2006 at 5:14 am
Two years ago I invested in a LSF almost purely as a tax strategy. Currently my overall return on that fund (a Dynamic fund) is just over 8% and just over 7.5% of that is just from the start of this year. I will be pretty happy if I can get my original investment out of this fund at the end of the 8 year holding period. So far it looks like I should be able to do that but a lot can happen in the 6 years I have left (I could still lose it all).
3 Canadian Capitalist // May 18, 2006 at 8:25 am
0xcc: I hope it works out for you and Dynamic seems to have a decent track record. I am going to avoid this non-core asset altogether in the future.
4 Phil S // May 20, 2006 at 3:54 pm
Isn’t this blog now partially irrelevant considering that the Dalton McGuinty’s Liberals have now eliminated the provincial tax credit for LSIFs? I don’t think anybody in Ontario would invest in LSIFs based solely on the Federal 15% credit. And outside of Ontario, the choices of available LSIFs stink even worse than what is available IN Ontario.
5 Canadian Capitalist // May 22, 2006 at 8:01 pm
Phil: I hope you meant the post and not the blog
Actually, the LSIF credit is still in effect till 2008. In 2009, it wull be reduced to 10% and in 2010 it will be further reduced to 5% and eliminated thereafter.
6 Canadian Capitalist » RRSP Tip # 3: Investments to Avoid // Feb 15, 2007 at 12:05 am
[...] Venture Capital Funds: Even with the tax kickbacks, Labour-Sponsored Investment Funds are poor investments. The long list of negatives includes sky-high MERs, very poor track record, opaque pricing of underlying investments and long holding periods. [...]
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