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moneysense.ca, 25/10/09
One More Reason to Avoid Labour-Sponsored Funds
Labour-Sponsored Investment Funds (LSIFs) have sky-high MERs and past returns have been outstandingly poor (See Labour Funds are best avoided and Dumping the Labour-Sponsored Investment Fund). Now, add one more strike to this list of negatives: lack of liquidity. In a recent column, Jon Chevreau pointed out that some LSIFs have halted weekly redemptions and instituted annual redemptions conditional on surplus cash available. Two such funds Vengrowth I and Vengrowth II say that the decision is in the “best interest of shareholders” but Jon Chevreau notes the outrage:
How can such freezes be imposed? LSIF investors ponied up the cash and took tax credits in return for agreeing to a long period of illiquidity, but the industry has not delivered its end of the bargain. What’s galling is it means hanging on even longer to money-losing investments with high management expense ratios (MERs). According to Morningstar, the median MER of the category is 5.5%, more than double mutual funds.
Fortunately, at least in Ontario, LSIFs may be on their last legs. Starting in 2010, the province will begin phasing out the 15% Ontario tax credit for LSIF investments.
moneysense.ca, 25/10/09
Nothing makes my blood boil more than hearing about LSIFs – they make Bernie Madoff look honest.
I have some VentureLink Brighter Future (great name) – I’m not sure if they are part of the restricted redemption funds but I’m still locked in anyway so it doesn’t really matter.
I think my “LSIF-free” day is sometime in 2010 – I’ll be posting about it.
MER 5.5%! Whew.
Probably about 3 years ago, the plan manager for our company self-directed GRSP rolled through for some 30-min sit-downs. He dangled the LSIF, and the 15% tax credit. He did mention their abysmal record, but said they might be about to turn the corner. Didn’t mention the MER…
Glad I didn’t bite.
Two things to bring one’s blood pressure up: leveraged funds and LSIFs. Thanks Gov for OHIP…
http://financialtactics.blogspot.com/2009/05/cmdf-my-own-toxic-asset.html
@Mike: A cursory glance at the prospectus shows MER of 6.7%, 8.2% & 11% in the past three years. Brighter Future might refer to the fund management’s, not shareholders
Sorry, couldn’t resist!
@Ben: Good that you didn’t bite. I don’t own a LSIF anymore but what bothered me the most was I couldn’t even dump it after I realized it was a total dog. Now that Ontario is scrapping the provincial credits, one big reason for investors’ attraction to these funds will be substantially reduced. I really hope these funds are on their last legs.
@as: There are a lot of other investments that are just as bad: PPNs, wraps come to mind. But, yes, LSIFs are among the most egregious.
Wow, those MERs are my Halloween scary moment…
One of the annoying things about these stupid funds is that if you bail before the 8 years then you have to pay the original tax credit back. For most of us – the tax amount we’d give back is almost equal to the current value of the holdings.
I wish the government would change this rule – everyone else is getting a bailout so why not LSIF holders? I think the gov’t should change the holding period to 2 or 3 years (and make it retroactive).
I live in Quebec, and this looks like an LSIF (I know little about them):
http://www.capitalregional.com/En/societe/avantages.html
but it has a 50% Quebec Provincial tax credit. This seems like a substantial tax credit, but I can’t find any info on it’s MER on the site.
Does anyone know anything about this fund?
LSIF = Labour-sponsored investment fraud.
The name of the game has become fund companies sucking the money out of the funds in the form of their fees. The freeze tactic fits right in with that conspiracy theory. If the fund managers had the investors’ best interests at heart, they would liquidate the investments, pay off the investors and shut themselves down. I’ve still got a bit of one to redeem next month and calm old me just seethes every time I look at this labour-sponsored, government abetted con game.
Now I can see why Growthworks decided to diversify by acquiring Mavrix fund management. The problem highlighted in the article though appears to be a problem at Vengrowth, and not at LSIF management companies in general.
Also, it’s well and good to say that LSIF’s have had dismal absolute performance over the past 8-10 years, but the alternatives, such as investing in an S&P500 index fund over the same period would have not done much better, and there would have been no tax benefits. (Of course this is not an entirely fair comparison since an S&P500 index fund is in a different asset class, and much more liquid.) The point is that performance is relative. Also, people who are finally able to redeem their LSIFs now invested at the height of the tech bubble. It’s not surprising that their angry; however, they should also look to their own decision to invest at a time when the market (especially for dot.com start-ups) was massively overpriced.
@Robillard: I was among the investors who bought into venture capital funds at what turned out to be peak valuations. IIRC, including the tax benefits, I lost roughly 30% of the capital — a much better outcome than if I had invested in the NASDAQ index.
However, I was among the rare lucky ones. The high MERs of pretty much every LSIF fund you can look at creates such a high hurdle that very few ever post positive returns even after including the tax refunds in *any* 8-year holding period! Though the recent past of the S&P 500 hasn’t been a happy one, in the majority of 8-year holding periods, the S&P 500 would have made positive returns.
I hate these funds and have NEVER sold them. There was more than one occaision when a client wanted one so badly and I couldn’t talk them out of it, and I told them to buy from someone else.
It is pretty clear that these products are terrible, but instead of blaming “conspriacies” and “seething” about the fact you own them, I think you guys that own them should blame yourself for buying them in the first place. This may sound harsh, but you should own up to the role you play in your misforture.
To say a fool and his money are soon parted would be too harsh. But to say you were fooled by some evil conspiracy is lame.
Rob – the only person talking about “conspiracies” here is you. I fully accept that I bought my LSIFs for the wrong (tax) reasons and I was a complete idiot for doing so.
It is pretty clear that these products are terrible
No shit Sherlock – why didn’t you tell me that back in 1996 before I bought my first units?
My complaint about the LSIF industry is that they keep going. They are a scam – they have bottled up Mona Vie into a mutual fund and are still selling it to this day.
Does the fact that people who invested with Madoff were stupid make him any less culpable? Admittedly LSIFs are perfectly legal but I personally would be very embarrassed to be running one.
Four Pillers – conspiracy was mentioned in comment #7 by Canadian Investor – my comments aren’t directed at you alone – there is often a theme in the comments I read on this site that blame everybody except themselves. That’s all.
It was pretty clear in 1996. I would have told you in 1996 like I told all my clients who wanted one. I said these are companies that are too crappy to get a bank loan, and too crappy to do an IPO. The government doesn’t want to fund them so they are trying to get you to. Maybe you might possibly hit the next Microsoft and make a fortune, but that’s like winning the lottery. Like the lottery, your chances are you will lose almost all of your money.
I think it was reasonable to figure out that these were crappy in 1996. If you bought it without really thinking about it or why these incentives were being offered, or you decided to work with someone who wasn’t honest, that’s the role you played in the matter. I am not trying to piss you off, but I think my comment is a fair one to all readers of CC. Sorry if it came across as directed at you alone, because that wasn’t my intention.
But yes, many of the people who invested with Madoff were stupid because they bought in to the fact that you could have high risk free returns. Not all of course. They didn’t ask questions, perform the odd audit (which can be hired and people that had $200Million with him that didn’t pay $10K to do an audit from time to time were stupid.), or really ask where the money was and double check things on their own.
I believe everyone with an advisor should do a little audit from time to time on their accounts and double check that what is on your statements, is really there. I believe people should never sign blank forms with their advisor but that happens all the time. People should ensure their advisor is in fact registered with regulators, and is associated with an actual dealer. It takes some effort, but given the stakes involved, it is worth the time and energy.
I agree with you and I’d be very embarrassed if I was running a LSIF as well. As I am proud I avoided this crap for my clients, I would be embarrassed had I sold them and had to answer questions about it now. I have always felt these were bad products. I think the same about seg funds (with very rare exeptions), principle protected notes, or index hugging funds that are charging high MERs, illiquid ETFs, etc. The list goes on and on.
People are right to worry about the illegal things causing them to lose their money, but far more money will be lost by things that are legal, but crappy.
Rob. Sorry, I missed the fact that CI mentioned the word “conspiracy”. You were the 2nd person to mention it…
I know you weren’t talking directly about me – rather about LSIF investors in general.
The important thing is that I’ve learned a big lesson – don’t invest for taxes being #1!
People are right to worry about the illegal things causing them to lose their money, but far more money will be lost by things that are legal, but crappy.
A great point.
@Rob, @Mike: While I personally was “encouraged” to look at LSIFs by an advisor, I still bear responsibility for buying into these dogs. The mere mention of immediate tax credits AND great recent returns (back in 2000) blinded me from digging deeper. As I mentioned in a comment above, I didn’t do too badly with my LSIF investment — it’s not even close to some of the dogs I’ve owned such as JDS or NT.
I also agree with Rob’s comments on DD. It is stunning that wealthy investors who put millions of dollars into Madoff’s funds either directly or indirectly, didn’t hire an independent advisor or perform the most basic background checks. Investors would do well to adopt the maxim: “Trust but verify”.
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I seriously can’t get over the fact that there is a fund with a MER of over 13%. That’s rediculous!
Still have some venture link IV and Covington funds in my portfolio and they have served me well. In general though, these investments should be last considerations in your portfolio. I’m only using them for tax considerations and with the reduction from 30% to 15% they will soon be leaving;)
Mike