Don’t jump into labour funds

Any way you look at it, it’s been a bad run for labour-sponsored venture capital funds. The long bear market took its toll on most of the entries in this category, leaving investors shell-shocked and wary of throwing good money after bad.

Over the three years to Nov. 30, the average labour-sponsored fund lost almost 11 per cent annually. Not a single fund was in positive territory during that period, with the worst performer of the lot being Triax Growth Fund, which had an average annual loss of 32 per cent. Some funds have looked better recently although, as a whole, the category is still in the red over the past 12 months.

Despite the abysmal results, investors continue to pour in money. During the last RRSP season, gross sales were $266 million and current estimates are that they could rise about 10 per cent to the $300 million range in the 2004 selling period, which runs from Jan. 1 to Feb. 29.

The attraction is the tax breaks these funds offer. Depending on where you live and the type of fund you buy, you can deduct up to 35 per cent of your investment from your income tax payable. Add your RRSP deduction to that if the units are purchased for registered plan and the federal and provincial governments will reimburse you for over 80 per cent of your investment, depending on your tax bracket. That’s a pretty strong incentive.

Focus on labour fund credit
But keep in mind that you’ll receive the RRSP deduction regardless of where you invest your money. Only the labour-sponsored fund credit is unique to these funds. The promotional literature often adds the two tax breaks together, but that can be misleading. Focus on the labour fund credit alone to get a more accurate perspective.

If you do that, you’ll find that the credit falls well short of compensating for losses incurred over the years in a poorly-performing fund. Unless the investment offers a reasonable chance of profitability, you’re better off passing.

Many labour funds will use the same old tried and true methods to market their funds in the upcoming RRSP season, counting on the tax breaks to offset the stigma of bad performance. But a few are moving in a different direction. Here’s one I chose to add to our Recommended List.

Front Street Energy Growth Fund. This fund offers less of a tax break than most labour funds. Nonetheless, it is worth considering as it offers excellent potential for capital gains in a short period of time. In fact, the Series I units of this fund show a one-year gain of over 27 per cent to Nov. 30, making it far and away the top performer in the category.

This entry was launched in July 2002. It is managed by two veterans from the glory days of Altamira, Frank Mersch, who scored huge gains for Altamira Equity for many years, and Norm Lamarche, who is widely respected in the investment community for his knowledge of the resource sector. The style of this duo suggests that the fund will be very active and potentially higher risk, but it also has the potential to produce impressive results, as we’ve already seen. The initial focus is on new companies that are being set up or acquired by proven executives in the energy field who have been displaced or bought out by the many mergers and acquisitions that have taken place in that sector in recent years.

The fund is available across Canada, however it does not qualify for any provincial tax credits. You’ll receive the federal 15 per cent credit, nothing more. That adds considerably to the real cost of acquiring units, and the amount of money you are putting at risk. But, so far at least, Mersch and Lamarche have more than compensated for those negatives with their performance.

The fund is sold through investment advisors. You can also learn more at the website, which is located at 

This find is only suitable for more aggressive investors. Consult a financial advisor before making a decision.