Labour funds offer tax breaks, but….

If it weren’t for the tax breaks, labour-sponsored venture capital funds would probably be facing extinction right now. Even with the write-offs, new sales during RRSP season are expected to be well down from 2001, which was anything but a banner year for the industry.

A look at the performance numbers tells the story. The average labour-sponsored fund lost 12.6 per cent in the 12 months to Dec. 31. Only a handful of funds showed a profit, with the best gain a piddling 3.8 per cent. Most funds suffered double-digit losses, the worst performance coming from StrategicNova Venture Growth Fund, which lost 34.5 per cent.

Technology sector reason for weak results
The weak returns are nothing new. Over the past three years, the average labour fund has lost 7.6 per cent. Even going back to five years, we still see a minus sign in front of the category average. The primary reason for these dismal results is that many labour funds have invested heavily in the technology sector. That’s where the action was, and fund managers were as mesmerized by the growth potential as everyone else.

Going forward, the funds are likely to be more cautious abt over-committing to a single sector. However, the damage has been done in the public mind, and it may take a long time before confidence is restored.

That leaves the tax breaks as the only selling point for the marketers this year. You can receive tax credits of up to 35 per cent from the federal and provincial governments if you live in the right place and choose your funds with care. If a fund does no worse than break even over the required eight-year holding period, a 35 per cent credit translates into an average annual return of about 4 per cent on the tax saving alone. It’s not a lot, but there’s always a chance that the fund will spin out some profit as well.

However, if the fund is only eligible for a 15 per cent federal credit, the odds start to tilt against you. This will is the case in all areas that don’t offer a supplemental provincial tax credit (e.g. Alberta, Newfoundland, Prince Edward Island) and for funds that are only registered federally. In these cases, the tax credit is only worth about 1.75 per cent annually over eight years.

Next page: The best pick

If the tax advantage hooks you, consider this fund
If the tax advantages are enough to make you consider a labour fund investment this year, our advice is to look at a newer fund. Reason: they don’t carry any baggage, and the managers are starting fresh with the benefit of knowledge gained from the high-tech bubble. If you are willing to forego some of the tax benefit for a labour fund that looks like it could produce some impressive results, here’s one to look at.

Front Street Energy Growth Fund: This energy fund is managed by two familiar names from Altamira’s glory years: Frank Mersch and Norm Lamarche. It invests both in conventional energy stocks and alternative energy-related projects such as fuel cells and wind-power projects.

The big disadvantage is that it is not eligible for any provincial tax credits, only the 15 per cent federal credit. So you have to make your decision primarily on the basis of the profit potential and the managers’ reputations (Lamarche is regarded as one of the top experts in this category and Mersch made big profits in resources for investors in Altamira Equity back in the early 1990s). This fund is off to a great start with a gain of 15 per cent in the first three months. It’s sold across Canada. Call 1-800-513-2832 or go to http://www.frontstreetcapital.com for more information.

This article originally appeared in Mutual Funds Update, a monthly electronic newsletter of common sense mutual fund advice edited by Gordon Pape. To take advantage of a three-month trial subscription available to 50plus.com users for just $9.97 plus tax, go to http://www.buildingwealth.ca/promotion/50plusproducts.htm