Technology losses hammer labour funds

Zoomer | January 1st, 2006

After years of mediocre performance, some labour sponsored venture capital funds scored huge gains in 1999 to 2000. The reason: some of the fledgling technology firms they invested in went public or were taken over at huge premiums

This year, it’s a totally different story, however. Many of these funds have been hammered, for the same reason they did so well in the late ’90s–the heavy emphasis on technology.

The average labour-sponsored fund lost 5.9 per cent over the year to May 31. But that average doesn’t convey a true picture of the damage. Several of the biggest losers are among the largest funds in this sector.

Big players

  • Triax Growth, with $233 million in assets, took a hit of almost 33 per cent.
  • Covington Fund I, with $170 million in assets, lost about 30 per cent.
  • Working Ventures Canadian, with $420 million under management, dropped 23.6 per cent.
  • Vengrowth I, with $549 million in the till, fell 20.3 per cent.
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Those four funds hold more than a third of all the money invested in labour funds (excluding the giant Quebec Solidarity Fund which doesn’t report its figures in the national media). Their average one-year loss is 26.7 per cent.

Part of the meltdown can be traced to the fact that many of the tech companies in the portfolios now trade publicly. As the sector has been battered, the value of these shares has plummeted.

Mark down
But there’s another, hidden reason behind some of these numbers. Some funds, including Working Ventures Canadian, have been marking down the value of technology companies that are still private to reflect market conditions.

This compounds the immediate shock effect on investors but may actually prove to be beneficial in the long term for two reasons:

1) A realistic valuation of the private holdings means that new investors are not paying an inflated price for new fund units.

If these companies were maintained at book value (a practice followed by some funds), new investors could face a big drop in valuations when companies go public or are bought out.

2) Some funds are considering making additional investments in some of the better private technology firms in their portfolios to average down the cost of their positions.

A realistic valuation of these assets based on the current market should ensure that the fund managers don’t overpay for the new stock.

Action now
If you plan to make new investments in labour-sponsored funds over the next year, make sure to ask about the policy being used to value private companies in the portfolio. If they are being carried at book value and the portfolio has a heavy technology weighting, look elsewhere.

From the Internet Wealth Builder, June 25 edition.