The sad fate of labour-sponsored funds

February 12 2010 by Ellen Roseman

Remember when all you heard from investment salespeople during the RRSP season was about the 30 per cent tax credits available on a labour-sponsored fund?

Sometimes, they added the RRSP deduction and showed how 75 to 80 per cent of your contribution was subsidized.

Sounded like a great deal, right? But did they also mention the sky high management fees or the fact that a portfolio of emerging businesses might prove to be highly illiquid in an economic downturn?

Unless you held the fund for eight years, you had to repay the tax credits. But just as cash-in time was getting close, many funds suspended redemptions and moved to annual distributions. This meant an even longer wait to retrieve your money, assuming you had much left.

What I find galling is that the high management fees continue to accrue, even though you’re stuck in the fund and can’t exit. That’s another thing your salesperson probably didn’t tell you.

I spoke to investment author Gordon Pape, who owns a bunch of labour-sponsored funds and didn’t see it coming. Neither did I when I bought the Vengrowth II fund, which I wrote about this week.

My column elicited lots of response from readers, some of whom asked if they could join a class action lawsuit against the fund managers.

20 comments

  1. Four Pillars

    Feb 14 2010

    My LSIFs just broke free of the 8 year mark on Feb 10. I’m finally free!!!

    However, I haven’t looked to see if there are redemption restrictions on my funds and one of them is called Vengrowth. 🙂 Oh well…

    Those funds are truly run by a bunch of crooks.

  2. second opinion mike

    Feb 16 2010

    The funds are run exactly according to the prospectus from what I can see. These funds were SOLD by advisors for the most part. The advisors earned big fees on the sale and brushed over the obvious risks and fund fee issues that should have been front and center for every investor. Suing your fund manager for following the prospectus is not going to accomplish much since it was “buyer beware” in the prospectus. Now, suing your advisor/brokerage firm for negligence may make some sense as the risk may have made the funds an unsuitable investment. Venture funds by their nature are very high risk….why do you think people need a tax break to be enticed to buy them!

  3. Chris W. Rea, BasicallyMoney.com

    Feb 23 2010

    My own VenGrowth II fund purchased for $5000 exactly seven years ago is now worth only $1900, and I still have to wait one more year before I can redeem. I’m skeptical it will even hold its value until that point.

    I’m also holding Front Street Energy Growth Fund, which cratered in 2008/early 2009 and didn’t really come back with the rest of the market. I’m down about 50% on that one. Part of the problem with these funds is many investments they hold are in private companies without valuations provided by an open market.

    No more laboured-sponsored investment funds for me. The tax break was nice initially but evidently insufficient compensation for the risk and high fees involved.

  4. Anthony Boright

    Mar 16 2010

    After many years, labour-sponsored funds have certainly fallen out of vogue in an industry that tries to launch new funds and other financial products continually, only to retire, rename, merge or otherwise drop them if they don’t stick with consumers.

    Your concern regarding transparency of fees and other disclosure-related items is also valid. The regulators’ proposed new rules concerning “Point of Sale” disclosure for mutual funds sold to retail consumers should – if ever enforced – go a long way towards spelling out exactly what investors are buying before they own it (and not when they try to sell, as is typically the rude awakening for many investors).

    Given the nature and complexity of investing, it will be awhile before consumers are truly informed about the financial products they’re sold; however, this new regulation will go a long way towards raising the financial literacy of Canadian investors.

  5. Larry Rodricks

    Sep 23 2010

    Hi Ellen, are the redemptions on Vengrowth II still frozen. The fund continues to drop and it \steams me\ everytime I see it in my portfolio. Thanks for your reply.

  6. A.Smith

    Nov 6 2010

    Hello Larry, Looks like the crooks at Vengrowth have found a way to keep more of our money or keep you locked in for at least 4 more years. Just long enough for them to take the rest of our money.
    http://www.vengrowth.com/resources_id=766.html

  7. Alfred Tsang

    Nov 8 2010

    Vengrowth II was the last mutual fund of any kind I bought. Those management fees are a ig ripoof. They take it from you year after year even you are losing your shirt.

  8. Alfred Tsang

    Nov 8 2010

    Vengrowth II was the last mutual fund of any kind I bought. Those management fees are a big ripoff. We have to pay it even thought our funds are losing money; and we are stuck with these Labour Sopnsored funds for at least 8 years. It is worse than reverse mortgage.

  9. LK

    Mar 28 2011

    I have VGII shares as well for 10 years with no redemptions in the end. Now fund managers arrange special committee to help shareholders.

    I do not buy it and who is paying for that? I guess again the shareholders.

    Maybe we should organize Facebook shareholders group of VGII and arrange our own committee to oversee any merger proposals. Any ideas?

  10. linda

    Jul 2 2013

    Has anyone successfully mounted a class action suit against these funds? The interesting thing is they have changed hands so many times now.

    Mine was originally a BEST fund, now it’s a Growth Works POS… had the most humiliating discussion with a smarmy, condescending sales rep there … really have you over a barrel.

    This whole labour sponsored funds thing is a failure of our regulators. Meanwhile, I’ve lost 91% of my original investment and I get to watch as fees eat up my capital year after year as it’s locked up.

    If they suspend redemptions, they should also suspend management fees. What kind of regulatory oversight is this? It’s criminal!

  11. john

    Sep 20 2013

    I have also sought to get what little of my money is left to no avail, the regulatory body that oversees growthworks, has laid down on consumers. If there is a class action suit I’m in
    Now that i have retired it is all the worse and my retirment looks bleak.

  12. nhon

    Sep 18 2015

    I put in $7000 in 2000s adn now only $1000 on Sep 2015.
    The company Covington put new restriction to keep my money.
    Is there a lawsuit we can do?