Labour-sponsored venture capital funds

Discuss your favourite picks, broker, and trading or investment style.

Postby smelly » 19 May 2006 23:56

BruceCohen wrote:
smelly wrote:BTW that last shot about how VG has done compared to MMF or Cdn Small Cap funds is really lame don’t you think? You really want me to respond to that?


Yes. You complained several times about the media not factoring in the tax credit when reporting LSIF returns. So I did factor in that credit. Do you consider a five-year CAGR of 2.5% to be a “good” return, especially during one of the best runs ever for Canadian equities? Yes or no.



Well I’m sorry Bruce but that’s just plain dumb. Of course 2.5% sucks when compared to MMF or Cdn stocks. So is that all you invest in? And if either one of those asset classes had a five year run in that neighborhood, would you dump them or say it’s a bad investment? When LSIFs had great numbers going into March ’00 were they good investments? If they should reverse their slide and post better than MMF and CDN stock numbers, will they then be good investments? Sorry, but that’s a dumb, dumb, dumb argument. Factoring in the tax credits is the only accurate way to measure returns and it show people that they’re not as bad off as they think. And if that keeps them from doing something dumb like selling and eating DSC and tax credits well then great. A review of my LSIF portfolio shows that my net cost so far is around $16K and the market value is around $34K. I’m still in the money and since I understand the investment, it’s risk and since it represents a very small percentage of my portfolio I have no intension of redeeming anything before 8 years and I’ll continue to buy more every year.

As far as the rest of your post, give it a rest. I have absolutely no problem with clients asking questions about their accounts. I enjoy helping them to understand their investments. Already, most of them know a lot more than the average finance journalist. What I find objectionable is when some putz writes some crap that causes clients undue stress. Or when a client transfers her LSIFs out to another firm “in cash” which triggers redemption of LSIFs in her RSP and she tells me she did it because her friend read somewhere not that there was a possibility of her LSIFs going bankrupt but there were in fact going to go bankrupt, yeah, I get pissed. But unfortunately, I don’t own a national newspaper or even have a column in one. I wish I did because the drivel written by many so called expert journalist would provide me a never ending source.
FWIW, we sent a letter to all of our clients to give them an accurate update on LSIF credits. It’s my understanding that a couple of LSIFs attempted to get revisions printed but to no avail (no, I can’t prove that).

I’ve not experienced any “dog’s breakfasts” of funds in a new client’s portfolio. I’ve seen many that didn’t appear to have a logical plan or strategy but if they contained any funds I didn’t particularly like, a decision was made to either hold until they were free of DSC, roll out 10% and matured units each year or, vary occasionally, sell the funds and the client ate the DSC. Each case was unique and certainly not as traumatic or costly as your story. There are no inherently bad funds. There are sector plays that go through extreme swings but they always recover don’t they? Like resource funds in ’97. Remember what a horrible dog they were then? Many investors lost a third to a half of their values. But what happened to those that stuck it out or even understood the beast and added money?

The other practices you mention aren’t inherently bad. On the face of it moving matured units into a new DSC schedule isn’t something I do all the time but if it’s to buy a LSIF, there's no choice. Was the advisor giving lots of good value to the client? Maybe the client is retired and not adding new money to the account and for the DSC advisor’s business model getting new commission is fair and reasonable. But the real answer to your question whether it’s a bad thing, I’d have to say maybe yes, maybe no.

Too many funds, too few funds? Ask 5 experts and you’ll get 5 different answers. You say, “many do, in fact, have too many or too few funds”. Quite a God complex there Bruce. Who made you the supreme expert?

You missed my point about high tech and resource. What I was saying is that some clients come in and say that an article they read was touting a certain asset class and it got them all hot and bothered and they interpreted the article as saying they should put everything into the asset class. I specifically remember a client expressing that about high tech in the late 90’s and even telling us that we just didn’t understand. There was a New Economy out there. Now as far as I know she wasn’t seeing any other advisor so I’ll go out on a limb and suggest that maybe she got that thought from the media. But I’ve seen some statements from other advisors with high tech, biotech, etc., so I’m sure there are advisors who have succumbed to the lure of bright shiny things too.

I’ll stipulate to your assertion that wraps and PPNs are big these days. That wasn’t in question. My point was that articles have been published which say that funds are passé, which also is just a very dumb thing to say.

And the stock was Lumenon and if an advisor recommends a stock that goes bust I would hold them accountable. I suppose when you deal with individual securities those things may happen but only if the investor’s risk profile allows for high risk. And if the advisor does it often enough, clients will leave. And I checked the article and I was wrong. It was FP and no, there was no analyst or advisor quoted in the article. Want me to fax it to you?

Regarding your obvious hatred for DSC I have a question. What do you suggest for the investors out there that aren’t into fee for service and the size of their account isn’t profitable for an advisor to do FE at zero and live on the trailers. Or are trailers evil too? I forget. Where will these people go for financial advice? I’m tired now. Do I have to continue? The rest of your issues were kind of pedantic weren’t they? Filler more than anything else.


Oh, I almost forgot. My three o’clock appointment was a client who wanted to talk about her LSIFs. When she sat down she proceeded to show me the article we’ve been talking about. I shit you not. It was perfect.
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Postby smelly » 19 May 2006 23:57

BruceCohen wrote:If you take this issue to a -- gasp! -- journalist, he/she would likely jump on it, getting good info from IFIC and one or two MF industry lawyers.


Hell, he probably bought it because a journalist touted it.
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Postby adrian2 » 20 May 2006 08:52

smelly wrote:Did you miss this post upthread or wasn't it acceptabe:

He’s never accepted challenges before so I doubt he would now. And anything short of a face to face and it would be a sham. Nope, just him. And it would have to be him, without any feed from his buddies. Besides, the ACB thing was the major one. Other than that there’s the “gossip” as you so innocently characterize it, the absence of a ROR chart based on net cost and his lack of explanation regarding the reasons for the high MERs. I also don’t have much respect for his vacillation regarding the merits of the asset class - “I doubt I’ll be buying any more labour funds”, “which is why I didn’t dump all my LSIF holdings”.

That was your response to Norbert, not to me. I've asked for all the discrepancies and errors. You've shown NONE.

smelly wrote:And I never said the author didn’t have a capial loss, once again, what I said was he may not have a loss unless he was aware of how the ACB is calculated. And unless he has that information, even with a dog like Triax, he may have overstated his loss by 30%.

As I've demonstrated to you, the author did have a capital loss, period. No "may or may not have a capital loss". You were wrong, the facts were clear. For the size of the loss, the author didn't go into details, you did. He said nothing wrong, you OTOH continued with: "Maybe I should be a good citizen and drop a dime to CRA and suggest they ask for backup on his '05 return". For this, you should have apologized. You didn't.

smelly wrote:OK? Can we put that to rest now?

You still have not shown at least one discrepancy or error. How many were there in the relatively long article? How about nada?

smelly wrote:Maybe you guys can get together and nominate one person for me to debate this with. I'd really appreciate it.

Do you really think everyone is there just to get you? Do you think everybody thinks with one mind, "the non-advisor mind" which you have to face and defeat for the good of the little guy?
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Postby brucecohen » 20 May 2006 12:00

Well I’m sorry Bruce but that’s just plain dumb. Of course 2.5% sucks when compared to MMF or Cdn stocks.


You complained several times about the media not factoring in the tax credit when reporting LSIF returns, thus implying the tax credit was a silver bullet that would turn a sow’s ear into gold. I simply tested that. Glad you concede that a 2.5% CAGR “sucks.”

When LSIFs had great numbers going into March ’00 were they good investments?


Yes, LSIFs did very well in the late ‘90s….because they were stuffed with tech, the same crap that the media – acting on its own -- induced all those stupid DIY investors to put all of their money into. I guess the LSIF managers were following the media’s advice too, huh?

So let’s extend the CAGR window to take in those heady returns. Eight LSIFs have 10-year records. Here they are with CAGR and asset level at Mar 31:

n Dynamic Venture Opportunities, 6.0%, $60 million
n WOF Balanced I, 3.1%, $205.5 million
n Vengrowth, 1.5%, $270.2 million
n Impax Venture Income, 0.6%, $2.8 million
n GrowthWorks Canadian Fund, -2.8%, $262.4 million
n Canadian Medical Discoveries, -3.1%, $236.4 million
n Covington Fund I, -3.1%, $58.9 million
n First Ontario, -6.4%, $26.7 million

Let’s assume our example investor – let’s call him Jon – was prescient enough to buy the best performer – DVO – even though Dynamic had just taken over a fund that was on the verge of bankruptcy, was out of favour itself as a fund company and mired in net redemptions, and confined its marketing of DVO to the production of a brochure. (Indeed, wholesalers were discouraged from talking about it because of fears at head office that it would hurt the brand. Ned agreed to take it over only as a favour to an old friend.) Note that the current asset level -- $60 million – is only a bit above the generally accepted breakeven $50 million point and far below Vengrowth, suggesting Dynamic still ain’t doing much to promote the product and advisors still ain’t doing much to sell it. But we’ll be generous and assume that Jon and his advisor were clever enough to foresee its potential.

Let’s assume Jon put in $5,000 and then at the end of the lock-in redeemed and rebought to trigger another tax credit. Current value is $8,954 plus the second $1,500 credit = $10,454. If we calculate the return over 10 years on a $3,500 cost base we get a CAGR of 11.6%. Damned good but remember that we’ve assumed a case in which every star lined up.

Now let’s compare the BEST LSIF situation to the MEDIAN Canadian small cap equity fund. The 10-year median Canadian SC CAGR is…11.5%. So, Jon got an additional 10 basis points of return by accepting an 8-year lock-in along with weaker governance and unregulated valuation.

Now let’s look at the more likely case – a $5,000 investment in Vengrowth. Current value at 1.5% over 10 years = $5,803. Add $1,500 for the reinvestment tax credit to get $7,303. CAGR on a $3,500 cost base = 7.6%. Pretty good, but well below the plain old ordinary boring small cap fund’s 11.5%…and still loaded with the added risk of the 8-year lock-in, wanky governance and unregulated valuation.

So, exactly how is an LSIF a better investment than a small cap fund?

A review of my LSIF portfolio shows that my net cost so far is around $16K and the market value is around $34K.


IIRC, some time ago here or on boomer a number of people blew apart the methodology you’ve used to compute your returns. In any event, you’ve doubled your money over what time period? What’s the IRR?

If they should reverse their slide and post better than MMF and CDN stock numbers, will they then be good investments?


What are the odds of the slide being reversed? They’ve been flat to negative during one of Canada’s strongest bull runs. The poor sales of recent years mean most of their money is already well past the J-curve VC managers cite whenever investors get impatient. So those holdings should be in the black, but apparently they're still not doing well enough to offset the impact of sky-high fees. Looks like LSIF managers and their investees haven't been able to take advantage of a bull market to do IPOs. How are they going to do IPOs after the market turns down? Then, there's the entry of big pension funds like Teachers and CPP. Pension funds and insurers got burned in the '80s when they believed the pitches of external VC managers who over-promised and under-delivered. So they pulled out their money, making it possible for Ron Begg to sell the LSIF concept to politicians on grounds that there was a dearth of capital. Now the guys who over-promised and under-delivered for pension funds and insurance companies are running LSIFs and still over-promising but under-delivering. Now the big pension funds are moving into VC but by creating their own in-house management teams...and they have much more money and much longer horizons and much higher risk tolerance than any LSIF -- with no georgraphic requirements. (In one fell swoop CPPIB recently committed $400 million to the Canadian private equity and VC market, instantly outstripping the largest LSIFs.) It'll be interesting to see what happens to deal flow. In any event, please cite the factors that justify your belief there will be an LSIF turnaround.

I’m still in the money and since I understand the investment, it’s risk and since it represents a very small percentage of my portfolio I have no intension of redeeming anything before 8 years and I’ll continue to buy more every year.


Where and when did I advocate that anyone redeem an LSIF before the end of the lock-in? I haven’t…because, without crunching the numbers, it seems the breakeven point on the next investment would be too high to cover the cost of repaying the tax credit and DSC, if any. Especially when the conventional stock market is peaking.

There are no inherently bad funds. There are sector plays that go through extreme swings but they always recover don’t they?


Gee, unit holders of Crocus and Retrocomm will be relieved to hear that. The same goes for investors in the 42 funds with negative 10-year CAGRs, according to PalTRAK. Imagine holding Mavrix Growth Fund with a 15-year CAGR of –3.3%.

And I checked the article and I was wrong. It was FP and no, there was no analyst or advisor quoted in the article. Want me to fax it to you?


My fax machine isn't working; would you like to e-mail the article. Or just tell us who wrote it and when. Was the author an FP reporter or a financial advisor? I don't believe that an FP reporter wrote an article with a buy recommendation that did not quote an analyst or advisor. Or was the article simply a report on the company's earnings? By the way, you said that an advisor would be held "accountable" if he recommended a stock that went tits up -- a claim you've made several times before. Exactly how would this advisor be held accountable -- what sanctions, penalties and redress would be imposed? By whom? What would the aggrieved client have to do to invoke such accountability? At what cost?

The other practices you mention aren’t inherently bad.


So it’s OK for an advisor to load his/her clients down with funds, ignore their phone calls and send no materials other than the annual statements mailed by the fund companies?

And it’s OK for an advisor to take someone who has just completed a redemption period and put her into another fund that is virtually identical to the previous one, starting a whole new DSC schedule.

And it’s OK for an advisor to do the same with a series of 10% annual withdrawals.

Many advisors don’t seem to be aware that Morningstar software now does similarity ratings.

Too many funds, too few funds? Ask 5 experts and you’ll get 5 different answers. You say, “many do, in fact, have too many or too few funds”. Quite a God complex there Bruce. Who made you the supreme expert?


I’m no expert at all, let alone a supreme expert. You – the professional advisor – were the one who declared it worrisome that people wonder if they have too many or too few funds.

But I’ve seen some statements from other advisors with high tech, biotech, etc., so I’m sure there are advisors who have succumbed to the lure of bright shiny things too.


Thank you for conceding a point.

Regarding your obvious hatred for DSC I have a question. What do you suggest for the investors out there that aren’t into fee for service and the size of their account isn’t profitable for an advisor to do FE at zero and live on the trailers.


Depends on the situation, as you would say. If this client shows potential for much greater asset accumulation, the advisor could do the early business as a loss leader. I know several advisors who grade prospective clients and do that. If the client has few assets and no prospects for great accumulation in the future, the advisor would be justified in doing DSC with full disclosure. The more ethical advisor would calculate the present value of the differential between the FEL and DSC trailers and credit that against a 4% or 5% FEL. So the client might end up paying 2-3% upfront in a transparent transaction.

Or are trailers evil too?


In concept, no. In application, yes. Because it’s a hidden payment based on no standards or accountability. The industry calls it a “service fee” but sets no standards for the service to be provided. (One gripe that Bylo shares with Ned Goodman is that discount brokers get the same trailer as full-service advisors.)

Years ago Jim Rogers of The Rogers Group and I advocated a system in which mutual fund companies sent each client an annual statement itemizing how much – in dollars and cents – was deducted from the fund on his/her behalf and how much of that – in dollars and cents – was spent on dealer compensation, portfolio management and fund operations. The client could then decide if his/her advisor was delivering value. (Rogers BTW was fully commissioned at the time) Several fund company presidents loved the idea, but said nobody had the guts to do it unless the regulators made everyone do it.

An alternative would be to return to the system used by several companies in the 1980s. Each quarter they redeemed units to cover their mgmt fee and sent the client a statement. A friend of mine has a broker who currently does this to create a trailer on the PH&N funds held in the account. Unfortunately, the guy falsely told my friend that these redemptions cover a charge imposed by PH&N, not by him. But you appear to consider my umbrage at wilful misleading to be “pedantic.”

The rest of your issues were kind of pedantic weren’t they?


Huh? You have been claiming there exists a crisis because one or more investors might misinterpret a media article and then might act on this interpretation and then might lose money and this loss might be major. (You still haven’t cited one real case)

I cited cases in which:

n The client of a full-service broker is paying for professional advice in creating and maintaining a diversified portfolio that makes sense and benefits from prudent asset allocation. In reality, he has been sold a grabbag of holdings including two expensive wraps and a dubious PPN. There is no sense of coherence, let alone any benefit from effective asset allocation. The account is generating fees worth thousands of dollars each year. You see no problem with this.

n An advisor told a couple of very modest means that they must substantially reduce their already modest standard of living if they hope to retire in relative comfort. This analysis was based on a software report that was based on erroneous data, a report that obviously was not checked before presentation. What would have happened had these people not had a friend who was willing and able to do the analysis required for a second opinion? How many other ordinary people have suffered from this guy's slipshod conduct? But, shaving a store clerk's income by 20% a year is just pedantic. Isn’t it?

n An advisor wilfully sought to mislead a client about market indices in general and the use of ETFs in particular. Basically, he lied. This client just happened to know enough to recognize the lie. What if he didn’t? And what if he believed the advisor and then told those lies to his friends and coworkers? But, lies told by advisors are merely pedantic, right?

My three o’clock appointment was a client who wanted to talk about her LSIFs. When she sat down she proceeded to show me the article we’ve been talking about. I shit you not.


So she “showed” you the article. Did she tell you to redeem her fund, or did she ask you if she should redeem her fund, or did she simply ask how her fund is doing? What fund was it, when did she buy and how is she doing? What did you tell her?
Last edited by brucecohen on 21 May 2006 10:16, edited 2 times in total.
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Postby adrian2 » 20 May 2006 12:45

BruceCohen wrote:Let’s assume Jon put in $5,000 and then at the end of the lock-in redeemed and rebought to trigger another tax credit. Current value is $8,954 plus the second $1,500 credit = $10,454. If we calculate the return over 10 years on a $3,500 cost base we get a CAGR of 11.6%. Damned good but remember that we’ve assumed a case in which every star lined up.

As I've mentioned before, it's not fair to take into consideration the tax credit before the holding period has expired. The second $1500 is "yours" only if you've waited the second 8 years. Otherwise, you can say that you can buy a LSIF, get your $1500 back a few months later and presto! you've got a triple digit CAGR so far.
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Postby brucecohen » 20 May 2006 18:53

adrian2 wrote:As I've mentioned before, it's not fair to take into consideration the tax credit before the holding period has expired. The second $1500 is "yours" only if you've waited the second 8 years. Otherwise, you can say that you can buy a LSIF, get your $1500 back a few months later and presto! you've got a triple digit CAGR so far.


Valid point but I bent over backwards to be generous to Smelly's argument. If we knock out the second tax credit, looks like the 10-year CAGR is 9.8%. Still a very respectable return, but the ordinary no-tax-gimmick small cap fund still did 17% better. This, of course, begs the question why an advisor would recommend a LSIF over a small cap fund.
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Postby smelly » 21 May 2006 19:58

adrian2 wrote:

That was your response to Norbert, not to me. I've asked for all the discrepancies and errors. You've shown NONE.


So what’s your beef, that I addressed my concerns about the article to Norbert instead of you or that you don’t think any of my concerns are valid? I listed the “gossip” (do you think it’s ok to publish unsubstantiated drivel like the alleged conversation with the LSIF executive?), the ROR chart with no mention of the tax free tax credit, the lack of explanation of why the MERs are larger than an average fund and the wishy washy “which is why I didn’t dump all my LSIF holdings” and “I doubt I’ll ever be buying any more labour funds” except maybe the mezzanine debt variety “if I were tempted again”. What he’s saying is that he got sucked into buying these things because of the tax credits and up until spring of ’00 he probably still loved them because of stellar performance. But now that performance is on a negative cycle, LSIFs are crap sold by bullshit artists and crooks. I can’t believe you guys would support this stuff.


adrian2 wrote:As I've demonstrated to you, the author did have a capital loss, period.


Well I have the article in front of me and by golly, I don’t see his numbers anywhere. I know we discussed some hypothetical numbers earlier and they illustrated a bona fide loss AND the author mentioned one of his losers was Traix, which I’ll concede would definitely be a loss but I don’t know all of his details. What was his original outlay for all funds and what were his proceeds? ONLY with all of that information do we know for sure IF he had a loss on all his LSIFs. Did he sell some for a net proceeds of more than his net cost? We don’t know. And even with Triax, did he calculate the loss properly or did he overstate it? Show me where the author tells us that and I’ll be happy to apologize to you – again - AND the author (well, at least you).


adrian2 wrote: Do you really think everyone is there just to get you? Do you think everybody thinks with one mind, "the non-advisor mind" which you have to face and defeat for the good of the little guy?


Well that would be paranoid. No it’s really because a 5 on 1 debate is a little tough. That’s all. But I wasn’t feeling well yesterday. I think I can handle it again so never mind (and get a sense of humour).
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Postby adrian2 » 21 May 2006 20:30

smelly wrote:I listed the “gossip” (do you think it’s ok to publish unsubstantiated drivel like the alleged conversation with the LSIF executive?)

Unsubstantiated drivel? Are you self characterizing your vicious unsubstantiated attack?

Alleged conversation? Yes, I think it's ok to publish it. Do you have any proof it's not real?

smelly wrote:the ROR chart with no mention of the tax free tax credit

It would be illegal to publish a ROR chart with the tax credit embedded in it. Ask the fund companies about it. The tax credit was mentioned 8 times in the article, starting in the second paragraph.

smelly wrote:the lack of explanation of why the MERs are larger than an average fund

And that explanation is, besides the greed of the fund company, and the "because the market will bear it" argument?

smelly wrote:and the wishy washy “which is why I didn’t dump all my LSIF holdings” and “I doubt I’ll ever be buying any more labour funds” except maybe the mezzanine debt variety “if I were tempted again”.

How is this a discrepancy or error?

smelly wrote:What he’s saying is that he got sucked into buying these things because of the tax credits and up until spring of ’00 he probably still loved them because of stellar performance.

Nowhere is he saying that he loved them because of stellar performance. At no point they had such a thing.

smelly wrote:But now that performance is on a negative cycle, LSIFs are crap sold by bullshit artists and crooks. I can’t believe you guys would support this stuff.

LSIFs are crap because of the 5%+ MERs.

Once again, where is at least one discrepancy and error?

smelly wrote:
adrian2 wrote:As I've demonstrated to you, the author did have a capital loss, period.


Well I have the article in front of me and by golly, I don’t see his numbers anywhere. I know we discussed some hypothetical numbers earlier and they illustrated a bona fide loss AND the author mentioned one of his losers was Traix, which I’ll concede would definitely be a loss but I don’t know all of his details. What was his original outlay for all funds and what were his proceeds? ONLY with all of that information do we know for sure IF he had a loss on all his LSIFs. Did he sell some for a net proceeds of more than his net cost? We don’t know. And even with Triax, did he calculate the loss properly or did he overstate it? Show me where the author tells us that and I’ll be happy to apologize to you – again - AND the author (well, at least you).


What's so hard to read in the following quote? He's saying he was under water for each of his sells, and for each one he repaid the tax credits. You've initially objected, yabbut he does not know that he does not have a loss because of the original tax credit and maybe you'll snitch him to CRA. You were wrong, morally and technically, the tax credit washes out if one repays it when you liquidate the investment.

Jon Chevreau wrote:The ones I opted to liquidate were sold even though the eight-year hold period had not expired. That meant, in the case of a typical $5,000 purchase, repaying $1,500 worth of federal and provincial tax credits.

In each case, it also meant taking a capital loss. The only saving grace was -- as I had preached in more than one column -- they were part of my "non-registered" portfolio so I could at least offset these losses against realized gains in other winning investments.


smelly wrote:And I never said the author didn’t have a capial loss, once again, what I said was he may not have a loss unless he was aware of how the ACB is calculated.


Once again, wrong. There is no "he may not have a loss", he has it.
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Postby brucecohen » 21 May 2006 21:10

smelly wrote:
the lack of explanation of why the MERs are larger than an average fund


adrian wrote:
And that explanation is, besides the greed of the fund company, and the "because the market will bear it" argument?


VC sponsors justify their mgmt fees on grounds that they must put in much more work than regular MF portfolio managers, even getting actively involved in running investee businesses. I find it interesting that the best performing LSIF today -- a phenomenal turnaround story -- is run on only a part-time basis (almost a hobby) by the CFO of sprawling Dundee Bancorp, who wasn't even a professional VC manager until he took on this fund.
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Postby smelly » 21 May 2006 21:35

BruceCohen wrote:
You complained several times about the media not factoring in the tax credit when reporting LSIF returns, thus implying the tax credit was a silver bullet that would turn a sow’s ear into gold. I simply tested that. Glad you concede that a 2.5% CAGR “sucks.”


Sorry, maybe you inferred that but I did not imply anything of the sort. My point was that when factored in, the value of the tax credit improves the ROR. To exclude them from the ROR is wrong. That’s all. I’ve listed elsewhere what my LSIF portfolio has done and the picture looks a hell of a lot less gloomy than this or any other article on LSIFs would have you believe. No sow’s ear into gold at all. You’re putting words into my mouth.

BruceCohen wrote:Yes, LSIFs did very well in the late ‘90s….because they were stuffed with tech, the same crap that the media – acting on its own -- induced all those stupid DIY investors to put all of their money into. I guess the LSIF managers were following the media’s advice too, huh?

So let’s extend the CAGR window to take in those heady returns. Eight LSIFs have 10-year records. Here they are with CAGR and asset level at Mar 31:

So, exactly how is an LSIF a better investment than a small cap fund?


See, I’m able to ignore that “I guess the LSIF managers were following the media advice” comment. See adrian2? Bruce has just thrown that in as an extra shot. It doesn’t mean anything. It’s just a glib comment. Bruce is just trying to make me look stupid by making a cynical and sarcastic comment. That’s all. It doesn’t mean anything. I’m going to ignore it and deal with the important parts of his post.

Bruce, you wasted your time and computing power. I never said that LSIF retruns were better than small cap funds. And why are you continuing to use past performance as a determining factor regarding the viability of LSIFs as an investment. The important performance is the future performance. Can you tell us what that will be? If you don’t like the asset class, fine. Don’t buy it.

BruceCohen wrote:IIRC, some time ago here or on boomer a number of people blew apart the methodology you’ve used to compute your returns. In any event, you’ve doubled your money over what time period? What’s the IRR?


I disagree
Eleven years
A lot better that articles like this would have me believe.

BruceCohen wrote:What are the odds of the slide being reversed?
In any event, please cite the factors that justify your belief there will be an LSIF turnaround.


I believe I’ve said clearly in another thread that I don’t consider my style of investing to be gambling so I cannot respond with the odds you’re looking for. I do believe in faith based on knowledge and wisdom, however. And I believe LSIFs will turn around and give good ROR on the gross investments. But we digress. We were debating the article of the 15th.


BruceCohen wrote:Where and when did I advocate that anyone redeem an LSIF before the end of the lock-in?


I don’t know that you have. But the author of the article certainly is. Or maybe only if it can be done at a loss (Ooops, there’s that capital loss bugaboo again)



BruceCohen wrote:Gee, unit holders of Crocus and Retrocomm will be relieved to hear that. The same goes for investors in the 42 funds with negative 10-year CAGRs, according to PalTRAK. Imagine holding Mavrix Growth Fund with a 15-year CAGR of –3.3%.


Gee, I hope those weren’t the only ones they ever bought. If they are, they ought to fire their advisor. Maybe the author should write an article about the importance of diversification to protect oneself against loading up on a loser. I mentioned that I owned Triax didn’t I? I’ve bought a lot of others too. A different one each year.

BruceCohen wrote:My fax machine isn't working; would you like to e-mail the article.


I don’t have a scanner. It was in the October 7, 2000 FP. The author’s name was Robert Gibbons. There’s nothing but Robert’s email at the end so I would assume he was a journalist. The article includes a very large picture of guys in clean suits in a lab holding scientific things. I checked again, no analysts or advisors mentioned as far as I can see. Somebody here must have a working fax machine out there so we can pass this thing over to Bruce.

If an advisor makes a bad call he or she is accountable to the client, no? Too many of those mistakes and I’m guessing they will loose clients or get canned. If it breached any KYC rules the client(s) have a case to seek redress. I’ve also said before that I’ve seen a couple of instances where clients complained to the dealer about trades that weren’t in contravention of any rules or even guidelines and the dealer compensated the client for their perceived loss (and paid for the transfer out).


BruceCohen wrote:So it’s OK for an advisor to load his/her clients down with funds, ignore their phone calls and send no materials other than the annual statements mailed by the fund companies?


No, ignoring phone calls is bad. I just did a “find” on the word phone and this is the only hit I got. Are you stuffing, Bruce?

BruceCohen wrote:And it’s OK for an advisor to take someone who has just completed a redemption period and put her into another fund that is virtually identical to the previous one, starting a whole new DSC schedule.
And it’s OK for an advisor to do the same with a series of 10% annual withdrawals.


Hey, you’re doing it again man. You didn’t say anything about a fund that is virtually identical to the previous fund. Did you, Bruce?



BruceCohen wrote:I’m no expert at all, let alone a supreme expert. You – the professional advisor – were the one who declared it worrisome that people wonder if they have too many or too few funds.


Once again you’re either missing my point or trying to put words in my mouth. This issue is one of the issues that I was referring to when I said

I've seen and heard things from clients and others that lead me to believe we should worry. I think that complacency is dangerous because there's lots of crap out there. And unlike some, I worry that this crap is influencing people to take action that will hurt them.





BruceCohen wrote:Thank you for conceding a point.


Wow, what a huge win for you.


BruceCohen wrote:Depends on the situation, as you would say. If this client shows potential for much greater asset accumulation, the advisor could do the early business as a loss leader. I know several advisors who grade prospective clients and do that. If the client has few assets and no prospects for great accumulation in the future, the advisor would be justified in doing DSC with full disclosure. The more ethical advisor would calculate the present value of the differential between the FEL and DSC trailers and credit that against a 4% or 5% FEL. So the client might end up paying 2-3% upfront in a transparent transaction.


Thank you for conceding a point. Sorry, couldn’t resist. But seriously, doing pro bono work on spec of making the account profitable in the future takes a lot of faith. Sounds good but I doubt many people would work that way. And since you brought up ethics, my turn. Do you believe the author in question was ethical with his comment about the LSIF industry exec’s comment?


BruceCohen wrote:In concept, no. In application, yes. Because it’s a hidden payment based on no standards or accountability.


FWIW, I’d vote for your concept of itemizing costs. Our Optima statements show clients exactly what, in dollars was deducted each quarter.

BruceCohen wrote:Huh? You have been claiming there exists a crisis because one or more investors might misinterpret a media article and then might act on this interpretation and then might lose money and this loss might be major. (You still haven’t cited one real case)


Ok, sorry. I was tired and sick as I was about to discover. But what do you call it when I raise a red flag on an article but I’m told it’s not a problem unless I can prove it’s a problem but you and others can list cases or situations that you claim to be real but we have no proof. And we certainly don’t have any other view but the one you have documented. I’m getting Naked Investor flashbacks. If the cases you’ve listed are true and accurate, I’d have to say it would take some real wild extenuating circumstances to find in favour of the advisors. Email me the tapes, notes and audited statements so I can verify what you’re saying is true and complete, ok?



BruceCohen wrote:So she “showed” you the article. Did she tell you to redeem her fund, or did she ask you if she should redeem her fund, or did she simply ask how her fund is doing? What fund was it, when did she buy and how is she doing? What did you tell her?


Fortunately this client came to me first instead of taking direct action. Unlike the client I was too late to help because she transferred her LSIFs out in-cash because of what a co-worker told her about LSIFs going bankrupt. First I referred her to the Net Invested Capital chart we review with each client every time they come in. This helps to focus on how the entire account has done and over a long term. Then I offered to document what her NIC is on her LSIF only. We will review this next week. Besides that, I was able to tell her in no uncertain terms how I felt about the article and the author. You know, the kind of valuable information that wouldn’t be looked upon favourabley here. BTW, where is the author? Why isn’t he fighting this battle for himself? Hmmmm.
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Postby brucecohen » 21 May 2006 21:50

smelly wrote:and up until spring of ’00 he probably still loved them because of stellar performance.


Looks like LSIF performance wasn't all that stellar then. Here, from PALTrak, are the calendar year returns for the median LSIF followed by the median Cdn small cap fund and then the median Cdn equity fund. (Note: these aren't asset-weighted because Morningstar doesn't do an asset-weighted LSIF index.)

1997: 2.1% versus 16.3% versus 14.8%
1998: 0.7% versus -13.6% versus -1.3%
1999: 18.3% versus 13.7% versus 19.4%
2000: 10.9% versus 6.8% versus 14.2%

Looks like the LSIFs had one stellar year (1999) but still lagged the straightforward (so to speak) Cdn equity fund universe.

The best performing LSIF in '99 was DVO which gained 99.1% albeit as a turnaround. The best performing small cap fund was Mavrix Strategic SC at 120.1%. The top Cdn equity fund was Transamerica"s GS2 at 110.5%.
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Postby smelly » 21 May 2006 22:54

I have a copy of the G&M fund report for the month of Feb '00 at work. It seems to me that it showed one year ROR for several LSIFs as stellar, I believe Triax was north of 100% for the year. Don't quote me because I don't have that report here but I think I'm pretty close.
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Postby brucecohen » 21 May 2006 22:59

Smelly, sorry to hear you haven’t been feeling well. Hope you’re feeling better.

My point was that when factored in, the value of the tax credit improves the ROR. To exclude them from the ROR is wrong.


I would have included that info in the article but, as several others here have noted, no financial organization can. The CFA standard prohibits inclusion of a tax break when calculating investment returns.

I never said that LSIF retruns were better than small cap funds.


No, you didn’t. You simply said LSIFs are good investments. I compared them to the closest peer group and found, admittedly to my surprise, that SC funds have been a much better fit for someone who wants the investment aspects of small companies and hasn’t simply been snowed by the lure of a tax credit and the LSIF industry’s marketing.

As I remarked earlier, my findings beg the question of why an advisor would recommend an LSIF over an SC fund. Consider that SC funds have these comparative advantages over LSIFs:
-- Lower MERs
-- No 8-year lock-in
-- No provincial investment quotas
-- No pacing requirements
-- No requirement that a 20% cash-like cushion be maintained
-- Tighter regulation of valuation and performance reporting for the portfolio holdings
-- Most importantly, the VC manager's goal is to cash in when the investee company is sold...often through an IPO when it becomes a small cap. That deal will be done at a good price only when the SC market is doing well (unless the investee company has patented a cheap, effective, environmentally friendly way to power motor vehicles or some other momentous technbology.)

And why are you continuing to use past performance as a determining factor regarding the viability of LSIFs as an investment. The important performance is the future performance.


As you pointed out, we can’t predict the future. But we can assess how these funds have done in the past, under various market conditions. I believe as well that there has been little turnover among LSIF managers, (though there is a lot of survivor bias in the stats because so many LSIFs have vanished.) So, it’s likely that the guy(s) who produced the returns for the past x years are still running the portfolio. If they didn't do well in the booms of the late '90s and recent years, what evidence is that they'll do well going forward?

I believe I’ve said clearly in another thread that I don’t consider my style of investing to be gambling so I cannot respond with the odds you’re looking for. I do believe in faith based on knowledge and wisdom, however. And I believe LSIFs will turn around and give good ROR on the gross investments. But we digress. We were debating the article of the 15th.


OK, strike the use of the word “odds.” I should have used "likelihood." OK? I cited several reasons why I believe a turnaround in the foreseeable future is unlikely. On what grounds – other than undefined “knowledge and wisdom” – do you feel a turnaround is likely?

This is not a digression. Though I haven’t been able to read Jon’s column, it appears he’s suggesting the opportunity cost of holding LSIFs is too high. Ergo, he sees little likelihood of a meaningful rebound.

Gee, I hope those weren’t the only ones they ever bought. If they are, they ought to fire their advisor. Maybe the author should write an article about the importance of diversification to protect oneself against loading up on a loser.


So, if an LSIF like Retrocomm or Crocus (the only LSIF with a Manitoba tax credit, IIRC) goes tits up it’s doesn’t matter because the investor should have known enough to diversify. But if a speculative OTC stock like Lumenon goes tits up, there’s a worrisome situation of dire public concern because one investor, who may or may not have been diversified, lost money?

I don’t have a scanner. It was in the October 7, 2000 FP. The author’s name was Robert Gibbons. There’s nothing but Robert’s email at the end so I would assume he was a journalist. The article includes a very large picture of guys in clean suits in a lab holding scientific things. I checked again, no analysts or advisors mentioned as far as I can see.


I think Gibbons was/is a freelancer writing for FP Magazine. Did the article really recommend the stock or was it a profile of a leading edge company in fiber optics? You said the article was published in 2000. A google search indicates Lumenon didn’t file for Chapter 11 until 2003. And you cited this person’s failed investment as one of several development that “lately” gave you cause to worry.

If an advisor makes a bad call he or she is accountable to the client, no? Too many of those mistakes and I’m guessing they will loose clients or get canned.


And if somebody prints too much stuff that the readers consider crap, they’ll stop buying the publication or continue buying the publication but stop reading the writer's work. The old FP conducted reader research to measure the popularity/recognition of its writers. I imagine the current NP does too.

If it breached any KYC rules the client(s) have a case to seek redress.


Sure, but my experience has been that advisors typically tell clients what to mark down on the KYC form. Indeed, one flaw in the KYC system is that we expect unsophisticated people to be able to characterize their investment profile. I will grudgingly admit that profile worksheets are one useful feature of wrap programs.

-----
Regarding situations when DSC is "bad"....

No, ignoring phone calls is bad. I just did a “find” on the word phone and this is the only hit I got. Are you stuffing, Bruce?

Hey, you’re doing it again man. You didn’t say anything about a fund that is virtually identical to the previous fund. Did you, Bruce?


No, I didn’t spell that out. I should have. I assumed that you and the others were aware of that. Now that you are, do you consider these abuses of the DSC structure to be “bad?”

---
Regarding your expressed concern about investors wondering whether they have too many/too few funds....

Once again you’re either missing my point or trying to put words in my mouth. This issue is one of the issues that I was referring to when I said

I've seen and heard things from clients and others that lead me to believe we should worry. I think that complacency is dangerous because there's lots of crap out there. And unlike some, I worry that this crap is influencing people to take action that will hurt them.


What crap? You wrote:
I've polled my peers about financial media influence and the majority of the responses say that the media isn't a factor because very few clients actually pay any attention. I used to feel that way too but lately I've seen and heard things from clients and others that lead me to believe we should worry.


I then asked: “and those things are?” Your reply cited several including:

I hear people saying they have too many funds, not enough funds,….


-----

Do you believe the author in question was ethical with his comment about the LSIF industry exec’s comment?


I don’t know because I haven’t seen the article. FP has no home delivery here and it’s too much trouble to go to the store to buy it. And I won’t pay for web access because I don’t enjoy reading newspapers on my computer screen (though the Star’s web site is easy to read)

FWIW, I’d vote for your concept of itemizing costs. Our Optima statements show clients exactly what, in dollars was deducted each quarter.


Good on you. Spread the word among your colleagues.

But what do you call it when I raise a red flag on an article but I’m told it’s not a problem unless I can prove it’s a problem but you and others can list cases or situations that you claim to be real but we have no proof.


I’ve asked for specifics of firsthand experience, not proof. The cases I cited are those on which the investors – friends of mine – consulted me. While I reviewed their account statements and other documents, I had no reason to keep them. I assure you, though, that these are real cases. And they’re fairly recent. They're also identical or similar to anecdotes other posters have cited in this forum and Boomer over time. As a sage once declared: [i]"I've seen and heard things from clients and others that lead me to believe we should worry. I think that complacency is dangerous because there's lots of crap (advisors) out there. And unlike some, I worry that this crap is influencing people to take action that will hurt them." :D
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Postby smelly » 22 May 2006 12:40

Before signing on this morning, I was planning on trying to get this conversation back on track as well as on a less emotional tone. But I see Bruce beat me to it. Good.

My original point was that, amongst other difficulties with the article, I was concerned that the author wasn’t aware of the proper methods to calculate capital gains or losses when it comes to LSIFs. Since he hasn’t responded, I still don’t know if he knows. Maybe he’s too busy writing up and submitting an adjustment to put his ’05 return right or maybe he has another reason for not responding. adrian2 and I went round and round – because of my boneheadedness and temporary insanity - about whether the proceeds were based on the gross or net and I finally realized I was wrong. It’s the net and I apologized for the mistake. Nonetheless, since the author failed to include his calculations, we don’t know if he is aware of the fact that the ACB is based on the net, after tax credit cost, of the original investment. So, to use the example of a $5000 purchase made in Ontario, the author or anyone considering following his lead would have to receive net proceeds of less than $3500 if they plan on claiming a loss. Anything higher than that will not be a loss so it’s important from an investment planning perspective (should I hold or sell?) as well as from a tax return filing perspective. If anyone assumes that since they paid $5000 and the proceeds were $3500 they have a $1500 loss they would be wrong. Even if they received $2500, the loss is $1000, not $2500. Does anyone disagree with these figures or the fact that it’s important to understand this for the two reasons I stated? So unless we see the author’s numbers, we don’t know for sure if he had a loss on all of his sales or if he used the correct calculation to determine the loss.

adrian2 also feels that my comment on ratting out the author to CRA was immoral. Well, adrian2, when people don’t pay their fair share of taxes it comes out of our pockets. That may not bother you but it bothers me so I see nothing immoral about ratting out on cheats even though it was more an empty threat than anything else. I’m a big believer in Karma so I’ll leave the author’s fate to the old, “what goes around comes around”. And based on that philosophy, a letter from CRA will not be the worst thing that he will experience.

Onto the responses from Bruce.

Sure, the LSIF companies can’t include the tax credits but when a reporter discusses the returns, their existence and the benefits should be included. Heck, we haven’t even factored in the concept that the tax credits are tax free. That’s another boost, no? It’s good to hear that a true professional would have had the decency and be interested enough in the truth to include that info in an article.

I suppose that small cap is the closest peer group with readily available history. But comparisons to SC are inaccurate due to the private equity nature of the majority of the investments in the LSIF portfolio. There are VC benchmarks, which I admit I don’t have up to date figures for, that suggest that the asset class is capable of long term (gross) returns much higher than SC. The last time I saw a figure was a few years ago and it was based on U.S. VC returns and it was somewhere around 25%/year. So even with MERs north of 5%, and even if you shave a few BPS off that 25%, this asset class has some potential. But that’s my opinion. And that’s the understanding and belief that I believe anyone promoting or considering this investment should hold. For anyone who regularly meets with Ray Benzinger or Earl Storie or David Levy or any of the other managers, we know two things. There are lots of excellent companies in many of these portfolios but without a buyer to confirm that, the performance will languish. But we believe it’s only a matter of time before things start popping. Call it blind faith if you want. I consider it an informed opinion.

However, as I’ve told clients, if you’ve lost faith in these things, certainly if you believe they will continue to lose value and reach zero one day, by all means you should sell ASAP. Personally, I think if any of my clients have lost faith in LSIFs they’ve also lost faith in me as their advisor so I think they should re-evaluate that relationship as well. I would.

Diversification spreads the risk. No one wants any losers but even good due diligence can get sucker punched. If someone bought only Retrocomm or Triax or Crocus, I feel sorry for them but hopefully they came out of the experience with a good life lesson. The old don’t buy anything just for the tax benefits could be one lesson. If the blame is on an advisor who didn’t make them diversify (we had some people who insisted on loading up on Triax against our, well documented recommendation) there’s something to look out for with the next time they are exposed to something different.

Similarly, when someone makes a buy based on a media fluff piece and it goes in the tank there are also lessons to be learned. But it’s when the article promotes the company and it’s stock, doesn’t mention a thing about it being speculative, that’s definitely a bad thing.
The Lumenon article was a glowing company profile with nary a discouraging word about its prospects. There was mention of skepticism that the CEO waved off and the mention of Nortel and Lucent as potential customers would have raised flags only with the fortunetellers amongst the readers I suppose. The last few paragraphs detailed the recent drop in the share price, which followed an earlier dramatic increase. No matter how you slice it, given the tone and the location of this article it was promoting the stock IMO. I’ll stipulate to your Chapter 11 filing date but I don’t know exactly how long the company continued in business. This is just one example of a client who felt sucked in by an article in the paper. I’ve been told of other, similar experiences but this is the first time someone had the article that they say they based their purchase on.

Popularity/recognition of a columnist/reporter/journalist doesn’t necessarily mean what he or she is writing isn’t crap. It just means it’s popular. And if the readers can’t distinguish crap from good stuff, the writer has it made. Or the smart readers who stop reading the writer are replaced by fresh acolytes on a regular basis.

I wish I could make all financial advisor clients better consumers but I can’t. I can do my best but again, I don’t have a national column to help people understand the importance of things like KYC.

Moving matured DSC funds to identical new DSC funds sounds fishy. But I think I gave you a couple of possible reasons why it would be acceptable so I’d reserve judgment until I heard the advisors side. You’re not going to get me to pronounce on this without all the facts.

Regarding the too many/too few funds thing, my point is that there isn’t a right or wrong answer. An advisor should have a philosophy or strategy and it should prove itself. When one article tells the reader that anything more than 6 funds is bad or another article says less than twenty funds is bad, it can be harmful. These are made up examples but my point is that many media experts pontificate on the right or wrong way to invest and readers will take it personally and get stressed out because they have 7 funds or only 19. If they come in to discuss the article, fine. But that doesn't always happen. Sometimes they just transfer out to another advisor. It’s amazing to me how someone can read an article in the paper, usually by someone with no more credentials than they have, and put anymore than a modicum of value to the opinion of the writer. It’s weird behaviour but I see it a lot.

The article covered a full page and at the top was a picture and quote by Warren Baldwin dumping on LSIFs. The small headline said,
“ A labour sponsored exec who’d lost much of his own investment said ‘I believed my own B.S.’"
The main headline said,
“Why I sold some labour funds”
The paragraph with the exec reads,
“I made this decision after meeting a few labour fund executives at a hedge fund conference in Niagara Fall. I still recall the amusing candour of one executive who had sunk $50,000 of his own money into his own labour fund and lost a substantial chunk of it. Worse, he had to face the ire of friends and family who had also invested in his fund. ‘I believed my own B.S.’, was his memorable confession to me"
I think I’ve got that right but maybe BYLO can work his magic and provide an online source for you.
Do you believe the author in question was exercising good journalistic ethics? Or did I watch All the President’s Men too many times because I thought this kind of thing was considered inappropriate at best.

And if you expect me to accept any of your examples of clients being taken by advisors, isn’t it reasonable for you to accept my suggestion that what people read or hear in the media has and will continue to inflict harm?
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Postby brucecohen » 22 May 2006 13:42

smelly wrote:But comparisons to SC are inaccurate due to the private equity nature of the majority of the investments in the LSIF portfolio. There are VC benchmarks, which I admit I don’t have up to date figures for, that suggest that the asset class is capable of long term (gross) returns much higher than SC. The last time I saw a figure was a few years ago and it was based on U.S. VC returns and it was somewhere around 25%/year. So even with MERs north of 5%, and even if you shave a few BPS off that 25%, this asset class has some potential.


You're probably referring to this produced by the US VC managers association. Let's assume it's accurate; we know the stats produced by hedge fund associations are dubious. It's interesting to compare the US industry with Canada's LSIF program. The US VC industry gets no govt subsidy and has little, if any, mass-market retail distribution. Here are the US CAGRs at 31-Dec versus the LSIF CAGRs:

1 year: 15.6% versus 0.4%
3 year: 7.5% versus 0.0%
5 year: -6.8% versus -3.6%
10 year: 23.7% versus 1.5%

The 20-year US CAGR is 16.5%. LSIFs don't go back that far.

The article covered a full page and at the top was a picture and quote by Warren Baldwin dumping on LSIFs. The small headline said,
“ A labour sponsored exec who’d lost much of his own investment said ‘I believed my own B.S.’"
The main headline said,
“Why I sold some labour funds”
The paragraph with the exec reads,
“I made this decision after meeting a few labour fund executives at a hedge fund conference in Niagara Fall. I still recall the amusing candour of one executive who had sunk $50,000 of his own money into his own labour fund and lost a substantial chunk of it. Worse, he had to face the ire of friends and family who had also invested in his fund. ‘I believed my own B.S.’, was his memorable confession to me"
I think I’ve got that right but maybe BYLO can work his magic and provide an online source for you.
Do you believe the author in question was exercising good journalistic ethics?


I'm confused. Did the LSIF exec make the comment to Warren or Jon? If it was made to Jon, the quote's definitely fair game. If Jon was quoting Warren who was quoting the LSIF exec, it's less clear and depends on Warren's trustworthiness. I dealt with Warren for years and always found him to be a straightshooter. So, in this case, I'd be inclined to side with Jon. Had Jon been quoting, say, Joe Killoran who was quoting an LSIF exec, I wouldn't us it.

I must say that when I regularly read LSIF proxy circulars -- years ago -- I was always struck by how little of their own money fund officers and managers had put into their funds. So I'm surprised by the $50,000 figure. If I were an active journalist today, I'd go through the circulars and compile a list of who owns how much. I think a lot of investors and advisors would find that info interesting.

(After an annual meeting, I once asked the Chairman of Working Ventures -- the head of the Cdn Federation of Labour -- why his union-run pension fund had only the nominal $1 in WV that was required by law. Without thinking, he replied that the only reason to invest in WV was to get the tax credits and they carried no value for a pension fund that was already tax-sheltered. I learned later that, not surprisingly, that his comments caused much consternation in WV's executiver suite when my article appeared the next morning. :lol: )
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Postby DanH » 22 May 2006 14:19

BruceCohen wrote:You're probably referring to this produced by the US VC managers association. Let's assume it's accurate; we know the stats produced by hedge fund associations are dubious. It's interesting to compare the US industry with Canada's LSIF program. The US VC industry gets no govt subsidy and has little, if any, mass-market retail distribution. Here are the US CAGRs at 31-Dec versus the LSIF CAGRs:

1 year: 15.6% versus 0.4%
3 year: 7.5% versus 0.0%
5 year: -6.8% versus -3.6%
10 year: 23.7% versus 1.5%

The 20-year US CAGR is 16.5%. LSIFs don't go back that far.


Structural differences certainly account for some of the return gap, Bruce, but last I checked (and it's been a while) there were significant methodological differences between the NVCA (U.S.) and CVCA (Cdn) return numbers.

BruceCohen wrote:I'm confused. Did the LSIF exec make the comment to Warren or Jon? If it was made to Jon, the quote's definitely fair game.


I read the article and Jon spoke with the former LSIF exec at a hedge fund conference. I don't doubt that the quote is accurate but knowing the source of the info and the fund in question (details I don't expect to get) would certainly paint more meaningful context around this.

For instance, one LSIF exec that I saw quoted a fair bit around the turn of the century is now running high-payout structured products. The LSIF he used to run? Well, let's just say it died a quiet, much overdue death.

In other words, I don't question that this conversation happened. But when somebody tells you something that is already in line with your beliefs or opinions, you're less likely to scrutinize the information or the source thereof. (Note: I used The Naked Investor to illustrate this point in a 2005 article.)
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Postby brucecohen » 22 May 2006 16:02

DanH wrote:I don't doubt that the quote is accurate but knowing the source of the info and the fund in question (details I don't expect to get) would certainly paint more meaningful context around this.

For instance, one LSIF exec that I saw quoted a fair bit around the turn of the century is now running high-payout structured products. The LSIF he used to run? Well, let's just say it died a quiet, much overdue death.


OK. If the guy had been with a true dog of a fund, I wouldn't have used the quote.
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Postby DanH » 22 May 2006 16:34

BruceCohen wrote:OK. If the guy had been with a true dog of a fund, I wouldn't have used the quote.


And even this is a matter of opinion to some extent. For instance, there are some popular funds and managers with whom I wouldn't invest a dime. So, I'm not necessarily saying that Jon might be at fault for using the quote. But many might feel differently about the quote if thethe source of the quote was known.
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Postby smelly » 22 May 2006 19:43

BruceCohen wrote:OK. If the guy had been with a true dog of a fund, I wouldn't have used the quote.


My two cents says that if the guy was dumb enough to talk to this writer even off the record, he was a loser. Before someone freaks out, let me explain and back up that comment. More than a couple execs and marketing reps from reputable (IMHO) investment firms and dealers have told me that this particular writer is not one that gets phone calls returned. Way too many bridges burned. So I find it very hard to believe that anyone with any intention of staying in this business in any capacity would be dumb enough to make that comment to this writer. They would have to be either new or a bonehead. So real or made up, it's not newsworthy I'd say.

So Bruce, unlike Woodword and Bernstien at the Washington Post in the '70s, finance journalists don't have to verify their sources? Does even the editor get told the real identities of undisclosed sources?
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Postby brucecohen » 22 May 2006 20:19

smelly wrote:So Bruce, unlike Woodword and Bernstien at the Washington Post in the '70s, finance journalists don't have to verify their sources? Does even the editor get told the real identities of undisclosed sources?


As I understand it, Jon spoke directly to the guy. So there was no need to verify the source; Jon knew he was formerly with an LSIF. Should Jon have insisted on seeing the guy's account statements? No. Journalists normally accept what they're told -- unless it seems too far-fetched.

Executives and civil servants who go through media training are taught to never lie to reporters. That's because if you do and get found out, the media has a herd mentality and a very long memory, so you'll suffer heavily in the long run. That's why spin doctors get paid so much to make it possible for these guys to mislead reporters without actually lying.

For example, journalists repeatedly stated -- with and without attribution --that "asset allocation accounts for up to 90% (or more) of a portfolio's return" because that's what they were repeatedly told by financial advisors and mutual fund marketers. It took years to get across that this statement was false. Nobody -- the journalists, the advisors or the marketers -- read the study, or even its extract, which concluded that AA accounts for up to 90% of the portfolio's variability, not its return. Currently, following prompting by marketers and advisors, several reporters have touted rebalancing as a meaningful benefit of a wrap. But, because it's not in the interests of advisor or marketers to point it out, the reporters routinely fail to mention that the benefit of this diminishes to the extent that the portfolio holds other investments that don't get factored into the automatic rebalancing.

In a similar vein, as you noted in another thread, LSIF promoters love to talk about the excellent companies in which they've invested. When I was at the FP I was barraged by calls asking me to meet with them to discuss that. I always declined on grounds that I had no way to assess the merits or demerits of a private company.

Yes, an editor normally would be entitled to the name of an undisclosed source if he/she asked. So would the newspaper's lawyer. IIRC, Washington Post executive editor Ben Bradlee decided not to press Woodward and Bernstein for the name of their source because the story was so sensitive and he trusted Woodward. (I was working in Washington at the time and most of the betting was that DT was an FBI official.)
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Postby brucecohen » 22 May 2006 21:29

So Bruce, unlike Woodword and Bernstien at the Washington Post in the '70s, finance journalists don't have to verify their sources?


An interesting take on Wategate from someone who was there:

http://www.watergate.info/sussman/25th.shtml
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Postby smelly » 23 May 2006 10:23

smelly wrote:I have a copy of the G&M fund report for the month of Feb '00 at work. It seems to me that it showed one year ROR for several LSIFs as stellar, I believe Triax was north of 100% for the year. Don't quote me because I don't have that report here but I think I'm pretty close.


OK, the Globfund report dated 3/12/00 for 2/29/00 shows the following one year RORs:

Working Ventures - 37.22
BEST Discoveries - 50.87
Vengrowth - 57.29
Covington - 67.82
DVOF - 105.61

But the top dog, the grand master of LSIFs going into the 2000 RSP/LSIF buying season and the one that likely got most of the new money .... Triax at 108.21

The three year numbers were all double digit. I doubt you'd be able to find a single media report with any discouraging words about LSIFs around this time.

I sometimes show clients this chart but I always show them the same report from the next year, 2/28/01. Triax had a one year return of minus 50.95. Hey, I just noticed that the only one on my list (which was sorted in order of best to worst 5 year numbers) that had a positive one year number on the second chart was Retrocom @ 1.87.
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Postby smelly » 23 May 2006 10:42

BruceCohen wrote:Had Jon been quoting, say, Joe Killoran who was quoting an LSIF exec, I wouldn't us it.


Now there's a guy we haven't heard from in a while. Is he back from his mandatory vacation out west? One thing you gotta give him, he's no rat.
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Postby brucecohen » 23 May 2006 11:23

smelly wrote:OK, the Globfund report dated 3/12/00 for 2/29/00 shows the following one year RORs:....

But the top dog, the grand master of LSIFs going into the 2000 RSP/LSIF buying season and the one that likely got most of the new money .... Triax at 108.21


You're citing returns for the 12 months ending Feb 29. I cited calendar year returns; Paltrak's historicals show calendar year returns but not year-over-year returns for the intervening months. Triax isn't listed. A quick google indicates it got absorbed by Covington, so its name and performance have now been lost.

The three year numbers were all double digit. I doubt you'd be able to find a single media report with any discouraging words about LSIFs around this time.


I'm sure you're right. I was no longer in the media. If you look back to early 1997 and before, you'll see I cited as potential pitfalls all of the problems that have beset the pack in recent years. :D (Indeed I clearly remember Lou Voticki of Admax screaming at me over the phone after I pointed out the lack of regulated valuation for LSIF holdings.) It was also sometime in the mid-90s that I showed how, even with the tax credits factored in, LSIFs had under-performed Cdn equity funds...even when the credits were reinvested in those very same funds. I used broadly diversified funds for the comparison; it didn't occur me to use small cap funds. Actually, I used the diversified load funds most commonly sold by financial advisors. :D

What's the significance of double-digit three-year returns when you couldn't sell after three years without having to pay the tax credit and DSC. What happed to the CAGR when those costs were included? Working Ventures had a 5-year CAGR then and maybe a 10-year CAGR. How'd it do? WV no longer appears on Paltrak because it was absorbed by GrowthWorks and I think it got combined with several other LSIFs that didn't work out. So, again, the history is lost...at least the readily accessible history. When you think about it, due to survivor bias, Paltrak's medians likely overstate LSIF performance. Too bad Morningstar doesn't do an asset-weighted LSIF index free of survivor bias.

Let's see how those stellar performers from Feb/2000 have done over the past 5 years. CAGRs are readily accessible for four of them:

BEST: -13.1%
Cov I: -10.4%
DVOF: +0.5%
Vengrowth: -8.1%

So Paltrak says the client who put $1,000 into BEST in Feb/99 and then gushed about his 50.87% return in the first year now has units worth $733, not counting the tax credits. And his money is still locked in. If we reduce his cost by $300 in tax credits, he's up by $33 after 7 years -- a CAGR of 4.2%.
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Postby smelly » 23 May 2006 12:23

BruceCohen wrote:Triax isn't listed. A quick google indicates it got absorbed by Covington, so its name and performance have now been lost.

What's the significance of double-digit three-year returns when you couldn't sell after three years without having to pay the tax credit and DSC.


Hey, if you bought Triax, wouldn’t you change the name? They consolidated six Triax funds into one, each with a different unit exchange amount so the historical performance takes some extra math. It’s now Covington Venture Fund. Bound to be confused with the existing Covington Fund.

I’m not posting those old returns to imply that we can expect them to recur. Just an interesting look that’s all. But in hind site, and as a lesson learned, if we ever experience a dramatic uptick again, It may make sense to eat the clawback and DSC if it results in a decent net ROR
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