LSIFs and hedge funds with training wheels

By Dan Hallett on February 14, 2011

I was recently asked to comment on Labour Sponsored Investment Funds (LSIFs) by the Canadian Press.  The words attributed to me in this article may give readers the wrong impression.  The article says, in part:

Hallett said these funds are most attractive to higher income earners and those with long investment time horizons because of the long locked-in period. He urges people to limit their exposure to less than 10 per cent of total holdings because of the risk from investing in small private companies and the challenges of extracting your money.

As I recall, I said that when I used to recommend LSIFs that this was my recommendation.  I continue to agree with the idea of adding alternative assets in portfolios.  However, there is a difference between having a good idea and having the appropriate structure available to implement a strategy.  Such is the challenge of including private equity in portfolios for small investors.  More complete is the view I expressed in an article for Morningstar two years ago.  That article’s title – Why labour fund investors should exit – if they still can – nicely sums up my general advice on LSIFs.

I also provided a summary of some research delving into why Canadian venture capital investing has been so mediocre (beyond LSIFs).  More current Canadian venture capital return figures indicate that the situation hasn’t changed drastically over the past two years.  The figures indicate, however, that in this specialized area of investing the gap between mediocre funds and the top performers is very wide – which means it’s really easy to find a poor performing manager in this class.

One large factor explains Canada’s poor VC performance seems to be age (i.e. how long the money has been invested) but that argument loses merit with time.  As far as LSIFs go, it’s likely that structural issues have hampered performance.  And as we’ve seen from some of the developments around fund mergers and capital repayment LSIFs, ineffective governance has played a material role.

Speaking of alternative assets, I also spoke to Reuters recently on regular (i.e. prospectus-sold) mutual funds that employ some hedge-fund-like strategies.  This refers to the many mutual funds that have been granted regulatory exemptions to employ shorting techniques, within prescribed limits.  Once granted, these funds also tend to feature performance fees on top of the already-generous base management fees.  Funds from firms like Front Street Capital, Dynamic (Power funds) and Sprott are perhaps the most prominent of this contingent.  I mentioned all three to the reporter but I forgot to mention to him one fund that is below the radar but gaining lots of momentum (in sales and performance).

Sentry Diversified Total Return is an intriguing little fund.  (Not so little anymore.  At the end of 2009 this fund had $33 million of investors’ money.  Six months later, it was north of $139 million.  Recently, it topped $400 million.)  Andrew McCreath manages the fund with few formal constraints.  We’ve done some work on this fund and we liked what we see so far.  Our work continues so we’ve not yet made up our minds on this fund.  But it’s worth mentioning in a category where other larger funds (and personalities) dominate the discussion.

Dan Hallett
See Beyond

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