By Dan Hallett on November 5, 2010
In a recent Globe and Mail column, Shirley Won wrote about how investors in VentureLink ‘capital repayment’ labour sponsored investment funds are not getting their capital back. The article quoted a financial advisor – who bought the funds for himself and his clients – who is upset that VentureLink isn’t holding up its end of the bargain. One could argue, however, that this is simply a case study in a lack of due diligence. Page 1 of the November 2002 prospectus for these capital repayment funds lists the investment objectives as:
The investment objectives of the Income Fund are: (i) to generate a superior level of income by making debt and equity investments in a diversified basket of established eligible businesses operating in traditional industries and investing in reserves; and (ii) to preserve and enhance the net asset value of the Income Fund.
But you didn’t have to dig too deeply to find some pretty stern warnings. In fact, on page three of the prospectus is a big paragraph – all in bold print – that begins with:
The Class A Shares are highly speculative in nature.
But it goes on to say:
An investment in the Class A Shares of the Income Fund is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. There is no guarantee that an investment in Class A Shares will earn a specified rate of return or any return in the short or long term. There is no assurance that changes will not be introduced to federal or provincial legislation which, if unfavourable, could impair the investment performance of each Fund and the ability of the Income Fund to attract future investment capital.
So, it required reading just the first three pages of the prospectus to at least trigger some questions around the capital repayment feature. These are admittedly easy observations to make in hindsight. But in a February 2004 article titled Take a pass on capital repayment LSIFs, I didn’t dance around my advice to steer clear of these gimmicky funds. I didn’t get far enough to even read the prospectus. When I realized that the capital repayment feature was dictating what kind of investments the fund could buy, it was clear to me that this was not an investment-driven product but rather a marketer’s dream.
While the Globe article touches on the subject, I would guess that investors will be unable to compel VentureLink to fulfill the capital repayment part of the objective. Searching on www.sedar.com for documents on these funds, I found an October 2010 filing of the voting results of these funds. Most of the wording is very standard but one part jumped out at me. The vote on the special resolution of, “…the adoption of the investment objective of the amalgamated fund as more particularly described in the accompanying Circular“. This sent me in search of the objective of the amalgamated fund.
This lead me to a 114-page Circular containing details of the special meeting and resolutions. Among the resolutions was a proposed change of investment objective (on page 15) from the original one (i.e. generating income, preserve capital) to:
The fund’s objective will be to realize long-term capital appreciation by making debt and equity investments in a diversified portfolio of securities in eligible Canadian businesses and by investing in reserves, including debt instruments whose returns are linked to the performance of the TSX and the financial services sub-index of the TSX.
A sufficient number shareholders seemingly voted in approval of this and many other changes. It’s likely that investors (and the advisor in the article) did not read the beefy circular and, as a result, were unaware of the change in objectives. Perhaps people will feel better trying to fight the firm on this point given that marketing material was somewhat inconsistent with the prospectus. If unsuccessful, however, this may be another in a long list of examples – such as Portus – of how important it is to read offering documents and pay close attention to risk factors that are highlighted for you.