Laboursponsored funds not always best
They’re speculative and risky, experts say
OTTAWA — The federal government is restoring the tax credit for labour- sponsored investment funds, but investment experts urge caution for investors who may be considering them.
They say tax credits should not drive your investment decisions and that labour-sponsored investment funds have been a risky proposition with a history of disappointing performance.
Labour-sponsored funds or labour-sponsored venture capital corporations were first introduced in the 1980s as a way for small investors to invest in small to medium-sized businesses.
Eric Kirzner, who holds the John H. Watson Chair in Value Investing at the University of Toronto’s Rothman School of Management, says the idea was that investors would do well and companies that otherwise would not have been able to raise capital would get needed funds.
However, investing in earlystage small businesses is a speculative and risky proposition.
“There has been the occasional success, but in general the performance of these funds has been awful,” Kirzner said.
He noted that for most individual investors, the venture capital sector is not an asset class he would recommend.
The funds also have a holding period that can be as long as eight years. That means if the fund is sold before the end of the hold period investors may face penalties and lose their tax credits.
Many funds also have higher fees than those associated with conventional funds.
Peter Bowen, vice-president of tax and retirement research at Fidelity Investments, said that performance has been a challenge for many labour-sponsored venture capital corporations.