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Number Cruncher

Management-fee rebate provides bright spot for Covington investors Add to ...

What are we looking for?

Biggest money makers over the past year.

Let’s look at what funds have outperformed despite uncertainties ranging from the euro-zone debt crisis to slowing global growth.

The screen

We looked for the top performers among active managers in all asset categories for the year ended March 31. U.S. dollar, segregated and duplicate versions of the funds were excluded, as well as exchange-traded funds.

What did we find?

A retail venture capital fund flying high with a spectacular 80-per-cent return.

Some of the gains in Covington Fund V – New Generation Biotech Balanced came from holdings such as Interface Biologics Inc. and CounterPath Corp.

But most of the profit in this labour-sponsored investment fund originated from an unusual source – a hefty $2.9-million management-fee rebate at the end of last year by Covington Capital Corp.

The firm dipped into its own coffers to boost returns because it was the only way the money-losing fund could meet its investment objective of returning to unitholders their original investment of $10 per unit by Dec. 31, 2011. This goal was in the prospectus when the fund was launched in 2001 by Triax Capital Corp.

“Even though it wasn’t a guarantee, we felt an ethical or  moral obligation to meet that $10 a unit [subscription price]” says Covington managing partner Scott Clark.

That “objective” likely helped to market a fund set to invest in risky, biotechnology startups. Investors, who also benefited from juicy tax credits, might even have seen it as a money-backed guarantee.

Covington, which acquired this fund in 2005 from Triax, took over the portfolio in late 2008 from former manager Genesys Capital Partners. The fund had been struggling because of poor performance and the need to cash in strip bonds before maturity to meet redemptions.

The experience by investors in the Covington fund contrasts with those in VentureLink Balanced, which also had a capital-repayment feature. VentureLink LP did not feel it had to meet that objective by a 2014 deadline. It merged that fund with three others in 2010 to create VentureLink Innovation Fund, and set a different goal of long-term capital appreciation.

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