A quote from an otherwise serious and intelligent money manager in a story that appeared in the Free Press some months ago has become a one-line joke in our corner of the newsroom.

In the midst of a market analysis discussion during the RRSP season, the money manager said something to the effect that when managing one's investment portfolio, the important thing to remember is "to sell at a premium."

Of course, that should go without saying, and it's undoubtedly the goal of every investor, financial adviser, portfolio or fund manager. But because it's such tricky business to accomplish, it has inspired countless different strategies.

The management of labour-sponsored venture capital funds (LSVCFs) is a case in point. The funds were originally put in place -- with a healthy tax credit as an incentive -- to provide much-needed investment capital in order to allow regional industries and economic activity to remain sustainable. However, it is a risky asset class for its retail investors, and as such, there are the possibilities of fantastic rewards and absolute catastrophes.

In Manitoba, investments in LSVCFs yield an immediate 30 per cent tax credit to the investor, in addition to an RRSP deduction. However, the principal must stay put for eight years and the funds typically require a longer-term horizon to achieve the kind of returns its managers are looking for.

A recent article by a couple of academics from Ryerson and York universities that is to appear in the fall edition of the Canadian Investment Review argues, among other things, that, notwithstanding the tax credit, LSVCFs underperform other similar types of investment pools. In the preface to the article, which was written by Ryerson's Scott Anderson and Yisong S. Tian of the Schulich School of Business at York University, the authors write that "these funds underperform other investment funds and market indices and... manager compensation is likely the main culprit behind the poor performance."

Needless to say, managers of Crocus Investment Fund and ENSIS Growth Fund -- the only two LSVCFs available to Manitoba investors -- take exception to the article's thesis. And with good reason.

Among other things, the authors complain about the overly complex and varying levels of fees and incentives paid to fund managers.

A lot of that contentiousness arises from arrangements some of the newer funds have made with third-party managers. They sometimes include bonuses that would get paid for the performance of certain assets, regardless of the performance of the entire portfolio.

But the portfolios of both Crocus and ENSIS are managed by their respective staffs and there is no external management. In the case of ENSIS, there is a separately structured management company -- made up of ENSIS staffers -- who are paid a fee of two per cent of the net asset value of the fund.

Crocus, which is one of the oldest of the 58 LSVCFs now in existence, is a rare venture capital organization in that it pays its managers a straight salary. The only bonus available is a very modest employee ownership program based on performance of the fund. At ENSIS, which has a more entrepreneurial structure to its management and ownership, its managers will receive a bonus of 20 per cent of any cumulative compounded return on investment the fund records which is over and above eight per cent.

ENSIS president Bill Watchorn pointed out the incentive would be based on realized gains and that the management bonus likely won't be paid until after the fund has been wound down, if it's paid at all.

Considering the continuing dismal state of affairs in the equity markets and the current uncertainties in the North American economy, neither ENSIS nor Crocus, nor any of the 58 LSVCFs, have achieved anywhere near an eight per cent cumulative return on investment.

Kirk Falconer, an official with Mary McDonald & Associates, a consulting company which has become the most authoritative independent voice on the Canadian venture capital business, said the authors' premise is flawed from the start when trying to compare the management of a LSVCF to that of a small-cap mutual fund.

Falconer points out that LSVCFs, unlike limited partnership venture capital funds, have a large administrative task in having to deal with its thousands of unitholders. Also, managing assets that are far less liquid than stock market assets requires a lot more resources than the stock picking function of a mutual fund manager, he adds.

The gravy train has not yet pulled in for LSVCF investors, nor has it arrived for the Manitoba managers of those funds.

Martin Cash's column on the Winnipeg business scene appears every Thursday in the Free Press business section. If you would like to contact him, please call 697-7256 or e-mail him at martin.cash@freepress.mb.ca.