Covington Capital Protected Series – How It Works

With just three weeks left in the 2009 RRSP season, there has never been a better time to look at the Covington Venture Fund - Capital Protected Series (“Capital Protected Series”):  a very simple solution to today’s volatile markets.

A Look Back At What We’ve Done – Covington Venture Fund - New Millennium Series

Before Covington launched the Capital Protected Series, we successfully took over the management of the Covington Venture Fund – New Millennium Series.  New Millennium was launched with a similar investment objective as the Capital Protected Series; to return investor’s initial capital upon maturity of the bond (in New Millennium’s case we were able to meet that objective early as this bond does not mature until 2011).  After Covington took over the Series and adjusted the venture investment portfolio, the Series has been able to return to investors not only their initial capital, but sits with a current NAVPS of over $15.00.  This $5.00 increase on the Series’ original NAVPS comes in addition to 30% tax credits investors originally received.

What We’re Doing Today - The Capital Protected Series

Covington’s Capital Protected Series is a conservative twist on a traditional venture capital fund.  The product is designed to meet our objective to return an investor’s full initial investment upon maturity as well as deliver them the immediate benefit of 30% in tax savings.  What makes this product stand out is that its investment objective has been designed around an eight year time frame; thereby aligning our investor’s returns with their tax credit hold periods.

The Structure – How It Works

By investing the majority of the Series’ assets in an A (low) Zero-Coupon - or Qualifying Bond, that matures to face value in just over eight years (December 2017), the majority of the Series’ assets are held in what is considered a conservative investment vehicle.  The reminder of the assets is then utilized to make mezzanine-style venture investments.  The key to the investment portfolio is very simple:  Covington looks for financings in later-stage companies that we feel have the ability to generate consistent returns.

With Covington’s established base of later-stage investments and an abundance of new opportunities available, Covington is uniquely positioned to be able to choose what we feel are the best short-term investment opportunities to continue to drive performance on our venture portfolio.

2008 Portfolio Performance Review

The Series, designed with one of the lowest Management Fees (1.25%) in the asset class, has already executed two successful venture portfolio exits and placed the bond portion (approximately 70% of the Series’ assets) in an A (low), Zero-coupon, RBC Bond.

Performance to date of the Series is the result of both the success of the venture portfolio and the current volatility of long-term bond pricing.  In 2008 the Capital Protected Series completed two successful portfolio exits – Cyence International Inc. and PowerBand Inc.  However, the Series’ NAVPS is reflective of the current volatility of long-term bond pricing.  As the bond continues to move toward its maturity date of December 2016, its increase in value will also be reflected in the NAVPS.

What 2009 Looks Like

The Series re-opened to new purchases in December 2008 (the Series will close March 31, 2009) and continues to be one of the most popular retail venture capital funds (“LSIFs”) available to Ontario investors.  As we move into 2009, we intend to invest in a similar graded bond vehicle as was done in 2008 that we feel will best meet the Series’ investment objectives.

Further management of expenses will come through the planned merger of assets from Series VII and the additional assets from the 2009 RRSP season.  The addition of these assets, coupled with economies of scale from the Series’ association with its parent fund – Covington Venture Fund, will support future reductions in the Series’ MER – a benefit to all investors.

While this investment cannot be guaranteed, the Series has been structured by our managers to meet its investment objective of a providing for full return an investor’s initial capital, within an eight year time frame; by implementing a conservative investment approach to both the underlying bond and venture portfolio.

I have attached a link to our Fact Sheet, outlining the basic information on the Series.  If you’d like more information on this unique product offering, please feel welcome to contact me at any time.

Wishing you a prosperous RRSP season,

Covington Group of Funds

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Important information about Covington Funds are contained in their prospectus. Please obtain a copy a prospectus from your financial advisor and read it carefully before investing. This investment may not be suitable for all investors. Some conditions apply. Commissions, trailing commissions, management fees and expenses all may be associated with this investment. Covington’s Funds are not guaranteed, their value changes frequently and there can be no assurance that the full amount of your investment will be returned to you. Tax credits subject to certain conditions and units must be held for eight years in order to keep the tax credits. Inception date for Covington Venture Fund - Capital Protected Series VIII & IX is November 2008. Prospectus amendment for Series VIII and IX is October 16, 2008. Inception date for Covington Strategic Capital Fund is January 2003. Performance data does not take into account sales, redemption, distributions or optional charges or income taxes payable by any shareholder that would have reduced returns. The indicated rates of return are the historical annual compounded total returns including changes in share value and reinvestment of all dividends. Performance data for Covington Venture Fund - Capital Protected Series as at January 31, 2009: (Series VIII): 1 Year -6.25% ITD -5.81% (Series IX): 1 Year -6.07% ITD -5.65%. Performance data for CDA TSX Composite Index 1 Year -32.95% 3 Year -5.17% 5 Year 3.62% ITD 7.04%. Principal repayment is subject to venture portfolio performance and redemption proceeds of Capital Protected Series.