The Barbados-based investment manager Fortress Fund Managers is warning investors to expect lower than average returns on their assets, given the dwindling number of investment options here that meet its objectives.
In its just released quarterly report for the January to March period, the investment firm said despite an overall positive performance, it continued to face significant challenges in its Fortress Caribbean High Interest Fund “because of the ongoing Caribbean government debt crisis”.
Pointing to Barbados’ “important economic challenges ahead” and the need for the company to “keep thinking long-term”, it said in a four-page document the credit crisis in Government debt was coupled with tightening currency controls, both of which worsened during the reporting period.
“There are very few investments in Barbados that meet the Fund’s objective of capital preservation and income. Investors should be aware that returns will likely continue to be lower than average during this unusual time as we remain squarely in capital preservation mode,” it said.
Acknowledging the downgrades by rating agencies Moody’s and Standard & Poor’s, the report noted that “these moves came after the Finance Minister [Chris Sinckler] made comments suggesting that a refinancing of domestic debt was imminent, and following the dismissal of the Central Bank Governor – both huge red flags to investors with experience in other markets”.
“At current rating levels of three notches above default the question being addressed is no longer ‘if’ a debt restructuring will need to occur, but rather ‘when’ it will happen and how large the investor losses will be from it,” the report warned.
It pointed out that global investors had noticed that Barbados’ US dollar bonds had fallen 25 per cent during the quarter, and now trading at 75-80 cents on the dollar, yielding ten to 14 per cent depending on maturity.
“On the other side of a restructuring, investors will typically want to see three things – a viable fiscal reform and economic growth plan from the government with support from other stakeholders, appropriate support from multi-lateral organizations, and a move to a sustainable debt profile,” it said.
“Unfortunately, none of these three yet appears to be in place, although the formation of working groups to advise on the debt and currency issues suggested some constructive initial steps may be underway.”
Global bond yields experienced little change during the quarter and remain near historically low levels despite another rate hike by the US Federal Reserve, the report indicated. It said the upward trend in inflation and economic growth globally suggested that interest rates might also continue to rise gradually.
The report said the average term to maturity of the fund’s portfolio remained very conservative at 2.8 years, with an average gross yield to maturity of 3.3 per cent.
The Caribbean High Interest Fund experienced return of 1.1 per cent during the period under review and is up 3.4 per cent over the past year. Net asset of that fund was $126 million.
This fund remains diversified with approximately 54 per cent invested in Barbados and 45 per cent invested globally.
The Caribbean Growth Fund gained 4.9 per cent during the first three months of this year and 109.9 per cent over the past year. Net assets of the Fund were $433 million, with a portfolio that remained well diversified by security, geography and currency, it said.
Global investments performed well during the quarter, led by emerging market shares, the report stated.