Fortress reports challenges to mutual funds

Risky government credits and limited investment options continue to be a major challenge for mutual funds in the Caribbean, says Investment Director of Fortress Fund Managers Roger Cave.

He gave this indication as he reported that after a good start to the 2022 financial year, the Barbados dollar funds managed by Fortress Fund Managers declined late in the year, although still outperforming those in other markets.

Highlights of the three Barbados dollar funds – Fortress Caribbean High Interest Fund, Fortress Caribbean Growth Fund and Fortress Caribbean Pension Fund – were shared with investors recently in the 2022 Annual Report.

Cave pointed out that the Fortress Caribbean High Interest Fund continued to face challenges finding new local investments consistent with its risk and return objectives, and undeployed cash remained a drag on performance.

Cave noted that Fortress had written consistently about fixed-income investors in the Caribbean facing two important challenges in earning healthy returns – risky government credits and limited investment options in Caribbean bond markets, and exceptionally low prevailing bond yields in the United States and other major markets.

However, Cave explained that the first challenge remained and was “possibly more acute because of stresses caused by the pandemic”.

“The second challenge, however, had seen much improvement. With this year’s historic sell-off in global bonds, US bond yields, and, therefore, future return prospects are now the highest they’ve been in 15 years,” he said.

He reported that the Fortress Caribbean High Interest Fund had a “rare” negative return of four per cent for the year ended September 30, 2022.

Cave said the returns in the Fund occurred “in an unusually volatile and negative period for global bond markets”.

“As post-pandemic inflation remains stubbornly high, the US Federal Reserve hiked its target rate five times bringing it from zero at the start of the year to a range of three to 3.25 per cent by September 30,” Cave added.

The Fund’s net asset value of its accumulation shares decreased from $2.1220 last year to $2.0383 as of September 30, 2022. The distribution shares declined from $1.0132 to $0.9730.

Total assets remained at $143 million as positive net subscriptions from pensions and monthly savings programmes continued. The Fund’s compound annual return since inception in 2002 was four per cent, excluding fees and expenses.

In relation to the Caribbean Growth Fund, Cave reported that after an exceptionally strong year in 2021, that Fund declined 8.4 per cent for the year ended September 30, 2022.

“The financial year started very well with the Fund’s net asset value reaching an all-time high of $7.76 per share in early April. At that time the Fund was up over eight per cent for the first six months of the financial year and was posting a one-year return over 16 per cent,” he reported.

Cave noted that the second half of the year was “very difficult” for this fund as stubbornly high inflation resulted in several hikes in interest rates by the US Federal Reserve.

This combined with high energy prices, led to significant declines in financial markets across the world, impacting equities, bonds and currencies, he said.

Cave noted, however, that the Fund’s value orientation and its diversification led to its portfolio “holding in much better than what was experienced by most markets globally”.

The Caribbean Growth Fund’s net asset value declined to $6.5803 from $7.1830 and net assets were $565 million, compared to $598 million a year prior. its annual compound rate of return since inception in 1996 was $7.6 per cent.

The Caribbean Pension Fund was down in all classes of share during the review period, following what was an exceptionally strong performance in 2021.

The aggressive accumulator share declined 8.3 per cent, the Conservative Consolidator share was down 7.1 per cent while the share for the Capital Share was down 4.4 per cent.

Cave said the year was noteworthy in that global stocks and bonds registered meaningful declines over the same period, in the face of high inflation and dramatic interest rate hikes from central banks.

In his 2022 Annual Report, he also reported that although outperforming their benchmarks, Fortress Fund Managers’ US dollar funds declined in 2022 after experiencing an “exceptionally strong” 2021.

Cave said the year ended September 30, 2022 saw “sharp declines across nearly all global asset classes, impacting Fortress Fund Managers’ US dollar funds. But they still outperformed their benchmark”.

The two sub-funds of the World Funds – the Fortress World Growth Fund and the Fortress World Fixed Income Fund – declined 19.7 per cent and 12 per cent respectively for the year, “both outperforming their benchmarks but still squarely in negative territory”.

Cave noted that in relative terms, the World Growth Fund benefited from the outperformance of higher quality, better-valued shares during the year, as the speculative bubble of the last few years unwound.

“This was one encouraging feature of the year as some of the riskier areas of the equity markets dropped 50 per cent to 70 per cent or more,” said Cave.

Fortress’ consistent focus on profitable, proven companies trading at reasonable valuations was key. The company said this helped sidestep some of the worst damage during the year’s market weakness.

Cave explained: “The Fund’s allocations across global equities were all down, with the most pronounced weakness in international and emerging markets as US Federal Reserve tightening pushed major currencies down 10 per cent or more, adding to local equity market declines.”

Regarding the world Fixed Income Fund, its performance was helped by a relatively short average term on maturity and focused on high-quality credits during a period of unusually high volatility in bonds and widening credit spreads, he said.

Fortress manages over $800 million in assets across 12 funds with investments in regional, US, international and emerging markets. (PR/MM)