Mar 2009 Financial News

Investors flee unit trusts...Managers say hold strain

Mar 04, 2009

Jamaican investors pulled an estimated $5 billion, or around 30 per cent of their capital, out of unit trusts last year - and the trend seems set to continue, even as managers of the mutuals insist they remain good investment vehicles for people not in a hurry to realise returns.

"The unit-trust market still presents an attractive option for investors with long-term invest-ment horizons," says Lisa Tapper, senior manager at Scotia DBG Investments Limited, the brokerage and fund-management arm of the Bank of Nova Scotia, Jamaica.

According to the Financial Services Commission (FSC), the agency that polices investment houses, at the end of 2008, total portfolio funds under management amounted to $11.9 billion, compared with $16.9 billion a year earlier.

Industrywide, the net asset value, a measure of performance of the unit to individual holders arrived at by multiplying the number of outstanding units by the average unit price, remained relatively flat at $15.02 billion at the end of last December, against $15.02 in 2007, when there was a 15.5 per cent growth over the previous year.

The industry's problem, analysts say, is the same one that afflicted all segments of the money market. The global financial crisis made investors skittish about their money, driving them to liquid and safe assets.

In Jamaica, like the rest of the world, it has not helped that the onset of the crisis in money markets triggered a global recession that has caused equities to tank. In Jamaica's case, stock prices slumped 25 per cent, dragging down with them unit trust funds heavily invested in equities.

"The decline has to do with the current global financial crisis and its impact on the general performance of the financial market and net redemptions," said Everton McFarlane, senior securities director at Jamaica's FSC.

"People seeking liquidity may seek to cash out portions of their portfolios, which may include unit trusts," McFarlane said.

Managers

There are four managers of unit trust funds: Barita Unit Trust Management Company; Capital & Credit Fund Managers Ltd; Scotia DBG Fund Managers Ltd; and Pan Caribbean Asset Management. Unit trusts are normally seen as safer havens for small investors, allowing them to invest in a wide range of instruments that would normally be outside their reach.

Funds, though, are usually denominated in three asset classes: real estate, equities and fixed income securities. In Jamaica, during normal times, the equities portion of a fund, the most active of the markets, usually has the highest weighting. So, when stock markets tumble, as Jamaica's has in recent months - it dipped over 4,000 points or more than four per cent in February - equities-based funds also come crashing down, a point underscored by Adrian Reynolds, fund manager at Capital and Credit Securities.

"The performance of the unit trust portfolios is tied to the market which they track," Reynolds explained. "For example, portfolios that are weighted primarily in stocks will not be doing as well in this environment. It would be expected that a stock-based unit trust will perform in a similar way."

Indeed, Capital and Credit's Income and Growth Fund, which carries a combination of equities and fixed-income securities, has nosedived, recording a one-year performance to the end of February of negative 32.37 per cent.

Similarly, other funds heavily weighted with equities, like Barita's Capital Growth Fund, which is weighted 60 per cent in equities and 40 per cent in fixed income securities, saw a decline of just under 19.08 per cent over the same period.

The industry's powerhouses, too, have taken a beating on their equity funds. Pan Caribbean, the sectors largest player - at the end of 2007, it claimed 41 per cent of the unit trust market, or $7 billion under management - saw its Sigma Equity fund decline 30.12 per cent in the year to February 26. That fund is mostly invested in stocks.

At the same date, Scotia DBG's Premium Growth fund reported a 12-month decline of 26.19 per cent.

In the face of the weakened equities market, unit-trust bosses have been realigning their portfolios, as the FSC's data for last year dramatically highlight. Combined, the unit trusts' holdings in equities dropped by $4.96 billion, or approximately 72 per cent, to $1.97 billion. Real estate investment, at $236 million in 2006, was up to $291 million last December. But mostly, the money, apart from what investors redeemed, followed rising interest rates to fixed-income securities, as the central bank sought to squeeze liquidity out of the market to defend the Jamaican dollar and tackle inflation.

At year's end, the unit trusts had $8.96 billion in fixed income instruments, five per cent down in 2007, but far outweighing investments in other classes of assets. The performances of these funds were starkly different from the others. For instance, Capital and Credit's Giltedge Fund, grew 12.01 per cent over the 12 months to the end of February, while Barita's Money Market Fund was up 10.48 per cent.

Over the same period, Pan Caribbean's Jamaica-dollar Sigma Solutions Fund was up 11.52 per cent while Scotia DBG's Money Market Fund grew 12.67 per cent.

Unit trust managers say that despite the downturn, people should resist the temptation to cash in their units and, where possible, invest more.

"We are recommending that investors, hold their units and make additional purchases," said Petula Clarke, unit trust manager at Barita. "For smaller investors, this may be the time to enter the market. The funds are pretty steady and they should benefit greatly by average costing."

Added Scotia DBG's Tapper: "We believe that investors should take advantage of the opportunities now to buy into the unit trusts at the current lows."


Source:
Sabrina N. Gordon, Business Reporter
sabrina.gordon@gleanerjm.com
Jamaica Gleaner
Wednesday March 4, 2009

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