Fortress funds hold their value in market volatility

Despite volatility in global financial markets in the second quarter of 2022, the funds managed by Fortress Fund Managers (FFM) were able to hold their value “relatively well but were still down for the quarter.”

The leading fund manager reminded investors that such ups and downs “come with the territory of investing for the kinds of substantial long-term gains we expect” and encouraged them to continue “the steady saving that is shown to build wealth over the years.”

This assessment was shared recently with investors in Fortress’ June Quarterly Report for their three Barbados dollar funds – the Caribbean Growth Fund, the Caribbean High Interest Fund, and the Caribbean Pension Fund.

The report observed that in the second quarter of the year financial markets turned “downright hostile” as investors faced high inflation, rising interest rates, and growing fears of recession. “The U.S. Federal Reserve and other central banks hiked their target rates aggressively and said plainly they expect more hikes to come to fight decades-high inflation readings. These concerns were added to already substantial worries over the war in Ukraine, geopolitical risks generally, and labour and supply disruptions. Interest rates rose, and bond and stock prices fell around the world,” Fortress explained.

Caribbean High Interest Fund records small decline in quarter

The Caribbean High Interest Fund declined 0.9% in the second quarter and was down 2.1% over the past year.

Fortress reported that global bond returns were unusually negative in the quarter as yields rose “significantly” from aggressive central bank rate hikes. Closer to home, in Barbados, there was no new corporate bond issuance, but FFM’s existing corporate positions continued to perform as expected, generating healthy yields.

“Prices were marked lower, though, in line with global bonds of similar credit quality. Government of Barbados bonds saw higher prices on the secondary market so the Fund’s positions in these securities were marked higher in the quarter,” the report noted.

Fortress added that with economic and interest rate risks mounting over the past several months, the High Interest Fund’s holdings had been focused on only the highest quality corporate credits and relatively short maturities. “More recently, though, as rates have risen and credit spreads widened, we have gradually added to the Fund’s exposure to longer maturity bonds and credit. Today’s lower bond prices, following a period of unusual volatility, will lead directly to higher returns in the future.”

The net asset value (NAV) of the Fund’s Accumulation share as of June 24 was $2.0727, while the Distribution share finished at $0.9895. Net assets of the Fund were $144 million, up from $140 million this time last year. The Fund’s annual compound rate of return since inception in 2002 was 3.7%.

Caribbean Growth Fund declines but is up over the past year

The Caribbean Growth Fund declined 7.1% in the second quarter but was up 0.6% over the past year. The NAV per share as of June 24 was $7.1944. The Fund’s net assets were $612 million, up from $587 million this time last year.

During the quarter global equities fell sharply as investors were hit with a “triple threat of high inflation, rising interest rates and growing risks of recession”. Also, the U.S. Federal Reserve (Fed) hiked interest rates twice, taking its target rate to a range of 1.5%-1.75%. And just as importantly, Fortress noted, with inflation at multi-decade highs, the Fed signalled more hikes during the year. “By the end of the quarter, every market sector was down, with technology and consumer discretionary stocks falling the most.”

In the Caribbean, share prices had pockets of volatility but were little changed. “Some of the larger moves included Goddard Enterprises in Barbados with a gain of 30%, and Massy and GraceKennedy which were down 17% and 10% respectively. The performance of Goddard Enterprises is noteworthy in a quarter characterised by general market weakness.”

Fortress took advantage of lower prices to add to its core holdings in the Fund and worked to adjust some regional Caribbean positions. “Among the kinds of well-valued, high-quality shares where the Fund invests, we still see excellent return potential from here. There are challenges, though, and they are real. The paths of Fed tightening, inflation, and economic or earnings slowdowns are critical, as are the geopolitical risks. But with many shares now down 25-50% from their recent highs, a lot of bad news is already priced in and there is good value to be found.”

The Fund’s annual compound rate of return since inception in 1996 was 8.1% per year and its portfolio remained well diversified by security, geography, and currency.

Pension Fund sees declines

The Caribbean Pension Fund, which invests across stocks and bonds in different proportions, saw declines in its three classes of shares between 1.9% and 5.9%. They returned between -1.7% and +0.2% over the past year.

As with the other funds, financial markets fell substantially during the quarter as central banks raised rates to fight inflation and geopolitical risks persisted.

Fortress concluded its quarterly report by highlighting the silver lining. “There are superb long-term investments to make today, and we have been taking advantage of lower prices to add to our global equity and bond investments. The silver lining of market declines like this one is that they increase the future return potential for patient investors who can ignore today’s noise. Markets will recover long before the news gets good again. The Fortress funds as always are positioned to benefit as that inevitably occurs. In the meantime, we keep calm and carry on.”

Fortress Fund Managers manages over Bds $800 million in assets across 12 funds with investments in regional, US, international and emerging markets.

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