After a good start to the 2022 financial year, the Barbados dollar funds managed by Fortress Fund Managers declined late in the year. Still, they outperformed those in other markets.
Investment Director Roger Cave made this assessment in the leading fund manager’s 2022 Annual Reports for its three Barbados dollar funds – the Fortress Caribbean High Interest Fund, the Fortress Caribbean Growth Fund, and the Fortress Caribbean Pension Fund. The reports, for the year ended September 30, 2022, were shared with investors recently and highlighted the funds’ performance and outlook.
High Interest Fund posts “rare” negative return
The Fortress Caribbean High Interest Fund had a “rare” negative return of 4.0% for the year ended September 30, 2022.
Cave said that the returns in the Fund occurred “in an unusually volatile and negative period for global bond markets. As post-pandemic inflation remained stubbornly high, the U.S. Federal Reserve (Fed) hiked its target rate five times, bringing it from zero at the start of the year to a range of 3-3.25% by September 30.”
Closer to home, the Fund continued to face challenges finding new local investments consistent with its risk and return objectives, and undeployed cash remained a drag on performance.
The Fund’s net asset value (NAV) 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 4% per year, net of fees and expenses.
Looking towards the future, Cave said that Fortress had written consistently about fixed income investors In the Caribbean facing two important challenges in earning healthy returns. “The first was risky government credits and limited investment options in Caribbean bond markets. The second was exceptionally low prevailing bond yields in the U.S. and other major markets.”
The investment director 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, U.S. bond yields – and therefore future return prospects – are now the highest they’ve been in 15 years,” he noted.
Caribbean Growth Fund “holds” better than global markets after 8.4% decline
After an “exceptionally strong year last year”, the Fortress Caribbean Growth Fund declined 8.4% for the year ended September 30, 2022.
The financial year “started very well with the Fund’s NAV (price of each share) reaching an all-time high of $7.76 per share in early April. At that time the Fund was up over 8% for the first six months of the financial year and was posting a one-year return of over 16%,” Cave reported.
The second half of the year was “very different”, he added, as “stubbornly high inflation resulted in several hikes in interest rates by the U.S. Federal Reserve.” This, combined with high energy prices, led to significant declines in financial markets across the world, impacting equities, bonds, and currencies.
The investment director noted, though, 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.”
He added that “the Fund’s decline this year represented meaningful outperformance and gave us several opportunities to position (it) even better for the future, with investments at more attractive prices.”
The Fund’s NAV declined to $6.5803 from $7.1830 and net assets were $565 million compared to $598 million a year ago. Its annual compound rate of return since inception in 1996 was 7.6%.
Cave noted that while no one knew what the future held, Fortress’ outlook was that the “markets’ singular focus on interest rates will fade soon as the Fed slows its tightening cycle, or even pauses in the months ahead. This does not mean rates will fall right away. It does mean, though, that the violent tightening is likely done. “Today’s worries will eventually fade and be replaced by whatever comes next. There are excellent investments to own today. We hope and expect they will be the source of outsized returns in the years to come.”
Caribbean Pension Fund down in all classes of share
After an “exceptionally strong performance in 2021”, the Fortress Caribbean Pension Fund had negative returns in all three classes of share – Aggressive Accumulator (AA), Conservative Consolidator (CC), and Capital Share (CS) – for the year ended September 30, 2022. The AA share declined 8.3%, the CC share declined 7.1% and the CS share was down 4.4%.
The returns reflected the differing asset allocations of the classes of share. Cave noted that “the year was noteworthy in that global stocks and bonds both registered meaningful declines over the same period, in the face of high inflation and dramatic interest rate hikes from central banks. Typically, bonds see far less volatility than stocks and sometimes even rally in periods of stock market weakness, helping cushion performance of balanced portfolios. Unfortunately, this year there were few assets that did not fall in price.”
The Caribbean Pension Fund invests in combinations of equities, fixed income and real estate consistent with the time horizons, risk tolerance and objectives for each class of share. As of September 30, 2022 approximately 80 companies were investing in the Pension Fund and record keeping services were being provided for over 4,500 employees.
Cave concluded the 2022 Annual Reports by highlighting Fortress’ recent 25th anniversary celebrations and its planting of 100 trees alongside the Barbados Trailway. “The idea of taking steps today to help something grow over many years into the future naturally appeals to long-term investors like us, and we hope we can do more of this type of activity in the future.”
He also thanked investors for their trust and support over the years. “We wouldn’t have started, let alone grown into what we are today, without you.”
Fortress manages over Bds $800 million in assets across 12 funds with investments in regional, US, international and emerging markets.