domestic asset management - step asset management kenwood n. kerr ba, ... investment management...
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BSFB/STEP
Domestic Asset Management
Kenwood N. Kerr BA, TEP &
Anthony R. Ferguson CFA, CMT
March 20th, 2007
Current Status
• Commodization of Services
• Value Added - Challenge
• Increasing numbers of service providers- BAB, CLICO,
FAMGUARD, ScotiaBank .
• Growing list of qualified practitioners-(Series 7, CIM,
CFA, Bahamas Society of Financial Analysts)
• Real Estate
• Private Placements – Dominated landscape (after IPO
fallout)
• BISX market capitalization - $3 billion.
Investment Standards and Practices
• Established International Portfolio Management
Process
• Technology – State-of-the-Art
• Prudent Expert Principles
• Research Procedures- Due diligence & reasonable
basis.
Available Services
•Cash Management
•Asset Management (Individual/Institutional)
•Brokerage & Custody Service
•Mutual Funds (Growth, Money Market and REIT)
•Corporate Advisory Services (IPO, Private Placement, M&A)
•Pension Administration & Management (Pending Legislation)
•International Asset Management
Investment Management Process
• Agree investment objectives – assessing clients
financial needs and objectives, risk tolerance,
income requirements, investment time horizon
• Determine appropriate strategic asset allocation –
identifying the optimal asset allocation
• Construct the appropriate portfolio- building a
diversified portfolio
• Frequent tactical reviews – continuous assessment
of the portfolio and changes in market conditions.
Agree Investment
Objectives
Determine Appropriate
Strategic Asset Allocation
Construct The
Appropriate Portfolio
Frequent Tactical Reviews
REAL ECONOMY
GROWTH (GDP)
SAVINGS
FISCAL POLICY
DEMOGRAPHICS
FINANCIAL
ECONOMY
REAL RATES
CAPITAL FLOWS
INFLATION
MONETARY POLICY
INVESTMENT OUTLOOK
NEGATIVE NEUTRAL POSITIVE
Market Analysis
Market Transaction Summary
Period Companies Amount
1968-1989 Five (5) <$15 mil.
1990-1998 Eight (8) $120 mil.
1999 Two (2) $18.75 mil.
2000 Seven (7) $80 mil.
2001-2006 (none) 0
*Note: Period dominated by private placement, lost investor
sentiment in equity investments.
Domestic Capital Market Structure
SECURITY VALUE
Total Domestic Assets $7.76 Billion
Cash Deposits 4.87 Billion
Government & Quasi Government Debt 2.88 Billion
Publicly Traded Companies 19
Market Capitalization (Dec 2006) 3.183 Billion
Mutual Funds 8
Mortgages - Residential & Commercial 2,504 Million
Market Capitalization December 29, 2006
Public Companies Authorized Shares Outstanding Shares % Shares Outstanding Market Capitalization %
Abaco Markets 19,975,000 15,892,000 79.56% $ 10,329,800.00 0.32%
Bahamas Property Fund 10,000,000 2,407,000 24.07% $ 27,199,100.00 0.85%
Bank of the Bahamas 25,000,000 12,000,000 48.00% $ 96,360,000.00 3.03%
Benchmark 10,000,000 4,959,111 49.59% $ 3,768,924.36 0.12%
Bahamas Waste 10,000,000 4,200,000 42.00% $ 7,350,000.00 0.23%
Fidelity Bank 35,000,000 16,666,670 47.62% $ 20,833,337.50 0.65%
Cable Bahamas 20,000,000 20,000,000 100.00% $ 200,000,000.00 6.28%
FirstCaribbean 150,000,000 120,216,204 80.14% $ 1,701,059,286.60 53.44%
Commonwealth Bank 75,000,000 31,283,480 41.71% $ 391,356,334.80 12.29%
Consolidated Water 2,023,850 2,023,850 100.00% $ 9,937,103.50 0.33%
Doctors Hospital 12,500,000 9,971,634 79.77% $ 24,929,085.00 0.78%
FamGuard 15,000,000 8,625,000 57.50% $ 49,938,750.00 1.57%
FINCO 27,500,000 26,666,670 96.97% $ 320,533,373.40 10.07%
Colina Holdings 35,000,000 24,729,613 70.66% $ 46,986,264.70 1.48%
ICDU 10,000,000 10,000,000 100.00% $ 71,500,000.00 2.25%
J S Johnson 8,000,000 8,000,000 100.00% $ 68,800,000.00 2.16%
FOCOL 10,000,000 8,454,987 84.55% $ 106,110,086.85 3.33%
Freeport Concrete 20,000,000 4,708,334 23.54% $ 2,589,583.70 0.08%
Premier 2,355,000 2,355,000 100.00% $ 23,550,000.00 0.74%
497,353,850 333,159,553 $ 3,183,131,030.41 100.02%
BISX CAPITAL MKT BREAKDOWN
Abaco Markets
Bahamas Property Fund
Bank of the Bahamas
Benchmark
Bahamas Waste
Fidelity Bank
Cable Bahamas
FirstCaribbean
Commonwealth Bank
Consolidated Water
Doctors Hospital
FamGuard
FINCO
Colina Holdings
ICDU
J S Johnson
FOCOL
Freeport Concrete
Premier
Domestic Market –Investment Portfolios
• Balanced Portfolio
• Aggressive Portfolio
• Conservative Portfolio
• Guarantee Investment Contract
Disciplined Investment Approach
Analyze Client
Objectives &
Constraints 1
Formalize
Investment
Policy
2
Develop
Asset
Allocation
3
Design
Optimal
Portfolio
4
Implement
Strategy
5
Monitor &
Rebalance
Portfolio
6
Investment Selection Process
• Investment Research
• Rigorous top-down/bottom-up approach
• Fundamental research
• In-Depth Company Analysis
• Quantitative Review
• Qualitative Assessment
• Risk Management
• Continuous analysis
• Implement Strategy
• Based on client risk and research recommendations
Asset Allocation is key!
Asset Allocation Methods
Asset allocation can be an active process in varying degrees
or strictly passive in nature. There are a number of different
methods of establishing asset allocations:
Strategic Asset Allocation
Constant-Weighting Asset Allocation
Tactical Asset Allocation
Dynamic Asset Allocation
Insured Asset Allocation
Integrated Asset Allocation
Asset Allocation Methods
Asset Allocation – Balance Strategy
Asset Class Strategy Estimated Return
Equities 35% - 45% 7% - 12%
Fixed Income
(Including preference
shares
35% - 45% 5.625% - 6.375%
Real Estate 10% - 20% 8% - 10%
Cash & Marketable
Securities
3% - 10% 3% - 5%
Asset Class Strategy Estimated Return
Equities 60% - 80% 7% - 12%
Fixed Income
(Including preference
shares
25% - 35% 5.625% - 6.375%
Real Estate 10% - 20% 8% - 10%
Cash & Marketable
Securities
3% - 5% 3% - 5%
Asset Allocation – Aggressive Strategy
Asset Allocation – Conservative Strategy
Asset Class Strategy Estimated Return
Equities 0% -5% 7% - 12%
Fixed Income
(Including preference
shares
60% - 80% 5.625% - 6.375%
Real Estate 5% - 15% 8% - 10%
Cash & Marketable
Securities
5% - 20% 3% - 5%
Historical Rates of Return
Cash Deposits 2 Yr 5 yr 10 yr
4.77 % 4.84% 4.66%
Fixed Income 2 Yr 5 yr 10 yr
7.00% 6.85% 6.50%
Equities 2006 2005 2004
24.10% 29.50% 19.70%
Challenges- Illiquidity in the Domestic Market
Company No. of shares Liquidation Period
J. S. Johnson 60,240 6-8 weeks
ICD Utilities 52,083 3-4 weeks
FOCOL 59,101 2-5 days
First Caribbean 57,142 4-6 weeks
Famguard 121,359 4-6 months
FINCO 47,619 2-3 weeks
Cable Bahamas 58,479 8- 10 weeks
Colina Holdings 227,272 6-8 weeks
Abaco Markets 561,797 10-12 months
Bank of the Bahamas 78,740 2-3 weeks
Assumption - Client owns a portfolio that holds 10 publicly traded
companies with a market value of $5 million with
initial purchase of $500,000 in each stock
Challenges- Zero Currency Diversification
Q4 2006 Current 3 Mths 6 Mths 12 Mths
U.S. Dollar Terms
Euro $1.2900 $1.2910 $1.2900 $1.3000 $1.3500
Yen 117.80 121.58 119.00 118.00 115.00
Sterling $1.9166 $1.9585 $1.9300 $1.9400 $2.0000
Swiss $1.2356 $1.2537 1.2550 1.2450 1.1950
Canadian $ $1.1392 $1.1806 1.1700 1.1600 1.1500
Australian $ $0.7705 $0.7730 $0.7700 $0.7600 $0.7700
Euro Terms
Yen 151.93 156.97 153.50 153.50 155.25
Sterling 0.6731 0.6591 0.6675 0.6700 0.6750
Swiss 1.5932 1.6187 1.6200 1.6200 1.6125
Average Forecast
Challenges- Lack of Legislation
• Injecting some element of foreign investment in your
portfolio of Bahamian investments, reduces the downside
risk in that portfolio. Having portfolios dominated by bank
deposits, government debt, selective local equities, a bit
of real estate and not much else can be quite limiting •Current exchange control provisions prevent participation of domestic investment capital in the international market. •As a result there is considerable mismatching of assets and liabilities with specific reference to institutional investors (e.g. insurance companies)
Market Challenges
• Liquidity
• Price Discovery (Valuation)
• Diversification
• Investor Education
• Regulation & Supervision
• Absence of Yield Curve (Debt Pricing)
• Delivering Performance
• Volatility
• Investor Relations
The Future
• Improved legislation
• Privatization
• Corporate financing
• Disintermediation
• Expanding Government Debt Listing – BISX
• Cross-boarder trading/unrestricted trading
• Listing non-B$ securities.
• Introduction of Alternative Investments
Tips For Selecting A Money Manager
While not all organizational needs are the same, there are some basic
guidelines that may help in you search for the right money manager.
•Look for a track record in handling a similar type fund.
•Establish yearly parameters on how the fund should be managed to
achieve its objectives.
•Require performance reports at regular intervals
•Good communications is essential to conduct business successfully.
•Keep it strictly business. Avoid making your decisions based on politics
or other relationships.
•Decide how your portfolio will be managed up front.
•Trust is everything. Seek out someone whom you are comfortable with.
Thank You