2011 Report.pdf - Fortress Fund Managers

Directors’ Report Cont.
PORTFOLIO POSITIONING
The Fund has approximately 26% of its portfolio invested in Government of Barbados treasury bills and deposits with
commercial banks. These are the lowest risk, most liquid investments available. Treasury bills are auctioned by the
Government every few weeks and we often participate in these auctions, bidding to invest cash or, more often, to
reinvest the proceeds of maturing treasury bills. From time to time our bids are not successful and we then invest
the cash in bank deposits until the next auction at which our bids are accepted. At September 30, the bulk of this 26%
balance happened to be on deposit with CIBC FirstCaribbean International Bank. However throughout the year this
amount was typically invested in treasury bills with 90-day maturities.
The rest of the portfolio is made up of a diversified mix of corporate and government bonds from the Caribbean
and international market, as well as specialised income-producing strategies and funds. The result of this structure
is a unique portfolio that can generate an attractive rate of return while controlling risk and enjoying much greater
liquidity than investments in regional debt alone would typically offer. Approximately 27% of the portfolio is invested
in US dollar and other international assets. The average term to maturity is very short, at 2.5 years. This significantly
limits the portfolio’s potential losses if interest rates rise.
The table below summarises some of the key allocations and categories of investment within the Fund, as well as the
approximate return on each over the past year.
Categories of investment within the Fund
Category/Strategy
1 Year Return
Barbados T-bills and bank deposits 3.3%
Barbados corporate bonds 6.0%
US$ and international bonds -2.5%
Fortress Equity Income Strategy 2.1%
Specialized US$ funds 5.0%
Returns on Barbados corporate bonds were good during the year, even though economic conditions were not strong.
Unfortunately, the tepid pace of economic activity in the Caribbean has sapped demand from companies to take out
loans or issue bonds to fund expansion – and limited our ability to make new investments. We are always on the
lookout for bonds issued by high quality companies and with solid security and a sound underlying business. Recently,
these have been harder and harder to find. There is demand for loans, but unfortunately not typically from sound
borrowers, and we have not been lowering the standards for investment in the Fund to accept these risks. We are
being patient, waiting for favourable risk/reward situations to emerge, in spite of the opportunity cost of holding more
cash than normal.
US and international bonds performed well for most of the year, but then suffered in August when global equity and
credit markets dropped dramatically along with the worsening European debt and banking crisis. Market prices
of many of the Fund’s individual corporate bonds declined, as did the price of the Templeton Global Bond Fund, a
significant holding. We may see further volatility in this area in coming months, and we expect to use further price
declines, if they occur, to add to investments in areas that have been punished by forced liquidations in Europe and
possibly elswhere.
US Treasury bonds performed very well during the year, even with historically low yields to start. This shows how
strong the demand was for assets considered (for now) to be “risk free”. The Fund held a position in US Treasury 5-yr
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