2011 Report - Fortress Mutual Fund Ltd

2011 Annual ReportFortress Mutual Fund Limited

Fortress Fund Managers is a Barbados-based investment manager. We have been providing top-ranked returns,open communication and accessible service to our clients since 1996.We offer a range of funds and investment products to meet the needs of individuals and institutions. In eachcase, our main goal is to achieve consistent long-term returns for our clients. We do this by applying sound,disciplined processes to our investments in equities, fixed income and real estate. We offer products with globalreach, as well as those that focus primarily on the Caribbean region.Please feel free to contact us to learn more about this Fund, or any of our products.Fortress Fund Managers LimitedFirst Floor, Carlisle HouseHincks StreetBridgetownBarbadosBB11144TEL (246) 431 2198FAX (246) 431 0514invest@fortressfund.comwww.fortressfund.com

FORTRESS MUTUAL FUND LIMITEDCaribbean Growth Fund2011

Investment Objectives & Fund DetailsThe Fund’s primary objective is capital growth over the long term.The Manager uses a value approach to invest primarily in Caribbean and international equities.All income, including interest, dividends and capital gains earned by the Fund, is automatically reinvestedand this income is reflected in the quoted net asset value (NAV) of the shares. The Funddoes not pay dividends.FUND NAME:Fortress Caribbean Growth FundLAUNCH DATE: December 9, 1996LAUNCH PRICE:$1.00 per shareMINIMUM INVESTMENT: $100.00$100.00 for subsequent investments$ 50.00 for monthly savings planNET ASSET VALUE PER SHARE – 09/30/2011 $4.4756NET ASSETS – 9/30/2011 $324,280,343MANAGEMENT EXPENSES:Investment Manager:Administrator:Custodian:1.75% per annum on the net assets0.10% per annum on the first $30 million of net assets0.0875% per annum on the remaining balance of net assets0.0875% per annum on the first $30 million of the net assets0.075% per annum of the remaining balance of net assetsINITIAL CHARGES: 2%REDEMPTION CHARGES:INVESTMENT MANAGER& ADMINISTRATOR:CUSTODIAN:FUND VALUATIONS:NAV QUOTATIONS:NoneFortress Fund Managers LimitedCIBC FirstCaribbean International Bank (Barbados) LimitedWealth Management DivisionWeekly on FridaysInternet: www.fortressfund.comLocal Barbados newspapersLipper Overseas Fund Table2

Directors & AdministratorsDIRECTORSSenator Geoffrey Cave, C.B.E., B.C.H., L.L.D. (Hon) - ChairmanC. David BynoeKenneth EmerySir Fred Gollop K.A., Q.C.John WilliamsRoger Cave - Investment DirectorINDEPENDENT AUDITORPricewaterhouseCoopers SRLChartered AccountantsThe Financial Services CentreBishop’s Court HillSt. MichaelBarbadosSECRETARYCorporate Services LimitedThe Financial Services CentreBishop’s Court HillSt. MichaelBarbadosREGISTERED OFFICEFirst Floor, Carlisle HouseHincks StreetBridgetownBarbadosATTORNEY AT LAWSir Henry deB. Forde, K.A., Q.C.Juris ChambersFidelity House Wildey Business ParkSt. MichaelBarbadosCUSTODIANCIBC FirstCaribbean International Bank(Barbados) LimitedWealth Management DivisionBroad StreetBridgetownBarbadosINVESTMENT MANAGER & ADMINISTRATORFortress Fund Managers LimitedFirst Floor Carlisle HouseHincks StreetBridgetownBarbadosTel: (246) 431 2198Fax: (246) 431 0514Internet: www.fortressfund.comEmail: invest@fortressfund.comFortress Caribbean Growth Fund (“the Fund”, legally named Fortress Mutual Fund Limited) is an open-ended mutualfund company and was incorporated on December 4, 1996 under the provisions of the Mutual Funds Act of Barbados.The Fund maintains its registered office at First Floor, Carlisle House, Hincks Street, Bridgetown, Barbados. Theprincipal activity of the Fund is investment in domestic, regional and international markets with the aim of achievinglong-term capital appreciation.Important information about this Fund is contained in its prospectus, which we encourage you to read before makingan investment. The indicated returns in this document are net of all fees and expenses. Returns are historical and arenot necessarily indicative of future performance. Investors should be aware that there are risks involved where thevalue of the Fund’s shares may go down as well as up. A copy of the prospectus may be obtained from the offices ofFortress Fund Managers, or downloaded at www.fortressfund.com3

Investment PerformanceSince inception in 1996, the Caribbean Growth Fund has generated a compound annual rate ofreturn of 10.7% per year. It has accomplished this by investing selectively in a diversified mixof regional Caribbean as well as international stocks. We use a value conscious approach to allinvestments, seeking to position in securities with good fundamentals and compelling valuations.Approximately 36% of the portfolio is invested outside of the Caribbean region in US dollars and avariety of other currencies.In 2011, Caribbean markets generally gained while international stocks declined. This resulted in performance for theFund that was significantly below its long term average. For the year ended September 30, 2011 it gained only 0.3% invalue. As the table below shows, over longer time periods of time the Fund’s performance continues to far surpass acombination of regional and international indexes.Investment Performance as of 9/30/113 mo. 1 year 3 year 5 year InceptionFortress CGF -4.7% 0.3% -3.3% 2.2% 10.7%Jamaica (US$) 3.1% 8.9% -8.8% -4.0% 5.9%Trinidad 3.8% 18.9% -3.4% 2.1% 12.4%Barbados -0.9% 8.6% -6.9% -2.8% 6.8%MSCI World -16.5% -3.8% -6.9% -1.7% 4.2%* periods longer than 1 year are annual compound returnsOver the past 10 years, equity markets in the Caribbean and around the world have endured significant pressures. Therehave been two recessions, a US-based financial crisis, a European sovereign debt crisis, several hurricanes, a few debtrestructurings, and, not to be ignored, oil prices have more than quadrupled. As the graph below shows, through it allstocks still generally managed to generate positive – if not always consistent – returns. The Caribbean Growth Fund hasoutperformed all major indexes over this period with significantly more consistency along the way. This has sometimesmeant missing out on dramatic short term gains, as in the Trinidad and Jamaica markets in 2003-2005 when the Fundlagged these markets, but then continued to gain in subsequent years even as they dropped precipitously.Caribbean Growth Fund Performance vs Indices - 10 Years200%150%100%50%0%FORTRESS CGF 8.3%Barbados Index 4.4%T&T Index 7.7%MSCI World Index 4.2%Jamaica Index (US) 3.6%-50%Sept2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20114

Portfolio PositioningThe Fund is positioned relatively conservatively, reflecting our view that business conditions may be challenging in theforeseeable future, and equity valuations do not in all cases reflect this prospect. Cash and cash equivalents were justunder 17% of total assets at September 30. This gives the Fund significant resources with which to fund shareholderliquidity needs and purchases of securities as opportunities arise in regional and international markets.The investment portfolio is made up of a diversified combination of regional Caribbean and international stocks, with36% invested in the US and other markets outside the Caribbean. Many of the Caribbean companies represented in theportfolio have operations throughout the region. In addition to individual equity investments, the Fund has also allocatedto selected strategies and funds that use disciplined, value-based processes to select securities with good risk/rewardprospects. By paying close attention to the prices paid for investments within the Fund, the portfolio reduces the risk ofprice declines and positions for long term gains.The graph below summarise the geographic distribution of the portfolio.Geographic Distribution of PortfolioBARBADOS36%32%TRINIDAD & TOBAGOJAMAICAOTHER CARIBBEAN13%BERMUDA4%4%11%INTERNATIONALTop 5 HoldingsHolding Country/Region Sector WeightNeal & Massy Holdings Ltd. Trinidad Conglomerate 8.6%Fortress Global Value Fund Global Various 6.1%OAM European Value Fund Europe Various 5.0%GraceKennedy Ltd. Jamaica Conglomerate 5.5%Fortress Equity Income Strategy US Various 4.7%The Fund’s largest holdings are major Caribbean corporations and international funds and strategies. In the Caribbean,some of the best value is currently to be found in the diversified, steady operators such as Neal & Massy and GoddardEnterprises. Financial flexibility will be important in the coming months as business conditions likely deteriorate andput pressure on companies with limited ability to self-finance or to access other sources of funding. This may createopportunities for well-capitalised companies to expand their operations and position for future earnings growth.The Fund continues to allocate significant amounts to internally run strategies in US and international equities, andto funds run by other managers with special expertise in a particular area. With the exception of the Fortress EquityIncome Strategy and CG Portfolio Fund, these were generally down during the year due to pervasive weakness inglobal markets. Over time, though, such international investments have provided excellent returns and diversification,and we expect them to contribute positively in both respects in the future.For a complete listing of the Fund’s holdings at September 30, 2011, please see the accompanying financial statements.5

Directors’ Report

Directors’ ReportThe Fund’s net assets grew from$306.3 million to $324.3 million...”This was a difficult year for the Fortress Caribbean Growth Fund, with a return well below itshistorical average. The net asset value (NAV) of the Fund increased from $4.46 per share at theend of September, 2010 to $4.48 per share at September 30, 2011. This represented a returnof 0.3%. During the year the Fund’s net assets grew from $306.3 million to $324.3 million. Theannual compound rate of return since inception is now 10.7% per year.In the Caribbean, equity markets generally performed well over the last year in spite of weak economic growth andfiscal pressures on regional governments. International markets, on the other hand, showed significant weakness.This had a negative effect on the Fund’s overall return. The European sovereign debt crisis remains a serious concernfor investors as its effects on government spending and the banking system continue to be felt even as the crisis itselfremains unresolved.The past few years have been frustrating for investors in the Fund, as it has not generated a rate of return even approachingits long term average. Naturally, we share this frustration. Unfortunately, high returns do not come frompast high returns – they come from the starting point of an unloved market with significant potential for improvement.Over the past few years, we have all been enduring the move from “above average” to “unloved” in bothregional and international markets. We cannot predict the exact point at which the Fund’s performance will increaseagain. But we can say that low prices and investor pessimism are the fertile soil from which recoveries in asset pricesgrow. In a way, we should be pleased when we see them.Through both rising and falling markets we continue to apply the same time-tested, value approach to selectinginvestments for the Fund. The focus is on consistently investing in good quality companies at attractive valuations,wherever we can find them.REGIONAL OPERATING ENVIRONMENTEconomic conditions in the Caribbean continue to be relatively weak. This naturally impacts the operations andoutlook for many of the companies in which the Fund invests. Business activity has improved noticeably from8

the worst days of the 2008/2009 crisis, but is still generally lacklustre and there has been upward pressure onunemployment. Regional governments’ fiscal situations have not improved. They continue to see debts grow as taxrevenues struggle to keep pace with expenditures. Inflation in Barbados is currently running over 6%, a level thatwe would argue is unsustainable in a competitive global tourism market, and one which every day is eroding thepurchasing power of each Barbados dollar earned or saved for the future.This time last year we wrote that we were “hopeful that government and business leaders will find the support theyneed to make critical improvements to our fiscal situation, capital markets and financial institutions. The growthand prosperity of all of us in the region depends on it”. Unfortunately, we are unable to report that there have beensignificant improvements in this area over the past 12 months.Fiscal situation:As noted above, the government fiscal situation in the region remains poor and has worsened. In June, the bondrating agency Moody’s downgraded Government of Barbados domestic debt to one notch above “junk” status. Italso changed its forward looking outlook to negative, suggesting that on the current trajectory the Government ofBarbados is unlikely to maintain an investment grade bond rating for much longer.Capital markets:Barbados stock markets continue to provide only limited choice and liquidity for equity investors. We wereencouraged by some measures taken in Jamaica to encourage companies to list their shares by providing taxincentives to do so. Unfortunately, this has not yet occurred in Barbados and investors of all kinds – mutual funds,insurance companies, pension funds and individuals – are still left with a very limited capital market.Financial institutions:The CLICO situation remains largely unresolved, leaving policyholders unsure of their position as the weeks andmonths tick by. Investors and savers of all kinds also wonder what would stop another CLICO-like debacle fromoccurring. The new Financial Services Commission in Barbados could potentially be a helpful step towards betterregulation of all kinds of financial institutions. Time will tell.We remain hopeful that further steps will be taken to address the economic challenges in Barbados and the Caribbeangenerally. But some of the fiscal pressures have become more difficult over the past 12 months, not easier. Recentevents in Greece highlight how quickly a weak underlying fiscal situation can move from being perceived as “absolutelyfine” to “disastrous”, with Greek government bonds falling in value to less than 30 cents on the dollar as protestorsdemonstrate in the streets against cuts to wages and to government services.FUND PERFORMANCE AND POSITIONINGThe Fund’s return for the year ended September 30, 2011 was 0.3%, well below its historical average annual compoundrate since inception of 10.7% per year. This year, gains in some Caribbean holdings were largely offset by declines ininternational investments. The Barbados, Jamaica and Trinidad markets returned 8.6%, 8.9% and 18.9% respectivelyduring the year, while the MSCI World index, a proxy for global stocks, fell 3.8% over the same period.9

Directors’ Report Cont.Caribbean InvestmentsThe Fund continues to position in some of the most conservatively managed and well-diversified companies in theregion. These holdings typically have limited levels of debt and are trading at attractive valuations. Over the pastyear they generally performed reasonably well, but were not the top performers in any market. This was not a yearwhen quality won the race.Over the past year we continued to work on increasing the regional diversification of the Fund. Relative to lastyear, the Fund now has a smaller percentage of assets in Barbados, at 32% of total. We correspondingly increasedholdings in Trinidad & Tobago and in Jamaica – to 13% and 11% respectively – as opportunities became available inthose markets to acquire shares at attractive prices.Even with greater diversification, the Fund’s largest weight in any single market is still Barbados. During the yearended September 30, Barbados stocks mostly struggled – with one notable exception. Barbados Light & Power wastaken over early in 2011 by Emera, which offered shareholders a price more than double that at which it had beentrading previously. The Fund benefitted from this transaction, tendering approximately $5.8 million worth of sharesat the offer price and booking a significant gain. This is a large position in dollar terms, but as a percentage of theFund it was only 1.8%.It is worth noting that the effect of the movement in Light & Power’s shares on the overall Barbados market indexwas so great that, had it not been for the takeover, the entire index would have been down marginally for the year,not up 8.6%.In Barbados, the Fund has relatively large positions in two financial companies: Sagicor Financial Corporation andFirstCaribbean International Bank. These are not easy times for financials. In the past year, Sagicor continuedto feel the weight of uneven operational results. The stock fell 7% during the year. The common and preferredshare financing completed in June, and the significant investment made by International Finance Corporation haveremoved some of the near term uncertainty at that company. We added a position in the Sagicor 6.5% preferredshares to the portfolio and expect these should be steady if unspectacular sources of return for the next 5 years.We expect as the credit cycle stabilizes, FirstCaribbean will be in a good position also to generate some consistentearnings. Both shares are trading at reasonably low valuations.The Fund’s 2.8% investment in Lascelles has been frustrating. The company’s majority shareholder, a subsidiaryof CL Financial, does not appear to have a transparent plan for preserving and growing shareholder value in thecompany against the backdrop of its own financial stresses. The shares continue to trade at a significant discount totheir intrinsic worth. This has triggered at least one takeover offer, the outcome of which will depend largely on themajority shareholder’s actions.10

Other large positions in the Fund include Neal & Massy and Grace Kennedy. These performed reasonably well duringthe year, with gains of 6.2% and 1.1% respectively. We expect their earnings performance will continue to be stableand that there is still room for their share prices to appreciate – especially given low interest rates and the substantialrecent performance of lower quality companies in the region, where more stable companies can now potentiallyplay “catch up”. Balance sheet write-downs taken by some companies in the past year also open up the potential foraccelerated earnings growth if conditions improve.International InvestmentsAs of September 30, the Fund held approximately 36% of its assets in US and international investments outside theCaribbean region and currencies. This relatively large section of the portfolio diversifies the Fund’s exposures fromthose in Barbados and the Caribbean region. Over the years, this type of structure has contributed significantly toreturns and helped to reduce the risk and volatility of the Fund. It also helps the Fund maintain its high degree ofliquidity. During the past year, though, it was a negative contributor to overall return as the European financial “crisis”sparked large market declines in August and September.The table below summarises the returns generated during the year by the funds and strategies that make up thebulk of our international allocation. All allocations are to strategies or funds that are run with disciplined, value-basedinvestment processes that we expect over time to add both diversification and profits to the Fund.Full details of the portfolio, including the amount of each allocation, may be found in the accompanying financial statements.Comparative ReturnsHolding Return BenchmarkFortress Global Value Fund -5.2% -3.8%Fortress US Equity Strategy -1.5% -0.9%Fortress International Equity Strategy -5.1% -8.9%Fortress Equity Income Strategy 2.1% 8.3%CG Portfolio Ltd 6.4% -4.4%Overseas Asset Management- OAM Asia Recovery Fund -5.0% -12.9%- OAM European Value Fund -0.3% -11.3%British Empire Securities Trust -8.3% -4.4%Caledonia Investments -6.6% -4.4%11

Directors’ Report Cont.The OAM funds in particular did an excellent job of protecting capital in the falling markets, outperforming theirbenchmarks by wide margins this year. The Fortress Equity Income strategy and CG Portfolio fund contributedpositive returns during the year, but smaller ones than in many previous periods. CG is largely focused in “real”return assets that aim to provide protection in an inflationary environment; the Fortress Equity Income strategyuses a portfolio of high quality US equities and related options to generate a low volatility return targeting 8% peryear. British Empire Securities and Caledonia Investments are both closed-end funds that trade on the London StockExchange. We are attracted to them because of the solid underlying investment process at work in their underlyingportfolios, as well as the significant discount to net asset value at which their shares have been trading in the market.Discounts have been 15-20% for Caledonia and 0-10% for British Empire over the past year. At September 30, theirdiscounts were both at wide ebbs, as stocks of all sorts were pushed lower on panicky selling.The Fund continues to focus its investments in companies whose operations and financing strategies can be resilienteven if economic conditions are challenging. We also want to see below average valuations, to buy shares or makeallocations “on sale” relative to what we believe they should be worth under normal circumstances. This usuallyhappens when bad news hits the headlines – and our expectation is that over time the operations of good companieswill tend to stabilise and overcome short-term problems.The European sovereign debt crisis has been one such news story, punishing stocks of all kinds in recent months. Therisks to European banks are real and we feel that there are too many unknowns to invest meaningfully in this area.Many non-financial companies have seen their share prices decline to attractive levels recently, though, and this storymay not have run its course. The Fund has approximately 17% in cash, up from 10% last year, ready to allocate if andwhen markets decline further and offer more good opportunities.OUTLOOKWe expect that the year ahead will not be an easy one in the Caribbean. In spite of some recent stability in bondmarkets and improvements in stocks, significant problems remain unsolved, and in some cases even unacknowledged.Governments’ reduced ability to pay their bills and to support the economy will not be easily absorbed by economieswhose competitiveness has gradually been eroded by domestic inflation and by stagnant productivity. Valuationsof some high quality companies are still good, suggesting they could perform acceptably well even in a mediocrebusiness environment. We have invested in these. At the time of writing, a number of the Fund’s larger holdings havebeen reporting improved operating results, and we are encouraged by this.Internationally, a better environment for equity investors probably lies ahead, but the good days are unlikely to returnovernight. The prices at which we can invest in the shares of high quality companies with respected global brandsand responsible balance sheets are in many cases quite good. Such companies will not require fast global economicgrowth or huge government stimulus in order to succeed. This is a good thing, because we are unlikely to get them.Business conditions may be challenging, but good companies can still generate profits. We are investing in thesecompanies.12

We will continue to search for investments with good return prospects and limited risk, wherever they can befound.Thank you to all our shareholders for investing with us, and we look forward to reporting to you on the Fund’sprogress again this time next year.Roger CaveInvestment Director13

Financial Statements15

Fortress Mutual Fund LimitedConsolidated Statement of Financial PositionAs of September 30, 2011(expressed in Barbados dollars)2011$2010$AssetsInvestments (note 5) 263,726,191 259,513,861Real estate available for re-sale (note 6) 2,337,231 9,540,239Due from brokers (note 8) 3,386,919 6,089,530Accounts receivable 685,409 595,190Cash and cash equivalents (note 9) 54,873,203 31,791,477Total assets 325,008,953 307,530,297LiabilitiesDerivative financial instruments (note 7) 62,400 –Accounts payable and accrued expenses 625,762 218,318Due to brokers (note 8) 448 1,006,788Total liabilities (excluding net assets attributable to holdersof redeemable mutual fund shares) 688,610 1,225,106Net assets attributable to holders of redeemable mutual fundshares (note 12) 324,280,343 306,265,191Total liabilities 324,968,953 307,490,297Share capital (note 13) 40,000 40,000Liabilities and shareholder funds 325,008,953 307,530,297Net asset value per share 4.48 4.46The accompanying notes form an integral part of these consolidated financial statements.Approved by the Board of Directors on November 30, 2011___________________________________ Director___________________________________ Director

Fortress Mutual Fund LimitedConsolidated Statement of Changes in Net Assets Attributable to Holders of RedeemableMutual Fund SharesFor the year ended September 30, 2011(expressed in Barbados dollars)Number ofsharesNet assetsattributable toholders ofredeemable mutualfund shares$Balance as at September 30, 2009 64,728,045 283,248,525Issue of shares 6,949,592 30,349,535Redemption of shares (3,020,689) (13,207,536)Total comprehensive income for the year – 5,874,667Balance at September 30, 2010 68,656,948 306,265,191Issue of shares 7,312,259 33,241,520Redemption of shares (3,513,952) (16,008,800)Total comprehensive income for the year – 782,432Balance at September 30, 2011 72,455,255 324,280,343The accompanying notes form an integral part of these consolidated financial statements.

Fortress Mutual Fund LimitedConsolidated Statement of Comprehensive IncomeFor the year ended September 30, 2011(expressed in Barbados dollars)2011$2010$RevenueNet fair value (loss)/gain on investments (note 5) (285,526) 6,361,592Dividend income 6,897,641 4,339,354Interest income (note 10) 591,122 1,740,073Gain on sale of property (note 6) 1,240,000 –Other income 21,879 –Total investment income 8,465,116 12,441,019ExpensesManagement fees (note 11) 5,478,751 4,959,873Trade fees 835,376 735,159Administrator and custodian fees (note 11) 535,724 486,898Operating expenses 186,887 302,760Impairment charge on property 543,008 –Professional fees 102,750 74,882Withholding taxes 188 6,780Operating expenditure 7,682,684 6,566,352Total comprehensive income 782,432 5,874,667The accompanying notes form an integral part of these consolidated financial statements.

Fortress Mutual Fund LimitedConsolidated Statement of Cash FlowsFor the year ended September 30, 2011(expressed in Barbados dollars)2011$2010$Cash flows from operating activitiesTotal comprehensive income 782,432 5,874,667Adjustments for:Net fair value loss/(gain) investments 285,526 (6,361,592)Dividend income (6,897,641) (4,339,354)Interest income (591,122) (1,740,073)Gain on sale of property (1,240,000) –Impairment on property 543,008 –Operating loss before working capital changes (7,117,797) (6,566,352)Decrease/(increase) in accounts receivable 154,316 (343,350)Decrease/(increase) in due from brokers 2,702,611 (1,154,980)(Decrease)/increase in due to brokers (1,006,340) 1,006,788Increase in accounts payable and accrued expenses 407,444 45,778Purchase of investments (108,098,578) (222,812,433)Proceeds on sale of investments 103,388,026 203,923,375Additions to real estate available for re-sale – (10,434)Proceeds from sale of property 7,900,000 –Cash used in operations (1,670,318) (25,911,608)Interest received 866,218 1,552,552Dividends received 6,653,106 4,278,593Cash from/(used in) operating activities 5,849,006 (20,080,463)Cash flows from investing activitiesIssue of mutual fund shares 33,241,520 30,349,535Redemption of mutual fund shares (16,008,800) (13,207,536)Cash from financing activities 17,232,720 17,141,999Net increase/(decrease) in cash and cash equivalents 23,081,726 (2,938,464)Cash and cash equivalents – beginning of year 31,791,477 34,729,941Cash and cash equivalents – end of year 54,873,203 31,791,477The accompanying notes form an integral part of these consolidated financial statements.

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)1 Incorporation and principal activityFortress Mutual Fund Limited (“the Fund”) was incorporated in Barbados on December 4, 1996, is registeredunder the Companies Act of Barbados and is licensed under the Mutual Funds Act 2002-22 as an authorisedMutual Fund. The Fund maintains its registered office at 1 st Floor, Carlisle House, Hincks Street, Bridgetown,Barbados. The Fund’s primary objective is capital growth over the long term. The Investment Manager uses avalue approach to invest primarily in Caribbean and international equities.The Fund’s investment and administration activities are managed by Fortress Fund Managers Limited (theInvestment Manager).2 Summary of significant accounting policiesThe principal accounting policies applied in the preparation of these consolidated financial statements are setout below. These policies have been consistently applied to all years presented, unless otherwise stated.a) Basis of preparationThe financial statements have been prepared in accordance with International Financial ReportingStandards (“IFRS”). The financial statements have been prepared in accordance with the historical costconvention, as modified by the revaluation of certain financial assets and financial liabilities held at fairvalue through profit or loss.The preparation of financial statements in conformity with IFRS requires the use of certain criticalaccounting estimates. It also requires management to exercise its judgement in the process of applying theFund’s accounting policies. Although these estimates are based on management’s best knowledge ofcurrent events and conditions, actual results could differ from these estimates.Estimates and judgements are continually evaluated and are based on historical experience and otherfactors, including expectations of future events that are believed to be reasonable under the circumstances.Standards, amendments and interpretations that are issued but not yet effective which may be relevantfor the Fund’s operationsIFRS 10, ‘Consolidated financial statements’ builds on existing principles by identifying the conceptof control as the determining factor in whether an entity should be included within the consolidatedfinancial statements of the parent company. The standard provides additional guidance to assist in thedetermination of control where this is difficult to assess. The Fund is yet to assess IFRS 10’s fullimpact and intends to adopt IFRS 10 no later than the accounting period beginning on or after 1January 2015.(1)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)2 Summary of significant accounting policies…continueda) Basis of preparation…continuedStandards, amendments and interpretations that are issued but not yet effective which may be relevantfor the Fund’s operations…continuedIFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition offinancial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. Itreplaces the parts of IAS 39 that relate to the classification and measurement of financial instruments.IFRS 9 requires financial assets to be classified into two measurement categories: those measured asat fair value and those measured at amortised cost. The determination is made at initial recognition.The classification depends on the entity’s business model for managing its financial instruments andthe contractual cash flow characteristics of the instrument. For financial liabilities, the standardretains most of the IAS 39 requirements. The main change is that, in cases where the fair value optionis taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk isrecorded in other comprehensive income rather than the income statement, unless this creates anaccounting mismatch. The Fund is yet to assess IFRS 9’s full impact and intends to adopt IFRS 9 nolater than the accounting period beginning on or after 1 January 2013.IFRS 13, ‘Fair value measurement’, issued in May 2011. The standard explains how to measure fairvalue for financial reporting and introduces significantly enhanced disclosure about fair values. Itdoes not address or change the requirements on when fair values should be used. IFRS 13 has beenissued to provide a single source of guidance for all fair value measurements and to clarify thedefinition of fair value. The standard is not applicable until 1 January 2013, but is available for earlyadoption. The adoption is not expected to have a significant impact on the financial statements.IFRS 11, Joint Arrangements - IFRS 11 is a more realistic reflection of joint arrangements byfocusing on the rights and obligations of the arrangement rather than its legal form. There are twotypes of joint arrangement: joint operations and joint ventures. Joint operations arise where a jointoperator has rights to the assets and obligations relating to the arrangement and hence accounts for itsinterest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator hasrights to net assets of the arrangements and hence equity account for its interest. Proportionalconsolidation of joint ventures is no longer allowed. The Fund is yet to assess IFRS 11's full impactand intends to adopt IFRS 11 no later than the accounting period beginning on or after 1 January2013.IFRS 12, ‘Disclosures of interests in other entities’ includes the disclosure requirements for all formsof interests in other entities, including joint arrangements, associates, special purpose vehicles andother off balance sheet vehicles. The Fund is yet to assess IFRS 12’s full impact and intends to adoptIFRS 12 no later than the accounting period beginning on or after 1 January 2013.(2)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)2 Summary of significant accounting policies…continuedb) Foreign currency translationFunctional and presentation currencyItems included in the financial statement of the Fund and its subsidiary company are measured using thecurrency of the primary economic environment in which it operates (“the functional currency”). Theconsolidated financial statements are presented in Barbados dollars which is the Fund’s functional andpresentation currency.Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rate prevailingat the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of suchtransactions and from the translation at year end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the statement of comprehensive income.Translation differences on non-monetary financial assets and liabilities such as securities held at fair valuethrough profit or loss are recognised in the statement of comprehensive income as part of the fair valuegain and loss.c) InvestmentsThe Fund classifies its financial assets into two categories:Financial assets at fair value through profit or lossLoans and receivablesManagement determines the appropriate classification of these assets at initial recognition.Financial assets at fair value through profit or lossi) ClassificationThe majority of the Fund’s investments have been classified as financial assets at fair value throughprofit or loss in accordance with International Accounting Standards 39 (IAS 39), FinancialInstruments: Recognition and Measurement.Financial assets in the category at fair value through profit or loss have been so designated bymanagement at inception since the assets form part of the managed portfolio whose performance isevaluated on a fair value basis in accordance with a documented investment strategy.(3)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)2 Summary of significant accounting policies…continuedc) Investments...continuedFinancial assets at fair value through profit or loss...continuedii)Recognition, derecognition and measurementRegular-way purchases and sales of investments are recognised on the trade date, which is the datethe Fund commits to purchase or sell the investments. Investments are derecognised when the rightsto receive cash flows from the investments have expired or the Fund has transferred substantially allrisks and rewards of ownership.The Fund’s interests in jointly controlled entities are initially recognised at cost and are subsequentlycarried at fair value based on the Fund’s proportionate share of the underlying fair value of theentity’s net assets.Investments in other investment funds are valued on the basis of the net asset value per share asdetermined by the administrators of those investment vehicles in accordance with industry practice.All other financial assets at fair value through profit or loss are initially recognised at fair value andsubsequently carried at fair value based on quoted bid prices. In the absence of quoted bid prices thelast close price and other information including the quoted offer price is considered by the Manager todetermine the appropriate fair value price to be used. In the event that a security held by the Fund isunquoted, if unusual market conditions exist, or in the event that a particular security’s value hasbecome impaired, as evidenced by no bids being quoted and offers below the previous trade price, theManager, in consultation with the Custodian, and on advice of an independent broker, will make areasonable estimate of the fair value price by using valuation techniques. These can include the use ofrecent arm's length transactions, reference to other instruments that are substantially the same ordiscounted cash flow analysis which make maximum use of market inputs and rely as little aspossible on entity-specific inputs.Gains or losses arising from changes in the fair value of securities classified as financial assets at fairvalue through profit or loss are recognised in the statement of comprehensive income as they arise.Average cost is used to compute realised and unrealised gains and losses on investments.Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are notquoted in an active market. Loans and receivables are carried at amortised cost using the effective interestmethod less provision for impairment. A loan or receivable is considered impaired when managementdetermines that it is probable that all amounts due according to the original contract terms will not becollected. This determination is made after considering the payment history of the borrower, thediscounted value of collateral and guarantees and the financial condition and viability of the borrower.(4)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)2 Summary of significant accounting policies …continuedd) Derivative contractsOpen contracts held for trading purposes are included in the statement of financial position at fair value.Fair value is based generally on market prices or broker quotations.The fair value of open contracts, which are comprised of call and put options, is included in investmentswhere the fair value represents an asset of the Fund. Where the fair value of the options represents anobligation of the Fund, the fair value is included in derivative financial liabilities. Amounts are offset andthe net amount reported in the statement of financial position if, and only if there is a legally enforceableright to set off the recognised amounts and there is an intention to settle on a net basis, or to realise anasset and settle the liability simultaneously. This is not generally the case and the related assets andliabilities are presented gross in the statement of financial position. Gains and losses arising from theapplication of this policy are taken to the statement of comprehensive income.e) ConsolidationSubsidiaries are all entities over which the Fund has the power to govern the financial and operatingpolicies generally accompanying a shareholding of more than one half of the voting rights. The existenceand effect of potential voting rights that are currently exercisable or convertible are considered whenassessing whether the Fund controls another entity. Subsidiaries are fully consolidated from the date onwhich control is transferred to the group. They are deconsolidated from the date that control ceases.Investments in subsidiaries are accounted for at cost less impairment.Inter-company transactions, balances and unrealised gains on transactions between group companies areeliminated. Unrealised losses are also eliminated.The Fund’s subsidiary holdings are set out below:2011 2010Cove 11 Limited 100% 100%Fortress Property (SVG) Ltd. – 100%Cove 11 Limited is incorporated in Barbados and owns Coral Cove Unit 11 in Payne’s Bay, St. James,which has been included in real estate available for re-sale.Fortress Property (SVG) Ltd is incorporated in Bahamas and owns Lot E24 at Canouan ResortsDevelopments, St Vincent, which was included in real estate available for re-sale.(5)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)2 Summary of significant accounting policies…continuedf) Real estate available for re-saleProperties that are being held for future sale are classified as real estate available for re-sale and are carriedat cost. Subsequent costs are included in the properties’ carrying value. The carrying value is immediatelywritten down to its recoverable amount if its carrying value is assessed to be greater that the estimatedrecoverable amount.Gains and losses realised on the sale of real estate available for re-sale are included in the statement ofcomprehensive income at the time of sale.g) Cash and cash equivalentsCash and cash equivalents are short term highly liquid investments with original maturities of threemonths or less that are readily convertible to known amounts of cash which are subject to insignificantchanges in fair value.h) Investment incomeInterest income is recognised in the statement of comprehensive income for all interest-bearinginstruments on an accrual basis using the effective yield method. Interest income relates to couponsearned on fixed income investments, short-term deposits and cash and cash equivalents.Dividend income is recognised when the Fund’s right to receive payment is established.i) Transaction costsTransaction costs are costs incurred to acquire financial assets or liabilities at fair value through profit orloss. They include the bid-ask spread, fees and commissions paid to agents, advisers, brokers and dealers.Transaction costs, when incurred, are immediately recognised in the statement of comprehensive incomeas an expense.j) ExpensesExpenses are accounted for on an accrual basis. Expenses are charged to the statement of comprehensiveincome. In addition to the management fees and administration expenses, the Fund is responsible for thepayment of all direct expenses relating to its operations such as audit, legal and professional fees.k) Due from and due to brokersAmounts due from and to brokers represent receivables for securities sold and payables for securitiespurchased, that have been contracted for but not yet settled or delivered by the statement of financialposition date respectively.(6)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)2 Summary of significant accounting policies…continuedl) Redeemable mutual fund shares/ Net asset valueThe Fund issues redeemable mutual fund shares which are redeemable at the holder’s option and areclassified as financial liabilities. Redeemable mutual fund shares can be put back to the Fund at any timefor cash equal to a proportionate share of the Fund’s net asset value. The redeemable mutual fund sharesare carried at the redemption amount that is payable at the statement of financial position date if theholders exercise the right to put the shares back to the Fund.Redeemable mutual fund shares are issued and redeemed at the holder’s option at prices based on theFund’s net asset value per share at the time of issue or redemption. The Fund’s net asset value perredeemable mutual fund share is calculated by dividing the net assets attributable to those shares by thenumber of outstanding redeemable mutual fund shares. In accordance with the provisions of the Fund’sregulations, investment positions are valued based on the procedures described in note 2c for the purposeof determining the net asset value per share for subscriptions and redemptions.m) Distributions payable to holders of redeemable mutual fund sharesThe Fund’s does not pay dividends or distributions to the holders of redeemable mutual fund shares. Allincome, including interest, dividends and capital gains earned by the Fund, is automatically reinvested andthis income is reflected in the quoted net asset value of the shares.n) TaxationThe Fund is licensed as an authorised mutual fund under the Mutual Funds Act, 2002-22 of Barbados.The Directors have resolved that all of the net income of the Fund is attributable to the Fund’s Class “A”redeemable mutual fund shareholders. In calculating the assessable income of the Fund for tax purposes,the Act provides for a deduction of up to a 100% of the income that is designated to be the income of theFund shareholders.3 Critical accounting estimates and assumptionsThe estimates and assumptions that have a significant risk of causing material adjustment to the carrying valueof assets and liabilities within the next financial year relate to the valuation of unquoted investments and thedetermination of impairment provisions. Management policies surrounding these estimates and assumptions aredisclosed in note 2c.4 Financial risk managementThe Fund’s activities expose it to a variety of financial risks: market risk (which includes price risk, interestrate risk and foreign currency risk), credit risk and liquidity risk.The Fund’s overall risk management programme seeks to maximise the returns derived for the level of risk towhich the Fund is exposed and seeks to minimise the potential adverse effect on the Fund’s financialperformance. The Fund’s policy allows it to use derivative financial instruments to moderate certain riskexposures.(7)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management …continuedMarket risk …continuedThe risk management policies employed by the Fund to manage these risks are discussed below.The objective of the Fund is to achieve long-term capital appreciation through investment in domestic, regionaland international markets.i) Price riskThe Fund is exposed to market price risk arising primarily from the changes in equity prices. To managethis risk the Fund holds a diversified portfolio of investments in accordance with its investment policy. Asummary of the overall statement of financial position market exposures at September 30, 2011 isdisclosed in note 5.At September 30, 2011 as disclosed in note 5, 25% (2010- 25%) of financial assets at fair value throughprofit or loss, comprise of investments in other funds that have been fair valued in accordance with thepolicies set out in note 2c. Since the shares of the other funds are not publicly traded, redemption can onlybe made by the Fund on the redemption dates and subject to the required notice periods specified in theoffering documents of each of the other funds. The rights of the Fund to request redemption of itsinvestments in other funds may vary in frequency from weekly to monthly redemptions. As a result, thecarrying values of the other funds may not be indicative of the prevailing values ultimately realised onredemption. In addition, the Fund may be materially affected by the actions of other investors who haveinvested in other funds in which the Fund has invested.SensitivityThe effects of a change in equity prices of the Fund’s financial assets at fair value through profit or loss areset out below.Financial assets at fair value through profit or loss:CarryingValue2011$Effectivechange atSeptember2011Impact onincome$Listed on Caribbean stock exchange and markets 136,814,882 8% 10,945,191Listed on US stock exchanges and markets 44,283,820 10% 4,428,382Listed on other exchanges and markets 8,815,234 10% 881,523Unlisted securities 72,164,077 10% 7,216,408262,078,013 23,471,504(8)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management …continuedMarket risk …continuedi) Price risk…continuedCarryingValue2010$Effectivechange atSeptember2010Impact onincome$Listed on Caribbean stock exchange and markets 112,037,191 8% 8,962,975Listed on US stock exchanges and markets 33,935,583 10% 3,393,558Listed on other exchanges and markets 8,399,907 10% 839,991Unlisted securities 79,389,326 10% 7,938,933(ii) Interest rate risk233,762,007 21,135,457Interest rate risk arises from the effects of fluctuations in the prevailing levels of market interest rates onthe fair value of financial assets and liabilities and future cash flow. The majority of the Fund’s financialassets and liabilities are non-interest bearing. As a result the Fund is not subject to significant amounts ofrisk due to fluctuation in the prevailing levels of market interest rates. Any excess cash and cashequivalents are invested at short-term market interest rates. The effective yield on loans and receivables isdisclosed in note 5 and on cash and cash equivalents in note 9.(iii) Foreign currency riskThe Fund holds financial assets denominated in currencies other than the Barbados dollar, the functionalcurrency of the Fund. Consequently, except where assets and liabilities are denominated in currenciesfixed to the Barbados dollar, the Fund is exposed to currency risk. The Fund’s policy is not to enter intoany hedging transactions to mitigate currency risk.Foreign currency risk arises as the value of future transactions, recognised monetary assets and monetaryliabilities denominated in other currencies fluctuate due to changes in foreign exchange rates. IFRS 7considers the foreign exchange exposure relating to non-monetary assets and liabilities to be a componentof market price risk not foreign currency risk. However, management monitors the exposure on all foreigncurrency denominated assets and liabilities.(9)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management …continuedMarket risk …continued(iii) Foreign currency risk...continuedThe table below summarises the Fund’s exposure to currency risk:September 30, 2011JMD$GBP$GYD$EUR$Financial assetsInvestments 34,300,418 19,213,356 5,727,640 –Accounts receivable 150,945 – – –Cash and cash equivalents 23,279 223,528 – 445,593Total financial assets 34,474,642 19,436,884 5,727,640 445,593Total financial liabilities – – – –Net position 34,474,642 19,436,884 5,727,640 445,593September 30, 2010JMD$GBP$GYD$EUR$Financial assetsInvestments 17,380,809 14,103,417 4,182,961 2,906,702Due from brokers 4,098 – – –Accounts receivable 45,657 – – –Cash and cash equivalents 3,021 1,242,188 – –Total financial assets 17,433,585 15,345,605 4,182,961 2,906,702Total financial liabilities – – – –Net position 17,433,585 15,345,605 4,182,961 2,906,702SensitivityThe Fund is most exposed to currency risk in its operating currencies whose values have noticeablyfluctuated against the Barbados dollar. These currencies include the Jamaica dollar (JMD), the GreatBritain Pound Sterling (GBP), the Guyanese dollar (GYD) and the Euro (EUR).(10)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management …continuedMarket risk …continued(iii) Foreign currency risk...continuedThe theoretical decrease in net assets had these currencies depreciated by 5% against the Barbados dollarwith all other variables held constant is considered below:Effect of a 5%depreciation as ofSeptember 30, 2011$Effect of a 5%depreciation as ofSeptember 30, 2010$Balances denominated in JMD 1,723,732 871,679Balances denominated in GBP 971,844 767,280Balances denominated in GYD 286,382 209,148Balances denominated in EUR 22,280 145,335A 5% appreciation in the currencies will have an equal and opposite effect to that disclosed above.Credit riskCredit risk is the risk that an issuer or counterparty to a financial instrument will be unable or unwilling to meeta commitment thereby causing a financial loss to the Fund.The maximum exposure of the Fund to the credit risk is set out in the following table:2011$2010$Government bonds – 6,006,602Loans and receivables 1,648,178 25,751,854Due from brokers 3,386,919 6,089,530Accounts receivable 685,409 595,190Cash and cash equivalents 54,873,203 31,791,47760,593,709 70,234,653Government bonds are issued by the Government of Barbados $ nil (2010-$3,099,900) which maintains aBBB- rating by Standard and Poor’s and the Government of Jamaica $ nil (2010-$2,906,702) which maintains aB- rating by Standard and Poor’s.Credit risk from loans and receivables is minimised through holding a diversified portfolio of investments,purchasing securities after careful assessment of the borrower and placing deposits with financial institutionswith a strong capital base. The Fund’s loans and receivables are unrated.None of the Fund’s loans and receivables and accounts receivables are impaired or past due but not impaired.(11)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management…continuedCredit risk…continuedAll transactions in listed securities are settled/paid for upon delivery using approved brokers. The risk ofdefault is considered minimal since delivery of securities sold is only made once the broker has deliveredpayment. On a purchase, payment is made once the securities have been received by the broker. The trade willfail if either party fails to meet their obligation. The Fund’s exposure to credit risk related to due to brokers isset out below in the following table:Due from brokers2011$2010$Neither past due or impaired 3,386,919 6,089,5303,386,919 6,089,530The Fund’s exposure to individual counterparty credit risk on its cash and cash equivalents exceeding 2.5% oftotal the Fund’s net assets is set out below:2011$2010$Cash and cash equivalentsFirstCaribbean International Bank (unquoted) 36,547,822 19,289,233Liquidity riskLiquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle itsobligations in full as they fall due or can only do so on terms that are materially disadvantageous.The Fund is exposed to weekly cash redemptions of Class “A” Redeemable Mutual Fund Shares (note 2 l). Ittherefore invests the majority of its assets in investments that are traded in an active market and can be readilydisposed of. The table below analyses the Fund’s financial liabilities into relevant maturity groupings based onthe remaining period at the statement of financial position date to the contractual maturity date.(12)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management …continuedLiquidity risk …continuedThe amounts disclosed in the table below are the contractual undiscounted cash flows. Balances due within 12months equal their carrying amount, as the impact of discounting is not significant.September 30, 2011Less than1 month$1 - 3 months$Derivative financial instruments 62,400 –Accounts payable and accrued expenses 580,234 45,528Due to brokers 448 –Net assets attributable to holders of redeemable mutual fund shares 324,280,343 –Total financial liabilities 324,923,425 45,528September 30, 2010Less than1 month$1 - 3 months$Accounts payable and accrued expenses 143,568 74,750Due to brokers 1,006,788 –Net assets attributable to holders of redeemable mutual fund shares 306,265,191 –Total financial liabilities 307,415,547 74,750Redeemable shares are redeemed on demand at the holder’s option (note 2 l). In the event of unusualcircumstances and redemption requests representing more than 20% of the Fund’s assets being received within30 consecutive days, the directors of the Fund reserve the right to suspend redemptions and to hold a specialmeeting of the Fund shareholders to determine the future of the Fund, including the liquidation of the Fund’sassets.Capital risk managementThe capital of the Fund is represented by the net assets attributable to holders of redeemable shares. Theamount of net asset attributable to holders of redeemable shares can change significantly on a weekly basis asthe Fund is subject to weekly subscriptions and redemptions at the discretion of shareholders. The Fund’sobjective when managing capital is to safeguard the Fund’s ability to continue as a going concern in order toprovide returns for shareholders and to maintain a strong capital base to support the development of theinvestment activities of the Fund.(13)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management …continuedFair value estimationThe Fund adopted the amendment to IFRS 7, effective October 1, 2009. This requires the Fund to classify fairvalue measurements using a fair value hierarchy that reflects the significance of the inputs used in making themeasurements. The fair value hierarchy has the following levels:Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).Inputs other than quoted prices included within level 1 that are observable for the asset or liability, eitherdirectly (that is, as prices) or indirectly (that is, derived from prices) (level 2).Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs)(level 3).The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety isdetermined on the basis of the lowest level input that is significant to the fair value measurement in its entirety.For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If afair value measurement uses observable inputs that require significant adjustment based on unobservableinputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fairvalue measurement in its entirety requires judgment, considering factors specific to the asset or liability.The determination of what constitutes ‘observable’ requires significant judgment by the Fund. The Fundconsiders observable data to be that market data that is readily available, regularly distributed or updated,reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in therelevant market.The following tables analyse within the fair value hierarchy the Fund’s financial assets and liabilities (by class)measured at fair value:September 30, 2011Level 1$Level 2$Level 3$Total$Financial assets at fair value throughprofit or lossListed equity securities 181,196,736 2,379,100 – 183,575,836Debt securities 17,644 – – 17,644Mutual funds 41,771,526 1,637,786 21,151,357 64,560,669Other – – 372,721 372,721222,985,906 4,016,886 21,524,078 248,526,870(14)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management …continuedFair value estimation …continuedSeptember 30, 2010Level 1$Level 2$Level 3$Total$Financial assets at fair value throughprofit or lossListed equity securities 144,743,397 7,095,911 – 151,839,308Debt securities 2,906,702 3,117,655 – 6,024,357Mutual funds 4,543,521 37,068,263 21,736,205 63,347,989Other – – 372,721 372,721152,193,620 47,281,829 22,108,926 221,584,375Investments whose values are based on quoted market prices in active markets, and therefore classified withinlevel 1, include active listed equities, listed close-ended mutual funds and traded government debt securities.The Fund does not adjust the quoted price for these instruments.Financial instruments that trade in markets that are not considered to be active but are valued based on quotedmarket prices, dealer quotations or alternative pricing sources supported by observable inputs are classifiedwithin level 2. These include investment-grade corporate bonds, untraded government securities and unlistedmutual funds. As level 2 investments include positions that are not traded in active markets and/or are subjectto transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which aregenerally based on available market information.Investments classified within level 3 have significant unobservable inputs, as they trade infrequently, areunquoted or are determined by a third party. Level 3 instruments include unlisted mutual funds and securities.The Fund invests in funds for which observable prices are not available as they are not listed in active markets.The fair value of these mutual funds in this category is determined by the administrators of these investments inaccordance with industry practice.There were no transfers between levels for the year ended September 30, 2011(2010-nil).(15)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)4 Financial risk management …continuedFair value estimation …continuedThe following tables present the movement in level 3 instruments by class of financial instrument:September 30, 2011MutualFunds$Other$Totalbalances$Opening balance 21,736,205 372,721 22,108,926Purchases 3,000,022 – 3,000,022Sales (2,786,750) – (2,786,750)Gain recognised in the statement of comprehensive income (798,120) – (798,120)Closing balance 21,151,357 372,721 21,524,078September 30, 2010MutualFunds$Other$Totalbalances$Opening balance 32,969,861 372,721 33,342,582Purchases 2,374,240 – 2,374,240Sales (16,598,356) – (16,598,356)Gain recognised in the statement of comprehensive income 2,990,460 – 2,990,460Closing balance 21,736,205 372,721 22,108,9265 Investments2011$2010$Designated at fair value through profit or loss:- listed equity securities 183,575,836 151,839,308- debt securities 17,644 6,024,357- mutual funds 64,560,669 63,347,989- joint ventures 13,551,143 12,177,632- other 372,721 372,721Total financial assets designated at fair value through profit or loss 262,078,013 233,762,007Loans and receivables 1,648,178 25,751,854Total investments 263,726,191 259,513,861(16)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)5 Investments….continued2011$2010$Net (losses)/gains recognised in relation to investments- realized (1,379,437) 2,568,160- change in unrealized 1,093,911 3,793,432(285,526) 6,361,5922011 2010SecurityCost$Market value$Cost$Market value$Financial assets at fair valuethrough profit or lossBarbadosGoddard Enterprises Limited 5,636,124 9,904,062 5,631,846 9,718,288Sagicor Financial Corporation 16,708,689 9,840,011 18,417,358 12,715,053FirstCaribbean International Bank Ltd 9,681,802 8,694,087 11,993,614 10,768,434Cable & Wireless B'dos Limited 4,497,341 7,476,065 4,729,522 8,965,627Insurance Corporation of Barbados Ltd 6,438,660 5,505,616 6,432,102 6,171,807Sagicor Financial Corporationpreferenceshares 3,500,000 3,500,000 – –Fortress Caribbean Property Fund Ltd 1,969,418 1,637,786 1,754,919 1,509,919Banks Holdings Limited 1,699,081 1,480,973 1,690,345 1,813,776Barbados Dairy Industries Ltd 983,958 1,113,651 983,958 1,113,651Barbados National Bank Inc 952,845 988,941 904,863 962,123Light & Power Holdings Ltd 1,080 1,388 2,137,332 2,595,964ANSA McAL (Barbados) Ltd – – 963,628 562,89652,068,998 50,142,580 55,639,487 56,897,538JamaicaGrace Kennedy 20,133,579 17,899,312 8,196,651 5,899,843Lascelles Demercado 9,206,737 9,125,916 9,119,172 9,067,901National Commercial Bank Ltd 4,366,214 5,728,578 1,360,203 867,121Sagicor Life Jamaica 605,338 903,200 605,338 622,005Capital & Credit Financial Group Ltd 158,339 235,982 – –Cable & Wireless Jamaica 1,440,853 224,327 1,971,869 598,747FirstCaribbean Intl Bank (Jamaica) Ltd 686,224 183,103 686,224 325,19236,597,284 34,300,418 21,939,457 17,380,809(17)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)5 Investments….continuedSecurityCost$2011 2010Market value$Cost$Market value$Financial assets at fair valuethrough profit or lossTrinidadNeal & Massy Holdings Ltd 28,754,610 27,785,410 15,611,408 13,216,376Guardian Holdings 6,546,758 5,261,585 5,908,741 4,650,105Ansa McAl Ltd 3,588,506 4,087,186 31,187 27,770Praetorian Property Mutual Fund 4,978,543 3,085,991 4,978,543 3,033,602Prestige Holdings Limited 172,221 186,630 – –Republic Bank Limited – – 6,723,189 5,968,13244,040,638 40,406,802 33,253,068 26,895,985BermudaBermuda Fire & Marine Ltd 8,083,787 8,583,771 8,083,787 7,777,242ChapleGate Credit Opportunity Fund 2,000,000 2,007,072 – –Bank of N T Butterfield Ltd 157,542 178,907 484,728 568,212Denholm Hall Russia Arbitrage Fund 197,535 116,916 197,535 167,96110,438,864 10,886,666 8,766,050 8,513,415East CaribbeanEast Caribbean Financial Holdings Ltd 2,932,344 4,080,799 2,832,221 4,325,464St Lucia Electricity Services 536,480 1,089,775 536,480 1,089,775Trading & Development Co Ltd 526,249 837,380 526,249 1,088,594St Vincent Brewery Limited 287,899 410,465 287,899 410,4654,282,972 6,418,419 4,182,849 6,914,298GuyanaDemerara Bank Limited 2,601,374 4,502,609 2,601,374 2,995,298Banks DIH Ltd 635,242 933,271 635,242 917,716Demerara Distilleries Ltd 233,674 291,760 233,674 269,9473,470,290 5,727,640 3,470,290 4,182,961Government BondsGovernment of Barbados – – 3,000,000 3,099,900Government of Jamaica – – 2,815,237 2,906,702– – 5,815,237 6,006,602(18)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)5 Investments….continued2011 2010SecurityCost$Market value$Cost$Market value$InternationalFortress Global Value Fund 23,525,492 19,695,340 23,525,492 20,768,143OAM European Value Fund 11,945,004 16,249,395 11,945,004 16,300,120Fortress Equity Income Strategy 13,599,940 15,059,209 13,599,940 14,741,319OAM Asian Recovery Fund 3,193,007 7,842,651 3,193,007 8,258,402C G Portfolio Fund Ltd 3,858,199 7,814,294 3,858,199 7,432,175Fortress International Equity Strategy 7,308,760 7,718,718 3,308,760 4,054,696Caledonia Investment UK Ord shares 8,306,926 6,938,707 1,736,177 1,699,377Fortress US Equity Strategy 3,999,940 5,139,912 3,999,940 5,216,463British Empire Securities & GenTrust 4,290,577 4,460,355 4,290,577 4,971,865OAM/Greenpark II 924,466 1,674,558 1,256,077 2,510,952IShares MSCI Brazil FR Index Fund 2,002,054 1,660,800 – –Integral Global ETF Strategy 2,000,000 1,651,951 – –Berkshire Hathaway Inc Class B 1,095,672 1,115,171 1,095,672 1,306,240CATCO Reinsurance Opp Fund C 1,000,000 1,080,000 – –Kura Africa Fund 1,000,000 770,960 – –Laroc Trading Fund B.V. 551,771 668,179 1,939,859 1,939,860Caribbean Utilities Co Ltd Class A 458,805 450,000 238,810 180,000OAM/Greenpark Secondaries – 240,712 – 375,026Greenlight Capital RE Ltd Class A 159,335 135,474 159,335 130,771Proshare Short S&P 500 – – 3,813,382 3,645,000Caribbean Strategic Fund Ltd – – 750,000 625,200Douglasbay Capital Plc – – 144,116 400,78289,219,948 100,366,386 78,854,347 94,556,391OtherCS&C Joint Venture 5,784,000 12,364,306 5,784,000 11,202,886Sunset Joint Venture 936,000 1,186,837 936,000 974,7466,720,000 13,551,143 6,720,000 12,177,632Holdings less than 0.05% 326,383 277,959 300,325 236,376Total financial assets at fair valuethrough profit and loss 247,165,377 262,078,013 218,941,110 233,762,007(19)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)5 Investments….continued2011 2010Cost$Amortisedcost$Cost$Amortisedcost$Loans and receivablesDeposits 740,000 747,856 24,696,690 24,851,532Fortress St. Lucia Limited (note 11) 900,322 900,322 900,322 900,322Total loans and receivables 1,640,322 1,648,178 25,597,012 25,751,854Total investments 248,805,699 263,726,191 244,538,122 259,513,861The effective yield on loans and receivables is 4.42% (2010 – 3.60%).6 Real estate available for re-saleThe detail portfolio of real estate available for resale is as follows:2011$2010$Coral Cove – Unit 11 2,337,231 2,880,239Canouan Resorts Development – Lot E24 – 6,660,0002,337,231 9,540,239During the year an impairment test on the carrying value of the real estate available for re-sale was performed.Based on these tests the Coral Cove Unit 11 property was subsequently adjusted to its net realisable valueresulting in impairment losses of $543,008 on the property being recognised in the statement of comprehensiveincome.During the year the Canouan Resorts Development – Lot E24 property was sold for $7,900,000. A net gain onthe sale of the property of $1,240,000 was recognised in the statement of comprehensive income.7 Derivative financial instrumentsThe Fund in the past used put and call options primarily to reduce the market risk from its portfolio of equityinvestments as conditions warrant. An option is a contractual arrangement under which the seller (writer) grantsthe purchaser (holder) the right, but not the obligation, either to buy (in the case of a “call” option) or sell (inthe case of a “put” option) a specified amount of an underlying security at a specified price on or before theexpiry date of the option. The seller receives a premium from the purchaser in return for this right. The marketvalues of these options change primarily in response to changes in values of the underlying assets.(20)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)7 Derivative financial instruments ….continuedOptions which the Fund may enter into are generally all exchange-traded, with pricing for valuation purposesreadily available from the exchange(s). Options are shown in the financial statements on a gross basis.Purchased options represent assets of the Fund; written options are liabilities. This is true even if the optionscorrespond to, or are intended to hedge, other underlying assets held in the Fund’s portfolio.As at September 30, 2011, the Fund held no purchased options contracts.At September 30, 2011 the Fund held $62,400 in written option contracts (2010-nil). The notional amountunderlying options written is $7,260,000. These numbers are most meaningfully considered in the context ofthe total market value and offsetting exposures within the Fund’s portfolio.8 Due from/to brokersDue from /to brokers represents security purchases and sales transactions contracted for but not yet delivered atthe end of the year.Due from brokers2011$2010$a) Funds advanced for purchases 3,386,919 241,522b) Sales awaiting settlement – 5,848,0083,386,919 6,089,530a) This amount represents funds advanced for the purchase of shares, which have not been issued at the yearend.b) This amount represents funds due from brokers on the sale of investments, which have not been receivedDue to brokers2011$2010$Purchases awaiting settlement 448 1,006,788This amount represents funds due to brokers on the purchase of investments, which have not been paid at theyear end.(21)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)9 Cash and cash equivalents2011$2010$Cash at bank 48,262,596 28,782,227Short term deposits and money market funds 6,610,607 3,009,250The effective yield on cash and cash equivalents is 0.21% (2010- 0.04%).10 Interest income54,873,203 31,791,4772011$2010$Loans and receivables 395,043 1,004,552Debt securities at fair value through profit or loss 76,360 469,304Cash and cash equivalents 119,719 266,21711 Related party transactions591,122 1,740,073Parties are considered to be related if one party has the ability to control the other party or exercise significantinfluence over the other party in making financial or operational decisions.Fortress Fund Managers Limited serves as manager, registrar and administrator of the Fund. As a result ofproviding investment advisory, management, registrar and administrator services, Fortress Fund ManagersLimited receives a weekly management and administration fee based on the actual net asset value of the Fund,calculated weekly and payable in arrears. The gross management fee amounted to $5,687,018 (2010-$5,147,217) for the year. The administrator fees amounted to $287,628 (2010- $261,887) for the year.Management fees of $208,267 (2010- $187,344) were refunded by Fortress Fund Managers Limited being0.75% - 0.90% of the net asset values of Fortress Caribbean Property Fund Limited, Fortress Caribbean HighInterest Fund and Fortress Global Value Fund shares held by the Fund during the year. This is to avoid doublecharging of management fees on assets invested in related Funds which have the same Manager.The Fund holds 1,559,796 (2010-1,372,654) shares in the Fortress Caribbean Property Fund.The Fund holds 11,059,827 (2010-11,059,827) shares in the Fortress Global Value Fund.Included in investments is a deposit of $900,322 (2010- $900,322) held with Fortress St. Lucia Limited.Interest is payable quarterly based on 3 month LIBOR plus 2.75%. At year end the interest rate on the depositwas 3.12% (2010- 3.04%).(22)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)11 Related party transactions…..continuedThe following are the units in the Fund held by the Directors:2011 2010Geoffrey CaveNumber of shares held at October 1 48,327 46,041Shares acquired 178,635 2,286Number of shares held at September 30 226,962 48,327David BynoeNumber of shares held at October 1 58,511 56,221Shares acquired 2,249 2,290Number of shares held at September 30 60,760 58,511Sir Fred GollopNumber of shares held at October 1 56,780 52,180Shares acquired 4,530 4,600Number of shares held at September 30 61,310 56,780John WilliamsNumber of shares held at October 1 22,103 23,278Shares acquired/(redeemed) 8,458 (1,175)Number of shares held at September 30 30,561 22,103Roger CaveNumber of shares held at October 1 59,052 54,982Shares acquired 4,025 4,070Number of shares held at September 30 63,077 59,052(23)

Fortress Mutual Fund LimitedNotes to Consolidated Financial StatementsSeptember 30, 2011(expressed in Barbados dollars)12 Redeemable mutual fund sharesClass ‘A’ Redeemable Mutual Fund Shares (Fund shares)Each Fund share is entitled to an equal share in the distribution of net income and net capital gains of the Fundand participates equally in all other respects. Fund shareholders shall not be entitled to vote at meetings ofshareholders of the Fund save and except as permitted under the Companies Act, CAP 308, for the following:i) Disposal of the assets of the Fund.ii) Any change or abrogation of the rights of the shares or any variation affecting the rights of the shares.iii) Any proposed amalgamation of the Fund or any amalgamation of the Fund13 Share capital2011 2010Numberof shares $Numberof shares $Common sharesAn unlimited number ofcommon shares of no parvaluesIssued 1,000 40,000 1,000 40,000Common sharesThe 1,000 common shares, held by the Fund Manager, carry full voting rights, but do not share in the profits ofthe Fund. On winding up of the Fund, the shares would be repaid at issued value.(24)

FORTRESS FUND MANAGERS LIMITEDFIRST FLOOR, CARLISLE HOUSE, HINCKS STREET, BRIDGETOWN, BB11144, BARBADOSTEL: (246) 431-2198 FAX: (246) 431-0514 • invest@fortressfund.com • www.fortressfund.com