2011 Report - Fortress Mutual Fund Ltd

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