2011 Report - Fortress Mutual Fund Ltd

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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
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2011 Report - Fortress Mutual Fund Ltd

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