2011 Report - Fortress Mutual Fund Ltd

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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
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2011 Report - Fortress Mutual Fund Ltd

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