The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

RoyalFidelity is planning to launch an “alternative” US$ fund this summer that aims to minimise market volatility risk, a move coinciding with the maturing of another product forecast to generate 50 per cent investor returns.

Joseph Euteneuer, vice-president of mutual funds and business development, told Tribune Business that the as-yet unnamed fund would take “a different angle” from the investment bank’s other funds by featuring a portfolio of “long and short managers”.

He explained that this would offer investors, such as the likes of the National Insurance Board (NIB) and insurance companies, protection against global equity market downswings and volatility that RoyalFidelity’s existing mutual funds are not structured to provide.

Mr Euteneuer also indicated to Tribune Business that RoyalFidelity hoped the new fund would attract subscriptions from investors in its TIGRS 2 international fund, which matures at month’s end/

He disclosed that, based on end-May 2014 figures, TIGRS 2 investors were on track for a “more than 50 per cent return”, their initial collective net investment having grown from $2.85 million to $4.5 million.

And Mr Euteneuer revealed that the new fund, together with the US$ High Yield Return Fund that was launched last November, were set to boost the Bahamas International Securities Exchange (BISX) with their forthcoming listings on its mutual funds tier.

“We are in the process of developing another new fund. It’s a bit of a different angle from the others; it’s an alternative product,” Mr Euteneuer told this newspaper. “It’s going to be based on a portfolio of long and short managers.”

Explaining the strategy behind the new fund, he said RoyalFidelity and other Bahamian asset managers were all ‘long’ managers, meaning they invested for the long-term across a broad portfolio of industries and companies.

While this generated strong returns in a ‘bull market’, such as the one that has prevailed in the US and most world equities markets over the past two-and-a-half years, Mr Euteneuer said such strategies offered investors little protection in a declining market.

Hence the decision to offer Bahamian investors, seeking access to global markets, a combination of ‘long’ and ‘short’ investment positions via some of the world’s leading hedge fund names, such as Paulson, Lazard and Renaissance.

“We decided to go down this route as another option for investors,” Mr Euteneuer said, “because the last two to three years we’ve had a run-up in the markets to very high levels.

“As a long-only manager, it’s great when the market goes up, but if volatility picks up - and at some point it will - you will go down with it. If you are a long-only manager, taking traditional allocations across sectors and leaving them, they will go down in volatility and you will not have any protection.”

Mr Euteneuer added that the new fund was intended to “give us a change to manage the downside volatility when and if it arrives”. The current equities market “can’t stay in this environment for ever”.

He suggested that world equity market volatility was “at historic lows” largely because governments were seeking to keep global interest rates down.

Recalling what happened in the post-Lehman Brothers crash as an example, Mr Euteneuer said RoyalFidelity’s first international fund lost 40 per cent of its value in 2008 - although its principal protection feature ensured investors suffered no losses.

“We were certainly not alone,” he told Tribune Business. “Everyone got wiped out then. If you were a long-only manager, you got tanked with it. We thought: Let’s at least offer an option that focuses on that in a fund, like buying short positions.

“It [the fund] will not top a rising market, but it will protect against a fall to the bottom when it goes down. It’s been good up to now, but you can’t manage investments looking in the rear view mirror.”

Mr Euteneuer said that combined with RoyalFidelity’s existing three B$ mutual funds, and its High Yield Return Fund and International Equities Sub-Fund, the new product would give Bahamian investors six options to choose from.

He added that the imminently-maturing TIGRS 2, which had invested in markets at “historic lows”, had performed much better than its predecessor.

With $4.5 million, or a greater than 50 per cent return, set to be delivered to investors, Mr Euteneuer said: “I don’t expect anything drastic to happen, but even if it does, with more than 50 per cent gains to-date, it would have to be really drastic to result in anything less than a pretty decent return over the last five years.”

RoyalFidelity is hoping most of the TIGRS 2 payout finds its way into the new fund. It cannot launch another TIGRS fund with built-in principal protection due to the low interest rate environment.

Meanwhile, Mr Euteneuer told Tribune Business that the High Yield Return Fund remained a work in progress since its November launch.

“The assets aren’t up to what we’d like them to be, at just under $5 million,” he said. “But for the first time in a lot of years we were able to secure US-denominated fixed income instruments that had fairly decent returns.”

The High Yield Return Fund, which provides B$ investors with access to their US equivalent, has generated returns of 1.92 per cent through 2014 to end-May.

“We’ve managed to get a portfolio together that has a yield of 5.75 per cent,” Mr Euteneuer added. “It’s not too bad. and hopefully by the end of the year it will get better as we get preference share dividends and payments, aned bond payments.”

He said the High Yield Return Fund had managed to secure investments in the Bahamian government’s recent US$300 million sovereign bond issue; Cable Bahamas’ US$ preference shares; US$ preference shares issued by Fidelity Bank (Cayman); and take positions in several US$ exchange traded funds.

Mr Euteneuer added that the US$ Equities Sub-Fund had generated returns of 2.34 per cent for investors year-to-date through the end of May 2014.