The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

RoyalFidelity's Prime Income Fund was yesterday said to have become "a victim of its own success" after enjoying 35 per cent growth over the past year.

Joseph Euteneuer, the investment bank's mutual fund manager, told Tribune Business it was increasingly challenging to find appropriate fixed income securities for a fund with "almost" $150 million in assets under management.

Given the relatively small size of the Bahamian capital markets, and limited supply of new preference share and bond issues, Mr Euteneuer said RoyalFidelity's 'flagship' fund often had to guard against returns dropping to the level of low-yielding bank deposits.

Yet with the Bahamas' 'low interest rate' environment having driven many retail investors "out of their comfort zone", the investment bank is "starting to see net positive capital inflows" across its mutual funds as fragile economic confidence improves.

Mr Euteneuer said that while he was "not going to jump on the IMF bandwagon" that the Bahamian economy has 'turned the corner', his data and private sector feedback suggested there was "more optimism in what's going on now than there has been for some time".

He added that the Prime Income Fund, the most popular among conservative, risk-averse local investors, now faced the challenge of converting cash into returns as there was "not too much to buy".

"We do have challenges trying to find sufficient issues to purchase for the fund," Mr Euteneuer told Tribune Business. "There's almost $150 million in the Prime Income Fund, and when cash comes in you have to do something with it.

"If you sit on it, it becomes like a fixed deposit. That becomes a challenge for us at times. The corporate finance team then have to seek out opportunities, bring new issues to the market - not just for us but other investors and broker/dealers.

"It's an ongoing thing," he added. "In this case, you can be the victim of your own success.... There's an overall desire for more issues to come to market. All the investment houses out there, there's a genuine desire to have more things to invest in; that's been the case for a long time, but how do you go about fixing it? This remains an issue in the marketplace."

Mr Euteneuer said RoyalFidelity's Prime Income Fund had grown by 35 per cent in the 12 months to end-March 2018, via a combination of returns and new assets, with its fixed income portfolio most closely resembling the traditional Bahamian reliance on bank deposits.

Yet the two other members of RoyalFidelity's local fund family both experienced redemption outflows of around $5 million over the past year, as nervous investors took fright at negative returns produced by declining stock market prices.

The Targeted Equity Fund, which focuses on equity investments in listed companies, produced a negative -2.64 per cent return for the 2017 full-year, but Mr Euteneuer urged investors to focus on the 'bigger picture' rather than react to short-term volatility.

"Investors see that and say: 'Oh, I'm losing money'; and make redemptions," he said. "We've seen net outflows from the Targeted Equity Fund and are not concerned; we understand it.

"But one thing investors miss is that equities, by their very nature, go up and down. There's not necessarily a pick up yet, but it will come. People that get out, one thing they forget is that mutual funds are long-term investments, so they can ride these upturns and downturns and be invested at a time when share prices go up again."

Mr Euteneuer thus warned that investors exiting now are in danger of 'locking in' their losses, and reiterated: "You have to be in it for the long haul."

RoyalFidelity's Targeted Equity Fund is down 79 basis points, or 0.79 per cent, for the first two months of 2018, but still contains $22 million in investor assets under management. Its Secure Balanced Fund, featuring a mixed equity/fixed income investment portfolio, is off 0.14 per cent for the same period, but remains $88 million strong.

"All it's going to take is one or two of the bigger holdings of that fund to surge forward and that situation will change very quickly," Mr Euteneuer warned Targeted Equity investors. "We're only in February, so I'm cautiously optimistic that the remainder of the year will see stronger and stronger returns to positive territory.

"We're starting to see net positive inflows into these funds. You can read whatever you want into that, but the way we look at it is investor sentiment makes a big difference in inflows and outflows.

"I know the IMF said we'd 'turned the corner' from an economic standpoint," the RoyalFidelity executive added. "I'm not going to jump on that bandwagon necessarily, but looking at the data in front of me it appears there's more confidence in what's going on now than there has been for some time. That's a good thing. We cannot sit around stagnating for too long. It's not healthy."

RoyalFidelity's Prime Income Fund is up 0.71 per cent for the first two months of 2018, while Mr Euteneuer said its US dollar-denominated investment funds were continuing to enjoy "a great year".

Its Equities Sub-Fund was up 16 per cent for 2017, and continued strong global markets meant it finished up 1.69 per cent for the first two months this year. And the High Yield Income Fund was ahead 0.28 per cent for the same period, having closed 2017 up 4.72 per cent.