Dean McDonald, Economic Analyst
McDonald
The first foreign-based mutual funds were registered in Jamaica between 2002 and 2003. However, mutual funds, which are pooled investments in particular assets such as bonds, derivatives or commodities, were being offered in Jamaica even before that.
Generally, however, they are long-term investments, which have a time horizon of at least three years. The benefit - particularly for funds that invest in riskier assets such as equities, commodities and derivatives - is they tend to provide investors with superior returns over the long term.
Additionally, investors have the benefit of investing in hard currency, whether through U.S. or Canadian dollars and therefore, these investments for Jamaican investors provide protection against devaluation of the Jamaican dollar.
Investors will also benefit from diversification by being invested in different asset classes such as bonds, equities, and commodities, among others.
To a large extent, only the more sophisticated investor would have gravitated towards this non-traditional investment.
However, in the past three years, Jamaicans have been demonstrating a healthier appetite for risk and those investors in pursuit of higher returns on their portfolios have turned their attention to investments, which do present a higher risk of capital losses, but also offer the investor an opportunity for higher returns on his/her hard-currency investments.
More mutual fund and collective investment options - both registered and unregistered - are available in the market now.
People are also looking fo to the 'alternative investment schemes', which, in some cases, represent forms of collective investment schemes.
At June 2007, the number of registered mutual funds in Jamaica stood at 61, which provides Jamaican investors with the opportunity to tap into funds locally, regionally and globally, and presents them with an opportunity to diversify between asset classes and currencies.
Less than one per cent of the $7.9 billion in total funds invested in these combined mutual funds for 2007 is related to Jamaican investors, but the growth in the figures year over year should not be discounted.
Data provided by the Financial Services Commission (FSC) indicate that internationally, investor interest in these funds has increased by 23 per cent from US$6.4 billion at the end of June 2006 to US$7.9 billion at the end of June 2007.
Jamaican investors are interested now more than before because of increased exposure to other investment vehicles, and fading interest in Jamaican-dollar or Government of Jamaica-backed instruments.
Also, with the relatively bearish conditions of the local equities market for the past two-and-one-half years, and only a handful of stocks still providing investors with capital stability or positive returns, Jamaican investors - particularly those who keep abreast of the happenings in global stock markets - have recognised their strong performance. Additionally, mutual funds are typically denominated in 'hard currency' and therefore, provide protection from local currency devaluation.
These investors have, therefore, shifted a portion of their portfolio towards mutual funds that provide access to these global markets.
With only a few investors having the capacity to invest in individual stocks in different markets and the difficulty in managing such portfolios, mutual funds offer the small, medium or large investor access to these markets by pooling their funds with others to invest in assets globally and obtain the benefit of the portfolio being managed by experienced portfolio managers.
Mutual-fund investments have performed very well in 2007.
Among seven of the 36 registered mutual funds manufactured and distributed by CI Funds - one of the largest mutual fund companies in Canada - their year-to-date performance reflects US dollar returns ranging from 11.64 per cent to 36.77 per cent.
With the average Jamaican investor being used to a maximum 5.5 per cent per annum return on US dollar repo investments or 8.0 per cent yield or less on Global Bond purchases, the returns are comparatively very attractive.
There are, however, other asset classes that invest in bonds whose returns also perform above USD repos.
Funds that have attracted the most interest include those that give exposure to a specific industry, such as the energy sector or other commodities.
Other funds that have attracted significant interest include funds that give exposure to emerging markets such as the BRIC nations - Brazil, Russia, India and China - and other Asian countries, such as Hong Kong and Singapore.
These countries have rapidly growing economies and stock markets that have done very well, with international investor interest reflected in the strong flow of funds to those markets.
Outlook for 2008
From a regulatory standpoint, the Ministry of Finance and the FSC have made some progress on regulatory issues related to mutual funds since the initiation of the registration of such investments.
What is hoped for, however, is that there will be amendments to the existing regulations to encourage the creation of local currency and locally based US dollar funds.
This would boost the local investment market and provide mor to Jamaican investors. It would also improve the investment-management acumen of the traders/portfolio managers and the knowledge base of investment advisers.
In fact, this would boost general capital market activity in Jamaica.
From an investor perspective, interest in mutual funds is likely to continue to climb locally as a competitive substitute for both traditional investment options and non-registered alternatives.
With respect to the performance of the mutual funds, while historical performance is no guarantee of future performance, emerging market equities are expected to continue to provide superior returns in 2008 relative to other asset classes, given the strong macroeconomic fundamentals of emerging economies.
Brazil, for example, is expected in 2008 to be upgraded to investment-grade status, given the strong improvements in its macroeconomic fundamentals, with GDP growth on a sustained basis of 4.5 per cent.
The challenge for potential investors is to increase their knowledge of the global marketplace in order to understand the reasons why mutual fund investing makes sense.
Dean McDonald is assistant vice-president, economic analysis & research, First Global Financial Services Limited. Email: dean.mcdonald@gkco.com.
