The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian investment bank says its largest mutual fund is receiving investor subscriptions as fast as it can invest them, branding the situation as "a good problem to have".

David Slatter, RF Bank & Trust’s vice-president of investment management, told Tribune Business that its Prime Income Fund is still sitting on a $120m cash pile despite investing half this sum over the past 17 months in a variety of fixed income securities such as government and private sector bonds, Treasury Bills and preference shares.

"Our fixed income fund continues to improve as excess cash is invested," he explained. "We saw that, as we get some invested, we get more net subscriptions, so it's a good problem to have. We're sitting on about $120m in excess cash. We've invested about $60m of it. Over the 17 months, we've invested around $60m of the $120m but now we're back up to $120m.

"The good thing is that there are quite a few projects on the go. The investment banking side of the business has definitely ramped up, so we will be able to place a significant portion of that over the next six months. The corporate finance and investment banking side of the business is definitely starting to heat up."

The problem with large cash holdings, which are unable to find investments yielding higher rates of return, is that they act as a drag on overall investor returns for RF's Prime Income Fund. With Bahamian investors traditionally risk averse, and preferring the comfort of more conservative investments such as fixed income securities and real estate, the investment bank's Prime Income Fund accounts for $430m of RF's total $1.134bn Bahamian dollar assets under administration.

"It's about one-third of the total assets under administration," Mr Slatter said. "It's trailing 12-month return is 3.3 percent, and that net return to investors is up from 2.6 percent in the middle of last year about nine months ago. Even though we still have this large surplus cash pile it's been coming down as we make these investments, so the cash drag on performance is starting to lessen over time."

Mr Slatter disclosed that, in a bid to reduce the Prime Income's cash holdings and drag on investor returns, RF "took the initiative last November" to invest some $30m in US Treasury Bills as "one way to get the excess cash invested". Noting that this has already produced "some capital gains", he added that the move is expected to pay dividends in future years with bond prices and yields expected to increase as US interest rates ease following the recent anti-inflation hikes.

Besides the Prime Income Fund, RF Bank & Trust's (the former Royal Fidelity) Bahamian dollar mutual funds also include the Secure Balanced Fund and Targeted Equities Fund. The former features a mix of equity and fixed income investments, while the latter focuses on higher yielding - but riskier - investments in stocks, shares and equities.

Mr Slatter explained that the returns generated by these two funds have both been impacted for 2023 to-date by a "local equities market that has kind of been sideways" and delivered a mixed first-half performance, with some stocks down and others having appreciated in price.

"The Secure Balanced Fund is in positive territory year-to-date, but the local equities market has had an impact," he told Tribune Business. "We expect the second half to be better than the first half." Stocks which have formed a significant part of its portfolio, and that of the Targeted Equities Fund, such as CIBC FirstCaribbean International Bank (Bahamas); AML Foods; Doctors Hospital; and Cable Bahamas have all been impacted to some extent by market conditions.

"Investor inflows have been steady in 2022 and 2023," Mr Slatter said of subscriptions. "I would say that the largest inflows have been into the Secure Balanced Fund as people look for some exposure and long-term gains that one expects with equities. The Secure Balanced Fund is in positive territory but it's below expectations on what it's achieved over the last ten years.

"If you look at the average annual rate of return, it's at year-to-date 0.8 percent. If you look historically, it's averaged between 6-7 percent. It's below where we have historically been, and I believe it's a reflection of the equities that we hold."

Alongside the Prime Income Fund's $430m, Mr Slatter said the Secure Balanced Fund and Targeted Equities Fund held $132m and $98m in investor assets under administration, respectively, at end-April 2023. "The Secure Balanced Fund has added $34m in assets under administration over the last 12 months, the Prime Income Fund has added $54m, and the Targeted Equities Fund has added $28m," he told this newspaper.

"Money in the bank is earning virtually zero, and the Targeted Equities Fund was up last year over 15 percent. The Standard & Poor's 500 was down 18 percent, and we were up 15 percent, so I tell my colleagues in the US that we outperformed them by 33-34 percent last year. The slowdown in performance may result in a slowdown in inflows, but the second half of the tear will see improvements again and we should see substantial inflows into both funds."

While the Targeted Equities Fund has delivered a negative -0.3 percent return for the first six months of 2023 to-date, Mr Slatter said it was still up 11.1 percent for the last 12 months while the Secure Balanced Fund had generated an 8.57 percent return over the same time period.

"We expect the performance of the Targeted Equities Fund and Secure Balanced Fund to improve in the second half of the year," he reiterated. "We don't expect the full-year results to be higher than average historical level." Mr Slatter said he believed the Bahamian capital markets, and local investors, had been "short sighted" and over-reacted to issues impacting several key BISX-listed stocks that will turn out to be no more than temporary impacts.

Pointing to CIBC as an example, he argued that the Canadian-owned commercial bank had US dollar exposure that has been affected by the Federal Reserve's interest rate hikes. "Our view is that the market should have treated that as a one-off event and stripped it out of their analysis," the RF investment chief asserted.

He added that CIBC's stock has already recovered some of its earlier losses, and said: "We feel that if the market's not correct in its analysis we take advantage of that and add to our holdings accordingly." With Bahamian economic growth forecast to remain strong in the short-term, Mr Slatter said the key will be whether the US tips into "a mild and short recession" in 2024 and 2025, and what if any impact this has on the post-COVID tourism rebound.