Fixed-income market on 'hold' as equities shine
Published:Sunday | November 13, 2011 | 12:00 AM
Marcella Scarlett, Business Reporter
Investor appetite for fixed-income products has diminished as interest rates fall, according to several Kingston analysts, who say the market is now more eager for equities and mutual funds.
Bond trader Sterling Asset Management, however, was the exception. The company said its business, which is concentrated on fixed income and cambio trading, has seen an uptick even as policy rates set by the central bank were pushed to a new low of 6.25 per cent at the end of summer.
Fixed-income investments are less risk averse than equities and mutual funds and have traditionally been popular, but almost two years in, the JDX-effect, which cut more than six percentage points off GOJ domestic bonds to 12 per cent on average, continues to linger in the market.
Since the February 2010 bond recall and swap, investors have been largely indifferent to the fixed-income market.
Analysts tell Sunday Business that while investors are not shedding their fixed-income holdings, they are not adding to their holdings either.
Brian Frazer, Scotia Investments Jamaica vice- president and general manager of Scotia Asset Management, said Scotia's unit trust portfolio was yielding an average of 11 per cent on fixed-income investments at the end of October compared to 25 per cent for equities.
Fixed income buyers today are on the hunt for either short term or variable rate offers on the off chance that rates might not yet have hit a floor, said Frazer.
The latest Treasury bill auctions suggest they have not: yields on the October Treasury bill fell 22 basis points to 6.25 per cent on the one month; the three month fell 15 basis points to 6.37 per cent; and by 29 basis points to 6.25 per cent on the six-month bill.
A Sunday Business poll of seven institutions in the fixed income market showed that short-term investment rates are pegged to the Bank of Jamaica 30-day certificate of deposit rate, which is at 6.25 per cent. Rates for investment of other tenors are measured against this benchmark.
At that rate, investors continue to see negative returns on investment with inflation currently tracking at an annual 8.1 per cent.
The equities market, which is currently the repository of some J$663 billion of wealth, has appreciated 15 per cent calendar year to date for mature stocks and 110 per cent for juniors, much of the latter driven by new listings.
Dave Cameron, manager of fixed income and securities trading at Sterling Asset, told Sunday Business that within his shop, clients are still interested in fixed income products "despite the volatility in the market" and that he has seen an uptick in business.
Cameron is encouraging investors not go the traditional route of repurchase agreements (repos) but rather to "maximise on their earnings ... buy the instruments outright since the market is pretty liquid and it is very easy to sell should the client wish to come out of that particular investment."
The fixed-income trader is decrying what he calls a deficiency of product alternatives within the investment segment.
However, three of his peers whose firms are not as wed to one area of the market - Roy Reid, portfolio manager at Jamaica Money Market Brokers; Vivian Bedassie, executive investment adviser at NCB Capital Markets, and Frazer - are trumpeting alternatives.
"Persons are recognising that there are exciting activities with local equities. There are activities with mutual funds, but to a lesser extent," said Reid. "The good thing about fixed income is that it has remained relatively stable for a while now and has remained moderately liquid," he said.
Like Frazer, Bedassie believes that interest rates for fixed-income investments may trend down even further and that speculations about the IMF agreement may create instability in the fixed-income market.
Bedassie, who has labelled fixed-income activity as close to dead, was not prepared to write off the market, however, given the risk profile of Jamaica investors as moderate risk takers.
Capital preservation
"They wouldn't want to go too far from fixed-income type investment," he said.
The reason: safety.
"The returns are not all that great. It is just to keep your money - capital preservation it is," said Bedassie.
This point was reinforced by Frazer who said that investors will always continue to demand fixed-income securities for capital preservation, because such investments can withstand inflationary erosion of capital with limited risk.
Cameron said equities are attractive mainly to large investors who have liquidity. He said smaller investors without liquidity remain loyal to fixed-income products.
However, Bedassie, says smaller clients are also moving into mutual funds and that "even pension funds are buying shares".
Both NCB Capital Markets and Scotia Asset Management told Sunday Business that in recent times there has been increase in their equity portfolios as investors have been looking to diversify portfolios.
Scotia Asset, the unit trust arm and subsidiary of Scotia Investments Jamaica, said one of its equity fund, which stood at J$840 million in October 2009, rose to J$1.2 billion in October 2010 and J$2 billion in October 2011.
Scotia announced last month that its Scotia Premium Growth Fund had surpassed the J$2 billion mark to become the "largest equity-based unit trust fund in Jamaica" amid Scotia's total portfolio of J$19 billion in funds under management, the company said in a previous statement.
Scotia Premium Growth's investments are 80 per cent equity and 20 per cent fixed income, according to Frazer.
The fund has produced returns of a 26.81 per cent in the past year, and a 10-year average annual compounded rate of return of 17.7 per cent.
Still, Frazer said, even though equities are outperforming fixed income, investors are still not comfortable with the risk.