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DaveCameron

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EugeneStanley

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PamelaLewis

DianBlackwood

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KevinRichards

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JudithBloomfield

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EugeneStanley

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Marian Ross•

Lisa Minto•

• Why Bonds are the Best Options for your Pension and Retirement Plan

• The Fine Print for PrincipalProtected Notes (PPNs)

• Sterling Social

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CharlesRoss

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• Opportunities in Economic Challenges

T H I S I S S U E

The Director General of the Planning Institute of Jamaica, Colin Bullock, has said that, while Jamaica’s economy has underperformed since the 1970s, the country can still point to some key achievements. He was speaking at a recent Investor Briefing held by Sterling Asset Management. He said, in the area of human capital development, social protection and security, Jamaica has shown positive indicators of enhanced social protection, education and skills training, labour market reform, citizen security and community renewal.“The Government of Jamaica has embarked on a growth strategy aimed at systematically addressing the long-standing constraints that account for the country’s underperformance” he said “The growth strategy is consistent with Vision 2030 Jamaica Plan, and is reflected in the structure of the current Extended Fund Facility (EFF) Arrangement with the International Monetary Fund.”He noted that the Government’s Medium-Term Growth Agenda is driven by macro-economic stability; fiscal consolidation with sustained debt reduction which releases economic resources for sustained growth; reforms of the tax system; public sector transformation and modernization;

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structural reforms aimed at improving elements of the business environment in order to strengthen Jamaica’s external competitiveness; and strategic investment projects. Jamaica, he said, had successfully

passed three quarterly IMF reviews and had met the quantitative fiscal targets for 2913/2014. Further, the economy had responded positively to structural reform initiatives , including a return to positive real economic growth, a decline in the debt-to-GDP ratio, the current account deficit and moderate inflation. “I am cognizant that there can be no gain without pain” Mr. B u l l o c k s a i d “Achievements have come with great sacrifice, especially for fixed income earners. For example, an element of the growth strategy may speak to the potential benefits of exchange rate depreciation to export oriented

or import substitution enterprise. On the other hand, exchange rate depreciation may, with static or declining real incomes, especially for public sector employees, be having a dampening effect on the consumer confidence necessary for social cohesion. “ While acknowledging the difficulties being experienced by Jamaicans as the country struggles to grow the economy, he pointed out that the economic programme being pursued by Government was designed to create opportunities and firms and Government itself to operate efficiently and support more robust, inclusive sustained growth and development. He urged people to seize these opportunities.“For the Government, it is a time to be clear in its role in creating the “public good” of a sound macro-economy and an enabling business environment with social inclusion. ,” he said “The Government should use this period of opportunity to enhance the facilitation of p r i v a t e investment and, by extension, export led growth.”The private sector, he observed, should recognize that a strong foundation is being established by the Government’s macro-economic programme, and should build on this strong platform. See highlights from Sterling Investor Briefing on pg4

OPPORTUNITIES IN ECONOMIC CHALLENGES

Colin Bullock

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Marian Ross

Mohamed El–Erian wrote an interesting article on Bloomberg explaining his view on why bond prices keep rising and why investors seem reluctant to give up on the asset class. El-Erian referred to elements of “behavioural finance” to make a few interesting points; the spirit of which I have tried to provide below:The “resilience of bond prices” and the sustained rise in value of bond portfolios have made investors less anxious to sell their holdings. (Who doesn’t like looking at the large positive number in their investment revaluation reserve?) Investors who rely on past performance to make their investment decisions, are very comfortable entering or even remaining in the bond market because of the asset class’s strong performance. He also noted that institutions such as insurance companies and pension funds are taking the gains they have accumulated in the equity market and now investing in long dated bonds. El Erian made sure to state that he was not positing that a movement away from bonds and into equities would never happen. Similarly, as investment managers we can well foresee a portfolio reallocation when the environment changes. However, for the time being, slowing inflation and overall mixed economic data are some of the factors contributing to an advance of bond

WHY BONDS ARE THE BEST OPTIONS FOR YOUR PENSION AND RETIREMENT PLAN by Marian Ross – AVP Business Development

prices in the US and Europe. Additionally, there are also fewer issuances of debt by companies and Governments resulting in a lower supply of fixed income instruments. This confluence of factors has resulted in a significant reduction in yield in the bond markets. Some bond portfolios were up as much as 15% in USD terms as at March 2014.

RISING INTEREST RATES MAY NOT BE ALL THAT BAD It is important to note that the entire fixed income asset class does not become obsolete with tightening monetary policy or rising interest rates. Rather, different types of fixed income assets become attractive. For example, there has been a surge in issuance of fixed income investments with built in options that give investors exposure to the equity markets or minimize their exposure to duration risk. These options increase the value of the fixed income instrument and provide investors with a tool to protect themselves against rising interest and inflation rates. Similarly, a series of “hybrid” investments that combine features of debt and equity have also arisen. The delayed interest rate hike gives investors time to reallocate their funds (within the fixed income asset class) to assets that are less susceptible to the adverse effects of rising rates and even take advantage of the change in economic policy.

LOCAL INVESTMENT MANAGERS CALLED IT WRONGHowever, as usual, what separates the good investment managers from the mediocre ones is making the right call at the right time. Some investment managers predicted a sudden and steep rise in the yield of 10 year US Treasuries They cited the onset of tapering and a potential rise in interest rates as reasons for the decreased allure of bond investing. However, since the

announcement of tapering in 2013, the 10 year UST has fluctuated between a high of 3.002% and a low of 2.42%. The massive sell off that was predicted has not materialized. In the last 2 years, there has been a wide variety of Jamaican dollar denominated products that offer local pension funds and investors a hedge to their JMD exposure. These products invest in the U.S. and European fixed income markets and provide pensioners with a store of value in a hard currency and developed economy. Many independently managed pension funds and prudent investors took advantage of these products and they have realized returns in excess of 30% in JMD and over 10% in USD terms. They also minimized the “downside risks” in our local economic environment. Despite the delayed response to the change in U.S. monetary policy, investors and investment managers should take steps to re-arrange their fixed income portfolios and prepare for future changes. Reducing duration risks and looking at different types of structured investments are ways of preparing of your portfolio to generate returns in an environment of rising interest or inflation rates.

Mohamed El–Erian

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Dian Blackwood

THE FINE PRINT FOR PRINCIPALPROTECTED NOTES by Dian Blackwood - Assistant Vice President, Financial Planning

The market consists of quite a number of structured investment notes but not all fit the risk appetite of every client. Each client is unique and looking for different exposures, returns, risks and maturities. With all these variables in mind let’s examine Principal Protected Notes to ascertain who should consider them suitable for their portfolio. Principal Protected Notes or PPN’s guarantee an investor, the principal amount of his/her original investment upon maturity. They have a face value and a maturity date. However, the return on PPN’s is usually tied to an underlying asset or index. The investment therefore returns principal plus the return generated by positive movements in the underlying index/security. If there are no positive movements, the issuer gives the investor back his principal only. These investments are tailored for risk averse investors wishing to protect their investments while still retaining the potential for higher returns generated by upward movement in the market. For example, if you invest US$10,000 in a PPN indexed to the Dow Jones Industrial Average for 5-years. For every one percent the Dow is up you would get a one

percent return on your note. If the Dow is up 50% over 5-years then at the end of the 5-years you wouldT receive $15,000 ($10,000 + 50% * 10,000). If the Dow however goes down, the client will receive only the initial amount invested; $10,000PPN’s as the name suggest offer principal protection, growth potential and diversification. PPN’s offer clients exposure to a wide variety of underlying assets that they would not ordinarily want to be exposed to, such as stocks, mutual funds, indices, commodities, and currencies.

A CLOSER LOOKInvestors are always encouraged to do extensive research, with the help of a financial advisor, on structured investment products and services. It is essential to first ascertain if the entity providing the guarantee is fiscally sound, solid and safe. Your principal is only as safe as the issuing institution. Another factor to consider when purchasing these notes is opportunity cost. If the underlying asset / index did not perform as well as you had predicted, you would have lost the opportunity to invest your funds elsewhere. This is where a keen financial advisor is needed to thoroughly understand and watch the performance of the underlying securities to assess the likelihood of upward movements. Also the advisor will investigate if the possibility exists for breaking the investment, how much the investor can take out in case of emergencies and how often. It is very important for investors to consider their liquidity needs before investing in PPN’s. For the most part, these investments are generally intended to be held to maturity.

IS IT FOR YOU?After you have collated all the necessary information on the PPN and the underlying securities ask yourself the following questions:

Do you wish to participate in specific markets without taking on the full risk of losing your initial investment?

Do you wish to include fixed term investments as part of your portfolio?

Do you believe in a buy and hold investment strategy?

Do you prefer investments that do not require active management?

The PPN’s provide a level of security however you the investor need to be comfortable with the underlying investments. Like any other investment do your homework before taking that step and be sure to read the fine print.

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STERLING SOCIAL

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Sterling Asset Management is a licensed securities dealer and provides investment management and advisory services to the corporate, individual and institutional investor. If you wish to have Sterling address your investment questions, please e-mail us at: info@sterlingasset.net.jm or visit our website at www.sterling.com.jm. Like our page on Facebook and follow us on Twitter.

For more details on how you can benefit fromSterling’s expertise call one of our advisors at (876) 754-2225-7 or come see us at:

7 Barbados AvenueKingston 5Jamaica, W.I.

www.sterling.com.jm.

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Sterling Asset Management hosted its annual investor briefing on the economy at the Terra Nova Hotel in June. Guest speakers at the event were:Colin Bullock, Director General of the Planning Institute of Jamaica (PIOJ), Therese Turner-Jones, Country Representative for Jamaica at the IDB and John Jackson, Publisher of the Investor’s Choice Magazine.