6 months ago
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Fund managers in Jamaica still invest more than half of client funds into fixed-income securities, but that figure fell over the year, while investments in real estate and cash grew by double-digits, according to the latest statistical report from the Financial Services Commission.
The shift comes amid declining short-term interest rates, which have reduced the attractiveness of fixed-income securities. Instead, fund managers doubled their cash exposure, and increased their real estate exposure by one-quarter.
Funds under management totalled $1.7 trillion as of September 2024, reflecting a two-per cent dip year on year. The report captures the 33 33 securities dealers regulated by the FSC.
However, the value of funds under management in the sub-category of collective investment schemes rose in the period, reaching $367 billion as of September 2024, having grown by six per cent year on year. The market segment comprises “20 funds” that are operated by a dozen managers.
Within the collective-investment pool, fixed-income investments totalled $199 billion, just about the same as in 2023. Equities, which account for the second-largest pool, grew six per cent to $92 billion. Real estate by 24 per cent to $45 billion, while cash spiked by 109 per cent to $13 billion. Other assets were flat at $17 billion.
The latest FSC statistical report is coterminous with the period when the central bank changed policy direction and began cutting interest rates, the first of which happened in August 2024.
In a series of 25-basis point cuts, the Bank of Jamaica has since reduced rates in four steps from 7.0 per cent to the current 6.0 per cent. The next policy rate decision is scheduled for February 20.
But even before the wholesale dip in rates, retail rates had started to decline from double-digit levels into single-digit territory.
The dynamics in the market have seen a shift into alternative investments, including those targeted at rich and sophisticated investors, the so-called exempt distributions that may not require issuers to produce prospectuses and are seen as more risky.
“There have been fluctuations in the registration and issuance of exempt distributions instruments, and an uptrend in the value amounts for Jamaican dollar denominations,” the FSC report stated.
The regulator noted, however, that going forward these exempt distributions could decline.
“As short-term interest rates decline, demand for exempt distribution debt instruments may slow down as the potential for earning higher investment returns diminishes,” the FSC said.
Capital, revenue and earnings of the 33 regulated securities dealers improved amid an inflow of funds from clients, according to the FSC report. Industry capital stood at $154 billion, which was 16 per cent higher year on year.
Cumulative revenue for the September 2024 quarter grew three per cent to $62 billion, but the sector as a whole racked up losses of $910 million. It was the first loss in at least five quarters.
The FSC said the bleed was the result of “the growth in non-interest expense [which] was primarily due to a reclassification exercise”.
Fund managers have been critical of the central bank’s rate hikes that were initiated in 2021 to cool pandemic-induced inflation. The bank’s policy rate went from 0.5 per cent to 7.0 per cent in a series of adjustments.
The FSC estimated the return on investment for the securities industry at 2.9 per cent at September 2024. The ratio is often a smaller than the percentage return that clients of the securities dealers receive from their investments.
Recent quarterly reports from financial institutions have highlighted the influence of interest rates on their profitability. For instance, Mayberry Investments Limited has focused on cutting costs, and refinancing debt to improve its capital structure – its latest bond float to raise $2.3 billion having opened on the market on Friday; and JMMB Group has sought revenue diversification to offset “operating in a ‘higher for longer’ interest rate environment”.
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