AFTER reporting an after-tax profit of $99.3 million for all of 2019, the T&T Unit Trust Corporation recorded a consolidated after-tax loss of $45.8 million during the first three months of its financial year.
The UTC’s executive director, Nigel Edwards, is not unduly disturbed by the results, relating it to the context of “a virus that is unprecedented.” The mutual fund company’s first quarter loss was described by the institution’s new chairman Gerry Brooks as a “swing in the net change in fair value of investment securities from a favourable result of $304 million in 2019 to an accounting loss of $508 million for the three months ended March 31, 2019.”
Taking a long-term view of investment process, Edwards refers to a discussion 24 years ago during the time he spent working at an investment bank in the United Kingdom.
“I was having a conversation with a colleague who was called a chartist, someone who was extremely technical. He was convinced that the market was overvalued. I said to him, ‘If the market is overvalued, why are you still in it. Why haven’t you sold off’.”
His colleague showed him a chart of the US stock market from 1917 to 1996. The chart indicated a steady ascent of the stock market over the 80-year period. “So I said to him, ‘What about the crash of 1987.’ And his response was, ‘What crash.’ He zoomed in to a 20-year period and it was only when he zoomed into a three year period that the stock market decline of 1987 was clear.”
For Edwards, the lesson from that conversation 24 years ago is that “there are many major instances that look big when they happen, but if you are in the market over a long period of time, those declines get lost in the ascent of the market.” And he agreed that the moral of that story is that if you are investing, do so for the long haul.
“When I look at our first quarter, it’s a reality. There is no denying the result or the outcome,” said Edwards.
But he described the 2019 performance of the UTC as “phenomenal.” He pointed out that the Corporation’s overall net income, including all the sub entities and after its three-year guarantee and the finance charge, was over $1 billion. When that is reduced to the consolidated income, for the Corporation only, the net income was $99.5 million.
That brings him to the business service that the UTC provides: managing financial assets over a long period of time. Part of the UTC’s current challenge of managing of financial assets for the long term is linked to a change in accounting standards that the Corporation adopted two years ago.
“In 2018, we would have announced that we took on board reporting under a new financial standard, which was IFRS 9,” Edwards said. “When we announced that, one of the things we explained was that as a result of the adoption of the new standard, the volatility of our income would increase.”
Under IFRS 9, the financial executive said, many asset managers were forced to choose a business model based on how they reported net changes to fair value of assets. Edwards said: “In our case, because we are providing net assets values to our customers on a daily basis, we have to show the gains or losses on a day-by-day basis.” That means the UTC’s gains and losses under IFRS 9 go to the company’s profit and loss account. Before the adoption of the accounting standard change two years ago, the UTC’s gains and losses in its investments were reflected in its balance sheet as reserves.
“Now, those daily changes in asset values are going through the income statement,” said the UTC executive director. That accounting change is fundamental to how the UTC manages assets over a long period of time. The change resulted in the Corporation’s “phenomenal” performance in 2019, but also in its $45.2 million net loss for the first quarter of its 2020 financial year.
That daily revaluation of its portfolios also has implications for individual unit-holders. “You as a unit-holder need to be assured that when you come to the Unit Trust and indicate that you have a Growth and Income Fund investment that is worth $18.50 per unit, we need to be able to convert a demand to liquidate that investment into cash for the customer immediately,” Edwards said.
Selling US equities
Asked how the UTC has mitigated the downside risk for its funds during the Covid-19 period, Edwards said the virus started surfacing as an issue for the UTC in early March.
“By mid-March, we had sold off all of our international equity positions in our Growth and Income Fund,” Edwards said, adding that the UTC started giving the instructions to liquidate the Fund’s US-dollar equity positions on March 13, which was the day after T&T announced its first Covid-19 case. On March 12, the US S&P 500 stock index plunged 9.5 percent, its steepest one-day fall since 1987.
The UTC sold the equivalent of $700 million (a little over US$100 million) in US-dollar equities in March. The proceeds are now being held in US-dollar cash or cash equivalents.
“As at the end of March 2020, our decision to sell the US-dollar equities in the Growth and Income Fund’s investment portfolio mitigated the Fund’s loss in the first quarter. “That’s because US equities declined by 20 per cent between the middle and end of March and local equities fell by 11.5 per cent in that period. In the Growth and Income Fund, we did suffer a 7 per cent loss, so there was some level of downside risk mitigation,” said Edwards.
Given the fact that the US stock markets rebounded in April, was the decision to liquidate the Growth and Income Fund’s US-dollar equities the right one?
“Absolutely yes,” Edwards said with certainty, “We don’t regret coming out when we did. It was the right decision to sell for two reasons: the one thing we don’t do is Monday morning quarterbacking, to use an American expression, which is to look in the rear-view mirror and say ‘Oh shucks, if only I had’. We take decisions based on what’s in the best interest of our portfolio at that point in time and based on the data available to us.
“Secondly, when we sold off in mid-March, we had a clear strategy as to how, when and why we would re-enter US equities,” which involved formulating a sector-specific plan, with specific parameters and triggers for new purchases.
Questioned on the commentary by the T&T Securities and Exchange Commission (in Express Business of April 29) in which it revealed that $2.3 billion had been withdrawn from T&T’s mutual funds in March, Edwards admitted that $1.3 billion had been withdrawn from the UTC during the first four months of 2020.
“But here is the really powerful fact: the net funds flowing into the Corporation in the period January to April was still positive by nearly $100 million. For that same period, our net coming into the Corporation was $92 million, inspite of the $1.3 billion going out. The bottom line is people are putting more money into their Unit Trust accounts than they are taking out.”