fortress caribbean high interest fund annual report 2002fortress caribbean high interest fund annual...

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Fortress Caribbean High Interest Fund

Annual Report 2002

DIRECTORS

Mr. Geoffrey Cave C.B.E. – ChairmanMr. David BynoeMr Ken EmerySir Fred Gollop K.A., J.P. Mr. Roger Cave – Investment Manager

INDEPENDENT AUDITORS

PricewaterhouseCoopersChartered AccountantsThe Financial Services CentreBishop’s Court HillSt. MichaelBarbados

SECRETARY

Corporate Services LimitedThe Financial Services CentreBishop’s Court HillSt. MichaelBarbados

CUSTODIAN

FirstCaribbean International BankTrustee BranchBroad StreetBridgetownBarbados

REGISTERED OFFICE

1st Floor, Carlisle HouseHincks StreetBridgetownBarbados

INVESTMENT MANAGER & ADMINSTRATOR

Fortress Fund Managers Limited1st Floor Carlisle HouseHincks StreetBridgetownBarbados

Tel: (246) 431 2198Fax: (246) 431 0514Internet: www.fortressfund.comEmail: [email protected]

ATTORNEY AT LAW

Sir Henry Forde K.A., Q.C., MA, LLM (Cantab)Juris ChambersFidelity HouseWildey Business ParkSt. Michael

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INVESTMENT OBJECTIVES AND FUND DETAILS

The Fortress Caribbean High Interest Fund aims to achieve thehighest level of income compatible with the preservation of capi-tal by investing in medium to high grade debt and equity securi-ties issued by corporate and government entities with a short tomedium term maturity profile principally in the Caribbean Region.

The Fund issues two classes of shares to the public –Accumulation shares and Distribution shares. Holders of the dis-tribution shares will receive dividends every six months. The firstdividend will be paid on November 30, 2002.

Fortress Caribbean High Interest Fund

May 17, 2002

$1.00 per share

$500.00$100.00 for subsequent investments$100.00 for monthly savings plan

$1.0204$1.0204

$ 17,268,610$ 2,405,457

0.75% per annum of the net assets of the Fund0.20% on the first $30 million in net assets0.175% on the next $50 million in net assets0.15% on amounts over $80 million in net assets

Nil

Up to 2% on amount placed less than 6 monthsUp to 1% on amount placed less than 2 yearsNil on funds placed after 2 years

Fortress Fund Managers Limited

FirstCaribbean International Bank

Weekly on Fridays

Internet: www.fortressfund.comLocal Barbados newspapers

FUND NAME:

LAUNCH DATE:

LAUNCH PRICE:

MINIMUM INVESTMENT:

NET ASSET VALUE PER SHARE: AccumulationDistribution

NET ASSETS: AccumulationDistribution

MANAGEMENT EXPENSES:Investment Manager & Administrator

Custodian

INITIAL CHARGES:

REDEMPTION CHARGES:

INVESTMENT MANAGER & ADMINISTRATOR:

CUSTODIAN:

FUND VALUATIONS:

NAV QUOTATIONS:

INVESTMENT PERFORMANCE

During the year ended September 30, 2002, the increase inthe value of the Fortress Caribbean High Interest Fund shareswas 2.04%.

INVESTMENT PORTFOLIO:

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DIRECTORS’ REPORT

The Fortress Caribbean High Interest Fund was launched in May

2002. The objective of this Fund is to provide investors with the

highest level of income while seeking to preserve the principal

value of their investment by investing in bonds and fixed income

securities. The Fund is uniquely structured with two classes of

shares to meet the needs of different investors. The

"Distribution" shares pay dividends twice per year while the

"Accumulation" shares do not pay dividends but reinvest the

income with the returns being reflected in the share price.

This Fund is very different to the Growth Fund in that the "High

Interest Fund" will be investing in conservative bond and inter-

est bearing securities seeking higher income yields, while the

Growth fund invests in equity securities with the objective of

growth and capital appreciation over the long term. Investors

should expect that the High Interest Fund should provide

returns, which are slightly higher than local long-term govern-

ment bond rates. We expect that the Fund should have less

volatility than the average equity or balanced fund but there is

still price risk resulting from movements in interest rates and

from the potential risk from issuers (Governments and

Companies) to default on their debt obligations.

At the end of September, the Fund had net assets of $19.67

million and had produced return of 2 % after four months. We

expect that the Fund will produce a return of about 6% for the

1st year which, is slightly below our initial target of 7%.

This is primarily due to excess cash in the Fund as two

expected bond investments did not materialize.

The Fund was launched in a period of extremely low interest

rates (40 year lows), in an environment of very high excess liq-

uidity in a country with exchange controls and the absence of

an active secondary market for fixed income securities. The chal-

lenges are further compounded by our country going through a

recession, which has resulted in a reduction in overall corporate

borrowing for expansion. This environment presents both

opportunities and challenges for this type of product. The

opportunity is that deposit rates in commercial banks have

reached the lowest levels ever in Barbados of 2.5 % which will

create strong demand for investment products offering higher

returns, the challenge is that there are very limited opportunities

in terms of new bond issues to invest these funds.

For the reasons listed above, the Directors had capped the size

of the Fund initially to $20m, which was approximately the level

of bond investments, which we had been able to accumulate

prior to the launch of the Fund. The Fund has remained tem-

porarily closed to new investment since it started in an effort to

protect the investors yield, despite receiving strong demand,

simply because there have just been no opportunities which

have met our risk and return objectives.

The Directors are aware that it is going to take time for our pri-

mary and secondary bond markets in Barbados to develop and

we will have to be patient in the development of this Fund, in

taking the opportunities as they arise. We thank you, our share-

holders for your support in helping us to start this new Fund and

we look forward to helping further develop the capital markets

in Barbados and the region.

Geoffrey Cave

Chairman

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INVESTMENT MANAGER’S REPORT

The Fortress Caribbean High Interest Fund has produced a

return of 2.04 % (6.12 %) annualized for the first four months

to September 30th 2002.

The Fund has invested primarily in medium term bonds issued by

Caribbean governments. The bonds in the portfolio have a

maturity mix of 18 % less than 1 year, 68 % between 1 and 5

years and 14 % longer than 5 years. Over 70 % of the invest-

ments are sovereign bonds issued by Caribbean governments,

the majority of which are in US dollars, which significantly

reduces the currency risk.

The Fund has been temporarily closed to new subscriptions

since June 1st 2002 in an effort to preserve the yield. Interest

rates are at 40 year lows which is extremely challenging for the

management of this type of Fund in an environment where the

secondary debt market is virtually non-existent. Governments

and to a lesser extent corporations are using the opportunity to

price very long maturity instruments at extremely low rates. We

have been careful in avoiding these bonds because of the

potential for the bonds to drop significantly in value should

interest rates begin to rise again. There are very few traded

instruments available in the region to hedge against the interest

rate risk and therefore we have been focusing our attention on

medium term Caribbean debt and short-term repurchase agree-

ments for the reinvestment of interest income and bonds that

have matured.

Since the end of the year, we have reduced our exposure to

Jamaica government bonds and we have invested in short-term

repurchase agreements, with the plan to diversify the portfolio

further through an overseas manager.

This fund is well positioned to take advantage of the continued

development of the debt markets in Barbados and the wider

Caribbean. The Fund’s investment opportunities are much more

restricted because of exchange controls in Barbados where the

cross-border mechanism for shares listed on regional exchanges

does not apply to sovereign bonds issued by Caribbean govern-

ments. Interest rates are much lower in Barbados than in other

Caribbean islands and there are very few local corporate bond

issues as most companies still rely on bank overdraft financing.

We expect that this will change over time as the spreads

between savings rates and borrowing rates are still very high,

which will offer opportunities for the creation of more corporate

bonds and other types of asset-backed securities.

Overall, we expect to be patient in protecting the investors yield,

taking only selected local opportunities as they arise and to

grow our regional and overseas portfolios when we can obtain

US funds.

Roger Cave

Manager

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GENERAL INFORMATION

Fortress Caribbean High Interest Fund ("the Fund") is an openended investment company which was incorporated on May9th, 2002 under the provisions of the Mutual Funds Act ofBarbados. The company maintains its registered office at 1stFloor, Carlisle House, Hincks Street, Bridgetown, Barbados. Theprincipal activity of the Fund is investment holdings in domestic,regional and international fixed income markets.

The Fund aims to achieve the highest level of income compati-ble with the preservation of capital by investing in medium tohigh grade debt and equity securities issued by corporate andgovernment entities with a short to medium term maturity pro-file principally in the Caribbean.

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FORTRESS CARIBBEAN HIGH INTEREST FUND LIMITEDBalance Sheet

As of September 30, 2002

(Expressed in Barbados dollars)

Notes

$

Assets

Cash and bank balances 738,265

Accrued Interest 241,142

Available-for-sale securities 5 18,713,935

Total Assets 19,693,342

Current Liabilities

Accounts payable and accrued expenses 18,275

Total assets less liabilities 19,675,067

Issued capital and reserves

Share capital 6 19,193,060

Retained earnings 482,007

Total shareholders’ funds 19,675,067

Net asset value per Accumulation share 6 1.02

Net asset value per Distribution share 6 1.02

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FORTRESS CARIBBEAN HIGH INTEREST FUND LIMITEDIncome statement

For the period from May 9, 2002, the date of incorporation, to September 30, 2002


Notes

$

Revenue

Interest income 375,634

Amortization of discounts 80,103

Unrealised gain on available-for-sale securities 5 109,413

Total investment income 565,150

Expenditure

Management fees 4 49,264

Custodian’s fees 13,137

Audit fees 15,000

Other fees 5,742

Operating expenditure 83,143

Net profit on ordinary activities 482,007

Earnings per share 0.024

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FORTRESS CARIBBEAN HIGH INTEREST FUND LIMITEDStatement of Changes in Shareholders’ Equity

For the period May 9, 2002, the date of incorporation, to September 30, 2002


Share Retained TotalCapital Earnings

$ $ $

Issue of shares at inception (June 1, 2002) 18,689,530 - 18,689,530

Redemption of shares (1,761,734) - (1,761,734)

Issue of shares 2,265,264 - 2,265,264

Net Income for the period - 482,007 482,007

Balance as at September 30, 2002 19,193,060 482,007 19,675,067

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FORTRESS CARIBBEAN HIGH INTEREST FUND LIMITEDStatement of Cash Flows

For the period from May 9, 2002, the date of incorporation, to September 30, 2002


$

Net profit on ordinary activities 482,007

Adjustment for:

Amortization of discounts (80,103)

Unrealised gain on available-for-sale securities (109,413)

Operating profit before working capital changes 292,491

Net increase in acrued interest (241,142)

Net increase in accounts payable and accrued expenses 18,275

Net cash from operating activities 69,624

Cash flows used in investing activities

Purchase of available-for-sale securities (18,524,419)

Cash flows from financing Activities

Issue of Mutual Fund shares 20,954,794

Redemption of Mutual Fund shares (1,761,734)

Net cash from financing activities 19,193,060

Net increase in cash and cash equivalents 738,265

Cash and cash equivalents - beginning of period -

Cash and cash equivalents - end of period 738,265

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1. INCORPORATION AND PRINCIPAL ACTIVITY

The company was incorporated in Barbados on May 9th, 2002

under the Companies Act of Barbados and is licensed under the

Mutual Funds Act 1998-45 of Barbados as an authorised mutual

fund. The company maintains its registered office at 1st Floor,

Carlisle House, Hincks Street, Bridgetown, Barbados. On May 31,

2002 the Fund was closed to new subscriptions in an effort to

protect the existing shareholders.

2. ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of

the financial statements are set out below:

a). BASIS OF PRESENTATION

The financial statements are prepared in accordance with

International Accounting Standards. The financial statements are

prepared in accordance with the historical cost convention as

modified by the fair valuation of available-for-sale securities.

(b). USE OF ESTIMATES

The preparation of financial statements in conformity with

International Accounting Standards requires management to

make estimates and assumptions that affect the reported

amounts of assets and liabilities and disclosure of contingent

assets and liabilities at the date of the financial statements and

the reported amounts of revenues and expenses during the

reporting period.

(c). FOREIGN CURRENCY TRANSLATION

Assets and liabilities expressed in foreign currencies are translated

at the rates of exchange ruling at the balance sheet date.

Transactions arising during the period involving foreign currencies

are translated and recorded at the rates of exchange prevailing on

the dates of the transactions. Differences arising from fluctua-

tions in exchange rates are included in the Income Statement.

(d). INVESTMENT INCOME

Interest income is recognised in the income statement for all inter-

est bearing instruments on an accrual basis using the effective

yield method. Interest income relates to coupons earned on fixed

income investments.

(e). AVAILABLE-FOR-SALE SECURITIES

The Fund’s investments have been classified as available-for-sale in

accordance with International Accounting Standard 39 (IAS 39),

Financial Instruments: Recognition and Measurement.

All available-for-sale securities are initially recognised at cost and

are subsequently carried at fair value based on quoted bid prices

where available. In the absence of quoted bid prices, the quoted

offer price is used. In the absence of a quoted price on a recog-

nised stock exchange, the security is valued at amortised cost,

which is considered to be a close approximation of the fair value.

Gains and losses arising from changes in the fair value of securi-

ties classified as available-for-sale are recognised in the income

statement as they arise. Average cost is used to compute realised

and unrealised gains on investments.

All purchases and sales of available-for-sale securities are

recognised at trade date, which is the date on which the Fund

commits to purchase or sell the asset.

(f). CASH AND CASH EQUIVALENTS

Cash comprises cash on hand and demand deposits. Cash equiv-

alents are short term, highly liquid investments that are readily

convertible to known amounts of cash which are subject to

insignificant changes in value.

FORTRESS CARIBBEAN HIGH INTEREST FUND LIMITEDNotes to the Financial Statements

For the Period Ended September 30, 2002

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(g). EXPENSES

Expenses are accounted for on an accrual basis. Expenses are

charged to the income statement except for expenses incurred on

the acquisition of an investment, which are included in the cost of

that investment. Expenses arising on the disposal of investments

are deducted from the disposal proceeds.

(h). NET ASSET VALUE PER REDEEMABLE MUTUAL FUND SHARE

The net asset value per each class of redeemable mutual fund

share is calculated by dividing the net assets attributable to the

individual class of share at the valuation date by the number of

redeemable shares in issue of that class at the valuation date.

(i). TAXATION

The Fund is licensed as an authorised mutual fund under the

Mutual Funds Act, 1998-45 of Barbados. In calculating the

assessable income of the Fund for tax purposes, the Income Tax

Act provides for a deduction of up to a 100% of the income that

is designated to be the income of the Fund shareholders. All of

the profits of the Fund are designated to the Fund’s Class "A’

shareholders and consequently the Fund has no taxable income.

3. USE OF FINANCIAL INSTRUMENTS

The objective of the Fund is to achieve the highest level of

income compatible with the preservation of capital by invest-

ing in medium to high grade debt and equity securities issued

by corporate and government entities with a short to medium

term maturity profile primarily in the Caribbean.

The Fund is exposed to market price risk, interest rate risk,

credit risk, liquidity risk and currency risk from the financial

instruments it holds. The risk management policies employed

by the Fund to manage these risks are discussed below:

Fair Value

Available-for-sale securities are carried at their market value as

disclosed in note 2E. The carrying value of the other financial

assets and liabilities are considered reasonable estimates of

their fair value.

Market Price Risk

The Fund’s interest rate securities, are susceptible to market

price risk arising from uncertainties about future prices of the

instruments.

The Fund’s market price risk is managed through diversification of

the investment portfolio. A summary of the overall balance sheet

market exposures at September 30, 2002 is disclosed in note 5.

Interest Rate Risk

Differences between expected contractual repricing or maturity

dates and changes in market interest rates may expose the fund

to interest rate risk. The company’s exposure to interest rate risk

on its financial assets, is disclosed in note 5.

Credit Risk

Credit risk is the risk that an issuer or counterparty will be unable

or unwilling to meet a commitment entered into with the Fund.

All transactions in listed securities are settled / paid for upon deliv-

ery using approved brokers. The risk of default is considered min-

imal since delivery of securities sold is only made once the bro-

ker has delivered payment. On a purchase, payment is made

once the securities have been received by the broker. If either

party fails to meet their obligation, the trade will fail.



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Liquidity Risk

The Fund is exposed to liquidity risk due to the relatively unde-

veloped nature of the secondary market for fixed income secu-

rities in the Caribbean.

Currency Risk

The Fund holds assets denominated in currencies other than

Barbados dollars, the measurement currency of the Fund.

Consequently, except where assets are denominated in United

States dollars or Barbados dollars, the Fund is exposed to cur-

rency risk since the value of the securities denominated in other

currencies will fluctuate due to changes in exchange rates. The

Fund’s policy is not to enter into any hedging transactions.

4. RELATED PARTIES

Parties are considered to be related if one party has the ability

to control the other party or exercise significant influence over

the other party in making financial or operational decisions.

Fortress Fund Managers Limited serves as manager and registrar

of the Fund. As a result of providing investment advisory, man-

agement and registrar services, Fortress Fund Managers Limited

receives a weekly management fee based on the actual net

asset value of the Fund, calculated weekly and payable in

arrears, at the rate of 1.75% per annum. During the year man-

agement fees paid to Fortress Fund Managers Limited amount-

ed to $49,264.

On June 1, 2002 bonds amounting to $3,108,895 and

$8,993,843 were purchased from the Fortress Mutual

Fund and Fortress Caribbean Property Fund respectively

at their carrying value, in exchange for units in the fund

of an equivalent amount. (See note 5)



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5. AVAILABLE-FOR-SALE SECURITIES

Cost Estimated Market Value$ $

Due within one year 3,337,515 3,375,169

Due after one year but within five years 12,527,014 12,684,436

Due after 5 years 2,659,890 2,654,330

18,524,419 18,713,935



The company believes that there are no significant concentrations of credit risk associated with its investments. The detailed port-folio of available-for-sale securities is as follows:

Security Maturity Coupon Cost Market Value Holding %$

Barbados

BET Building JV Cert. - Series 5 1/30/03 - 122,201 125,152 0.67%BET Building JV Cert. - Series 7 7/30/03 - 609,053 624,255 3.34%BET Building JV Cert. - Series 9 1/30/04 - 619,002 634,901 3.39%BET Building JV Cert. - Series 10 4/30/04 - 128,685 132,043 0.71%BET Building JV Cert. - Series 12 10/30/04 - 194,905 200,253 1.07%BET Building JV Cert. - Series 15 7/30/05 - 430,193 442,827 2.37%Government of Barbados Bond 12/31/12 8.00% 1,000 1,000 0.01%Government of Barbados Bond 12/31/06 7.00% 9,000 9,000 0.05%

2,114,039 2,169,431 11.59%

Jamaica

Government of Jamaica Bond 6/12/05 10.875% 1,480,125 1,522,950 8.14%Government of Jamaica Bond 6/12/05 10.875% 1,269,910 1,286,520 6.87%Government of Jamaica Bond 6/12/05 10.875% 1,512,000 1,491,000 7.97%Government of Jamaica Bond 9/30/03 11.75% 600,000 619,500 3.31%Government of Jamaica Bond 6/12/05 10.875% 1,532,526 1,511,661 8.08%Government of Jamaica Bond 6/20/17 10.625% 301,500 294,750 1.57%

6,696,061 6,726,381 35.94%

-7.63%-7.70%

-7.80%

-7.85%-8.10%

-8.40%

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The detailed portfolio of available-for-sale securities is as follows:Security Maturity Coupon Cost Market Value Holding %

$ $

OECS

St. Kitts/Nevis Government Cert. – Series 6 1/24/05 - 1,438,566 1,478,654 7.90%

St. Kitts/Nevis Government Cert. – Series 7 7/24/05 - 1,026,640 1,056,218 5.64%

St. Kitts/Nevis Government Cert. - Series 12 1/24/08 - 885,381 916,853 4.90%

Government of St. Lucia Bond 1/31/03 7.25% 2,006,262 2,006,262 10.72%

5,356,849 5,457,987 29.17%

Belize

Government of Belize Bond 8/15/12 9.50% 2,357,390 2,358,580 12.60%

2,357,390 2,358,580 12.60%

International

Lehman Brothers Callable Bond 7/24/05 9.125% 2,000,080 2,001,556 10.70%

2,000,080 2,001,556 10.70%

Total Portfolio 18,524,419 18,713,935 100.00%

The unrealised gain on the available-for-sale securities of $109,413 has been recorded in the income statement.

-7.65%

-7.95%

-8.70%

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6. SHARE CAPITALNo. of Shares $

Common Shares

Authorised and Issued

A maximum number of Common Shares 1,000 1,000

Redeemable Accumulation Shares Authorised

An unlimited number of "Redeemable Accumulation Shares"

Balance – issued on inception 16,360,081 16,360,081

Issued during the period 2,236,609 2,245,238

Redeemed during the period (1,738,369) (1,761,734)

Accumulation Shares – end of period 16,858,321 16,843,585

Redeemable Distribution Shares Authorised

An unlimited number of "Redeemable Distribution Shares"

Balance – issued on inception 2,328,449 2,328,449

Issued during the period 19,836 20,026

Distribution shares – end of period 2,348,285 2,348,475

Total Share Capital 19,207,606 19,193,060

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6. SHARE CAPITAL CONTINUED

Class of Shares Shares Increase in Total value Total no. Net asset Share Issued Redeemed Net Assets of shares of shares Value

$ $ $ $ $

Accumulation 18,605,319 (1,761,734) 423,025 17,266,610 16,858,321 1.02

Distribution 2,348,475 - 58,982 2,407,457 2,348,285 1.02

Total 20,953,794 (1,761,734) 482,007 19,674,067 19,206,606

Common SharesThe 1,000 common shares held by the Fund Manager, carry full voting rights, but do not share in the profits of the Fund. Onwinding up of the Fund, the shares would be repaid at par.

Redeemable Mutual Fund SharesEach class of Fund shares is entitled to share in the net income and net capital gains of the Fund. Fund shareholders shall not beentitled to vote at meetings of shareholders of the Fund save and except as permitted under the Companies Act CAP 308 and ofthe following:

(i) Disposal of the assets of the Fund(ii) Any change or abrogation of the rights attached to the shares or any variation affecting the rights attached to the Fund shares(iii) Any proposed amalgamation of the Fund with another company or any amalgamation of the Fund with another Mutual Fund(iv) Any proposed liquidation or dissolution of the Fund.

Redeemable Distribution SharesThis class of shares will distribute substantially all of its income accruing to the investors in the form of dividends, which will bepaid semi-annually. No dividends have been distributed during the year.

Redeemable Accumulation SharesThis class of shares will not pay dividends but will retain all of its income accruing to the benefit of the net asset value of theshareholders of this class.



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