Money Matters

Could a Mutual Fund be the Greatest Gift of All?

For our first annual Islandista Holiday Gifting Guide, we spoke with Fortress Fund Managers’ marketing manager Kim Howard who shared some insights on how investing in a mutual fund can serve as a fantastic and valuable gift for your child.

Islandista: For our readers who may not be familiar with how mutual funds work, can you explain what it is?

Kim Howard: A mutual fund is an investment in which the money of many people and entities is pooled together to buy stock from different companies, bonds, or other investments (such as real estate). Each investor gains access to diverse investments and professional management that they may not have been able to access on their own.

Kim Howard, Marketing Manager of Fortress Fund Managers.
Kim Howard, Marketing Manager of Fortress Fund Managers.
Mutual funds are typically managed by an investment company, such as Fortress Fund Managers. The funds are divided up in to shares and the price of each share is known as the “Net Asset Value (NAV)”. Mutual funds are a long-term investment and over time can offer higher returns than a traditional savings account.

 Islandista: Tell us about the various mutual funds which Fortress offers.

Kim Howard: Fortress manages a total of 12 mutual funds in both Barbados and U.S. dollars. When the firm opened almost 17 years ago, it started with the Fortress Caribbean Growth Fund, which invests primarily in local and regional companies. It was another three years before the Fortress Caribbean Property Fund was established to invest in properties in Barbados and abroad. This closed-end fund trades on the Barbados Stock Exchange and recently was split into two different cells. The Fortress Caribbean High Interest Fund was our third fund and is focused on investing in corporate and government debt securities or bonds.

For institutions looking to provide pension plans to their employees, there’s the Fortress Caribbean Pension Fund which provides mixed access to some of our other funds. It has three classes of shares, each with different objectives and suited to various levels of risk tolerance.

We offer a similar fund for individuals who want to invest for their retirement years, the Fortress Registered Retirement Savings Plan (RRSP). This is similar to our pension fund in that you can choose one of the three classes of shares and invest in an underlying mix of our other funds. These investors get benefits that are not available through any of our other funds. For example, many people know that they can claim up to $10,000 of the amount invested in their RRSP every year when filing their income tax returns, once they’ve invested by December 31st of the previous year.

However, few people realise that they can make a one-time tax-free withdrawal from their RRSP of up to $25,000 when purchasing their first home. So not only are you saving on taxes, and ensuring some level of security when you get older, but you have the opportunity to save towards one of your biggest lifetime purchases.

Over the past four years, we have developed seven U.S. dollar funds which have various objectives and are invested in different equity markets across the globe. They are particularly well suited to long term investors (such as individuals, company pension funds and captive insurance companies) who, given the current low interest rates on bonds, are seeking higher returns with much less risk than traditional equity markets might offer.

 Islandista: Is there a minimum investment sum and if so, what is it?

Kim Howard: Each of the funds requires a different minimum investment, but people are often surprised to learn that you can invest in the Fortress Caribbean Growth Fund and the Fortress Registered Retirement Savings Plan (RRSP) with as little as BBD$100, while the Fortress Caribbean High Interest Fund has a slightly higher minimum of BBD$500. The U.S. dollar funds are in a different category and start at USD $5,000.

Islandista: How have the various funds performed over the years?

Kim Howard: We have a range of funds that invest in different assets, like stocks, bonds and real estate, both in the Caribbean region and globally.  Returns recently have been stronger in our U.S. and international funds than in those that invest in the Caribbean region.  Over the long term, our funds have compound annual rates of return ranging from 5% to 20% per year, depending on the fund and the asset class in which it invests.  For investors, it is important to find the fund that suits your risk tolerance and objectives best.

Islandista: How does Fortress select the companies which it invests in for its funds?

Kim Howard: Whether we are investing in the Caribbean or internationally, our goal is straightforward:  to own shares of good, well-run businesses, and to purchase them as cheaply as possible.  Over time, this gives us access to the daily wealth generating “machinery” of a portfolio of profitable businesses, with limited risk.  We perform analysis on hundreds of companies around the world on an on-going basis to be prepared to seize opportunities as they arise.  Our investments in bonds and real estate follow a similar philosophy of getting the highest expected return consistent with reasonable levels of risk.  You don’t want to put all your eggs in one basket, so our stock and bond portfolios are broadly diversified by region, industry and issuer.

Islandista: Can you get your money back and is there a penalty?

Kim Howard: While mutual funds are designed to be part of a long term investment plan since you see better returns over time, you can always access your money! The redemption fees or penalties vary from fund to fund. The Fortress Caribbean Growth Fund has no redemption fee, while the Fortress Caribbean High Interest Fund’s 2% redemption fee is only applied if the funds are invested for less than two years.  With the Fortress RRSP (and any RRSP) aside from the exception of the one-time withdrawal to be used towards buying your first home, any withdrawals will be taxed as regular income and 25% withholding tax will be applied.

Islandista: If I wanted to get a mutual fund for my child, how would I go about that?

Kim Howard: Just as you would for yourself, first complete an application form. You can collect one from our office in Carlisle House or on our website – In the “joint applicant” section you would add “For ‘child’s full name’ ”. Bring the completed form in to our office along with at least (i) one type of national identification, (ii) proof of address and (iii) the cheque, debit card or cash to start the account. It only takes a few minutes to get going and no appointment is necessary. Once the account has been opened, you have many options for making further investments. In addition to coming to our office on Hincks Street, you can mail a cheque, set up an automatic salary deduction, request a standing order from your bank, or pay online via FirstCaribbean International and First Citizens banks or at any SurePay location.

Islandista: Can it be in their name but under my control until they are old enough?

Kim Howard: No. It has to be in the adult’s name and “in trust for” the child until they turn 18. At that time, you have the option of turning it over to him/her and both of you would then need to come in to our office to change the account details.

Islandista: One major long-term expense that parents have to think about is how to pay for their children’s university education down the road. Can you explain how a mutual fund would be a good investment vehicle for parents who want to be able to pay for tertiary education for their children in the future?

Kim Howard: Given that a mutual fund is a long-term investment and the greatest benefits can be seen over time, saving for a child’s education via a mutual fund can be valuable in achieving that goal, and the earlier you start the better. That way you have more time to ride out any downturns in the market and maximize your returns. In addition, mutual funds can be used as collateral for loans from lending institutions, thereby giving you access to more income than you may have available by the time your child needs it.

Islandista: Could you give us some forecasts based on different ages and investment levels?

Kim Howard: People with a longer time horizon often have a greater ability to take risk, and can therefore position to earn a higher return on their investment.  The two basic categories of mutual fund investments are stocks and bonds.  We have a fund for each, and investors can combine them in the exact proportion that suits their needs – or choose from one of the three “preset” options available in the Fortress Pension Fund or RRSP.  Over time, equities typically involve more risk and a higher return than bonds.

Predictions are hard to make, especially about the future but here goes… We expect that over the next 10 years stocks will return approximately 7% per year, and bonds will return approximately 4%.  A blended portfolio with some of each would be expected to return about 5.5% per year on average – significantly better than a bank savings account, but don’t forget, the return is not guaranteed and it can be better or worse than expected.

Islandista: So for example, if an Islandista with a 1 year old invested $500 in a Fortress fund for Christmas 2013 and put in $100 a month from now until their child was 18, how much would their investment have grown?

Kim Howard: Saving can be hard if you are always trying to set aside a lump sum, or if you don’t start early enough.  We strongly recommend a monthly savings plan just like in this example – it’s something many of our clients are doing right now.

Looking at the example, if we assume a return on investment of 7% per year – which is well below the long term average for our Caribbean Growth Fund over the last 16 years, but we think a reasonable estimate going forward – your Islandista’s account would be worth $40,315 on her child’s 18th birthday.  Of course, future returns may be higher or lower than our assumption but any way you slice it that’s a lot of education savings for only $100 a month.

Islandista: For the benefit of our readers, tell us some other ways that a mutual fund can be used in the future.

Kim Howard: A mutual fund can be used as collateral for a mortgage or loan. Many people use it as a way to save for their children’s educational costs. Of course the Fortress Registered Retirement Savings Plan (RRSP) is designed to provide income for you when you retire and currently it’s one way to ensure that you save on taxes every year, once you invest by December 31st of the previous year.

By Me

island ~ ista
From Latin -ista via Portuguese -ista
one who follows a principle; an adept.

As an islandista I live, embody, exude the spirit of the Caribbean islands.

2 replies on “Could a Mutual Fund be the Greatest Gift of All?”

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some material for your blog in exchange for a link back to mine.
Please shoot me an e-mail if interested. Thanks!

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