BSFB/STEP

Domestic Asset Management

Kenwood N. Kerr BA, TEP &

Anthony R. Ferguson CFA, CMT

March 20th, 2007

Current Status

• Commodization of Services

• Value Added - Challenge

• Increasing numbers of service providers- BAB, CLICO,

FAMGUARD, ScotiaBank .

• Growing list of qualified practitioners-(Series 7, CIM,

CFA, Bahamas Society of Financial Analysts)

• Real Estate

• Private Placements – Dominated landscape (after IPO

fallout)

• BISX market capitalization - $3 billion.

Investment Standards and Practices

• Established International Portfolio Management

Process

• Technology – State-of-the-Art

• Prudent Expert Principles

• Research Procedures- Due diligence & reasonable

basis.

Available Services

•Cash Management

•Asset Management (Individual/Institutional)

•Brokerage & Custody Service

•Mutual Funds (Growth, Money Market and REIT)

•Corporate Advisory Services (IPO, Private Placement, M&A)

•Pension Administration & Management (Pending Legislation)

•International Asset Management

Investment Management Process

• Agree investment objectives – assessing clients

financial needs and objectives, risk tolerance,

income requirements, investment time horizon

• Determine appropriate strategic asset allocation –

identifying the optimal asset allocation

• Construct the appropriate portfolio- building a

diversified portfolio

• Frequent tactical reviews – continuous assessment

of the portfolio and changes in market conditions.

Agree Investment

Objectives

Determine Appropriate

Strategic Asset Allocation

Construct The

Appropriate Portfolio

Frequent Tactical Reviews

REAL ECONOMY

GROWTH (GDP)

SAVINGS

FISCAL POLICY

DEMOGRAPHICS

FINANCIAL

ECONOMY

REAL RATES

CAPITAL FLOWS

INFLATION

MONETARY POLICY

INVESTMENT OUTLOOK

NEGATIVE NEUTRAL POSITIVE

Market Analysis

Market Transaction Summary

Period Companies Amount

1968-1989 Five (5) <$15 mil.

1990-1998 Eight (8) $120 mil.

1999 Two (2) $18.75 mil.

2000 Seven (7) $80 mil.

2001-2006 (none) 0

*Note: Period dominated by private placement, lost investor

sentiment in equity investments.

Domestic Capital Market Structure

SECURITY VALUE

Total Domestic Assets $7.76 Billion

Cash Deposits 4.87 Billion

Government & Quasi Government Debt 2.88 Billion

Publicly Traded Companies 19

Market Capitalization (Dec 2006) 3.183 Billion

Mutual Funds 8

Mortgages - Residential & Commercial 2,504 Million

Market Capitalization December 29, 2006

Public Companies Authorized Shares Outstanding Shares % Shares Outstanding Market Capitalization %

Abaco Markets 19,975,000 15,892,000 79.56% $ 10,329,800.00 0.32%

Bahamas Property Fund 10,000,000 2,407,000 24.07% $ 27,199,100.00 0.85%

Bank of the Bahamas 25,000,000 12,000,000 48.00% $ 96,360,000.00 3.03%

Benchmark 10,000,000 4,959,111 49.59% $ 3,768,924.36 0.12%

Bahamas Waste 10,000,000 4,200,000 42.00% $ 7,350,000.00 0.23%

Fidelity Bank 35,000,000 16,666,670 47.62% $ 20,833,337.50 0.65%

Cable Bahamas 20,000,000 20,000,000 100.00% $ 200,000,000.00 6.28%

FirstCaribbean 150,000,000 120,216,204 80.14% $ 1,701,059,286.60 53.44%

Commonwealth Bank 75,000,000 31,283,480 41.71% $ 391,356,334.80 12.29%

Consolidated Water 2,023,850 2,023,850 100.00% $ 9,937,103.50 0.33%

Doctors Hospital 12,500,000 9,971,634 79.77% $ 24,929,085.00 0.78%

FamGuard 15,000,000 8,625,000 57.50% $ 49,938,750.00 1.57%

FINCO 27,500,000 26,666,670 96.97% $ 320,533,373.40 10.07%

Colina Holdings 35,000,000 24,729,613 70.66% $ 46,986,264.70 1.48%

ICDU 10,000,000 10,000,000 100.00% $ 71,500,000.00 2.25%

J S Johnson 8,000,000 8,000,000 100.00% $ 68,800,000.00 2.16%

FOCOL 10,000,000 8,454,987 84.55% $ 106,110,086.85 3.33%

Freeport Concrete 20,000,000 4,708,334 23.54% $ 2,589,583.70 0.08%

Premier 2,355,000 2,355,000 100.00% $ 23,550,000.00 0.74%

497,353,850 333,159,553 $ 3,183,131,030.41 100.02%

BISX CAPITAL MKT BREAKDOWN

Abaco Markets

Bahamas Property Fund

Bank of the Bahamas

Benchmark

Bahamas Waste

Fidelity Bank

Cable Bahamas

FirstCaribbean

Commonwealth Bank

Consolidated Water

Doctors Hospital

FamGuard

FINCO

Colina Holdings

ICDU

J S Johnson

FOCOL

Freeport Concrete

Premier

Domestic Market –Investment Portfolios

• Balanced Portfolio

• Aggressive Portfolio

• Conservative Portfolio

• Guarantee Investment Contract

Disciplined Investment Approach

Analyze Client

Objectives &

Constraints 1

Formalize

Investment

Policy

2

Develop

Asset

Allocation

3

Design

Optimal

Portfolio

4

Implement

Strategy

5

Monitor &

Rebalance

Portfolio

6

Investment Selection Process

• Investment Research

• Rigorous top-down/bottom-up approach

• Fundamental research

• In-Depth Company Analysis

• Quantitative Review

• Qualitative Assessment

• Risk Management

• Continuous analysis

• Implement Strategy

• Based on client risk and research recommendations

Asset Allocation is key!

Asset Allocation Methods

Asset allocation can be an active process in varying degrees

or strictly passive in nature. There are a number of different

methods of establishing asset allocations:

Strategic Asset Allocation

Constant-Weighting Asset Allocation

Tactical Asset Allocation

Dynamic Asset Allocation

Insured Asset Allocation

Integrated Asset Allocation

Asset Allocation Methods

Asset Allocation – Balance Strategy

Asset Class Strategy Estimated Return

Equities 35% - 45% 7% - 12%

Fixed Income

(Including preference

shares

35% - 45% 5.625% - 6.375%

Real Estate 10% - 20% 8% - 10%

Cash & Marketable

Securities

3% - 10% 3% - 5%

Asset Class Strategy Estimated Return

Equities 60% - 80% 7% - 12%

Fixed Income

(Including preference

shares

25% - 35% 5.625% - 6.375%

Real Estate 10% - 20% 8% - 10%

Cash & Marketable

Securities

3% - 5% 3% - 5%

Asset Allocation – Aggressive Strategy

Asset Allocation – Conservative Strategy

Asset Class Strategy Estimated Return

Equities 0% -5% 7% - 12%

Fixed Income

(Including preference

shares

60% - 80% 5.625% - 6.375%

Real Estate 5% - 15% 8% - 10%

Cash & Marketable

Securities

5% - 20% 3% - 5%

Historical Rates of Return

Cash Deposits 2 Yr 5 yr 10 yr

4.77 % 4.84% 4.66%

Fixed Income 2 Yr 5 yr 10 yr

7.00% 6.85% 6.50%

Equities 2006 2005 2004

24.10% 29.50% 19.70%

Challenges- Illiquidity in the Domestic Market

Company No. of shares Liquidation Period

J. S. Johnson 60,240 6-8 weeks

ICD Utilities 52,083 3-4 weeks

FOCOL 59,101 2-5 days

First Caribbean 57,142 4-6 weeks

Famguard 121,359 4-6 months

FINCO 47,619 2-3 weeks

Cable Bahamas 58,479 8- 10 weeks

Colina Holdings 227,272 6-8 weeks

Abaco Markets 561,797 10-12 months

Bank of the Bahamas 78,740 2-3 weeks

Assumption - Client owns a portfolio that holds 10 publicly traded

companies with a market value of $5 million with

initial purchase of $500,000 in each stock

Challenges- Zero Currency Diversification

Q4 2006 Current 3 Mths 6 Mths 12 Mths

U.S. Dollar Terms

Euro $1.2900 $1.2910 $1.2900 $1.3000 $1.3500

Yen 117.80 121.58 119.00 118.00 115.00

Sterling $1.9166 $1.9585 $1.9300 $1.9400 $2.0000

Swiss $1.2356 $1.2537 1.2550 1.2450 1.1950

Canadian $ $1.1392 $1.1806 1.1700 1.1600 1.1500

Australian $ $0.7705 $0.7730 $0.7700 $0.7600 $0.7700

Euro Terms

Yen 151.93 156.97 153.50 153.50 155.25

Sterling 0.6731 0.6591 0.6675 0.6700 0.6750

Swiss 1.5932 1.6187 1.6200 1.6200 1.6125

Average Forecast

Challenges- Lack of Legislation

• Injecting some element of foreign investment in your

portfolio of Bahamian investments, reduces the downside

risk in that portfolio. Having portfolios dominated by bank

deposits, government debt, selective local equities, a bit

of real estate and not much else can be quite limiting •Current exchange control provisions prevent participation of domestic investment capital in the international market. •As a result there is considerable mismatching of assets and liabilities with specific reference to institutional investors (e.g. insurance companies)

Market Challenges

• Liquidity

• Price Discovery (Valuation)

• Diversification

• Investor Education

• Regulation & Supervision

• Absence of Yield Curve (Debt Pricing)

• Delivering Performance

• Volatility

• Investor Relations

The Future

• Improved legislation

• Privatization

• Corporate financing

• Disintermediation

• Expanding Government Debt Listing – BISX

• Cross-boarder trading/unrestricted trading

• Listing non-B$ securities.

• Introduction of Alternative Investments

Tips For Selecting A Money Manager

While not all organizational needs are the same, there are some basic

guidelines that may help in you search for the right money manager.

•Look for a track record in handling a similar type fund.

•Establish yearly parameters on how the fund should be managed to

achieve its objectives.

•Require performance reports at regular intervals

•Good communications is essential to conduct business successfully.

•Keep it strictly business. Avoid making your decisions based on politics

or other relationships.

•Decide how your portfolio will be managed up front.

•Trust is everything. Seek out someone whom you are comfortable with.

Thank You