Gradual growth for Sagicor Select

There is a great deal of interest in the Sagicor Select Funds that is offering 2.5 billion shares for subscription by the general public at $1 per share and a slight discount for some selected applicants.
The company has the right to upsize the offer by an additional 1.5 billion shares. The offer opened July 3 with a closing date of July 17.
Financial Select Fund aims to give results before expenses, corresponding generally to the price and yield performance of the JSE Financial Index that seeks to mirror the financial sector companies on the Jamaica Stock Exchange. The list includes some that are not wholly financial, with NCB Financial dominating with 38 percent of the index at the beginning of March.
In order to track the performance of the Index, the Select Fund uses a replication strategy, with the Fund investing substantially all of the securities represented in the Index in approximately the same proportions as the Index. The Financial Select Fund will rebalance monthly, if necessary, to maintain the appropriate balance to track the index. On average, the Financial Select Fund will invest at least 95 percent of its total assets in the securities comprising the Index. The Index is developed and maintained by the Jamaica Stock Exchange and calculated based on market capitalization of the various companies making up the index.
The company estimates that “financial stocks will increase in price by an annual rate of 8 percent over the five-year period, with the net asset value of the total assets expected to rise to $7.2 billion in 2024. The performance of the securities held is expected to be favourably impacted by the growth in the financial sector and the consequent higher earnings for the companies whose stocks form part of the JSE Financial Index, on average,” the company stated in the prospectus.
Frankly, if that were the returns, investors would be better off investing in a number of the preference shares listed on the market that provide a rate of return that is equal or better without the same risk. Since the Financial Index started at the beginning of March this year, it has gained 22 percent as NCB Financial in the main, the largest portion of the Index and the fund, moved from $145 to last trade at $188, to be up 30 percent since the end of February.
Fortunately, with interest rates being low and continuing to fall, profits of companies will most likely rise, including financial sector ones and therefore drive the value of stock in the fund at a much higher rate than the unrealistic forecasted levels.
The positive with the fund is that if one is of the view that the sector will continue to grow at an attractive pace then it could be a good vehicle to hold without having to buy a basket of the stocks and having to manage them appropriately. The down side is that because it is not a managed fund, the value will rise and fall with the stocks in the portfolio. Additionally, the fund violates one of the carinal principle tenets of investing, that of having a balanced portfolio, so that no one investment is so large as to drag down the portfolio significantly. Investors do not need to go beyond the 1990s to see how devastating concentration of investment can be.
IC considers the environment to be very conducive, to the fund do well going forward with a likely growth rate closer to 20 percent per annum for a few years than 8 percent, but investors should not factor in a premium to the net asset value of the fund anytime soon if at all.
Some investors just don’t want to be bothered with managing a portfolio but want direct exposure to the market and that is where a select fund is seen as useful. Each investor has to determine what it is that they want from an investment. Investors are unlikely to see the level of gains generated from the Wigton public offer from this issue in a matter of weeks, for example.

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