Q&A with CMMB Securities

Q. What’s up with those newspaper ads all claiming their company has the highest returns on their mutual funds? They can’t all be the highest.

Kevon, Diego Martin   

A: At present, there is no properly defined structure for regulating all mutual funds in Trinidad and Tobago. The Central Bank has issued unofficial guidelines that govern mutual funds managed by subsidiaries of commercial banks. The Securities and Exchange Commission (SEC) is yet to develop rules for the functioning of the mutual funds industry, including a standard system for calculating and reporting fund returns.
The method used for calculating returns; the period for which returns are reported; and the consistency of reporting returns all vary across the industry. Furthermore, there are no rules for disclosure of the method used for calculating returns.

Thus mutual fund providers enjoy a great degree of flexibility when reporting returns.  Investors must question the selection of certain mutual funds over others; the accuracy of performance measures; and the reason for highlighting one particular period while failing to report in the subsequent period.  A mutual fund provider, for instance, may report an annualised return for a growth fund based on the fund’s quarterly performance. Annualising the quarterly return in such a manner is not appropriate for a stock fund, as it presupposes the return earned in the first quarter will be the same in subsequent quarters. This may not be possible given the volatile nature of stock market returns. 

The local mutual industry has experienced rapid growth in recent years. In 2003 the level of mutual fund assets was almost equivalent to the domestic deposit base.  Legislation and standardisation need to be put in place to protect and guide investors. Until such time, investors must question ads highlighting impressive performance and either verify the accuracy and comparability of returns by contacting the mutual fund providers themselves, or by consulting their financial advisors.  
 

Q. As an investor, is there any way of taking advantage of the surge in oil prices we see from time to time?

Patricia, La Romain  

A: There are a number of options you can consider to take advantage of rising oil prices. One such option is buying shares of companies that produce and sell oil. While we have no such companies listed on our local stock exchange, you can find them listed on the US and London stock markets. These include Shell, BP and Chevron. By extension you can also find some mutual funds with a concentration of energy stocks. Both these investments derive direct benefit from rising oil prices. BP, for example, recorded a 17% increase in first-quarter profits with the recent surge in oil price.  However, one must keep in mind that oil prices are highly volatile. As such, an investor would buy stocks in such companies or invest in mutual funds when oil prices are low rather than when they are already surging. 

There are a number of derivative instruments which can be used to bet on oil prices, such as oil futures or warrants. If, for example, you purchase 6-month futures with a contract price of $40, the higher oil prices rise beyond $40, the greater the value of your futures contract.  The futures contract obligates you, at the end of six months, to take delivery of the oil at a price of $40 per barrel. However, futures are highly traded contracts, so an investor does not actually take delivery of the oil. But before the expiration of the contract, if the price of oil has risen significantly, the investor would be able to sell his/her contract at a higher price than originally purchased. 

One drawback of buying a futures contract is the large amount needed to pay for it. In some cases you need to have at least $500,000 to purchase a futures contract. Disclaimer for Articles: “All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever.

CMMB and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer or a solicitation to buy or sell.”