Initial Public Offering | Sagicor Select Fund Ltd. Class C Shares

Overview

As was the case with the listing of Sagicor Select Fund Limited’s Class B shares, it is our opinion that the listing of the Class C shares could help to enhance the sophistication of the Jamaican Stock Market by offering investors a passively managed, intra-sector index tracking fund at a relatively low fee (i.e. management fees). The new listing will be the second of its kind which has been specifically structured to track a particular index (in the case the JSE Manufacturing and Distribution Index), the former being Sagicor Select Fund’s class B shares which tracked the JSE Financial Index.

It is our opinion that the fund’s tracking of the manufacturing and distribution sector is likely to be an attractive offer to the market. This is because the manufacturing and distribution sector has been one of the best performing sectors on the Jamaica Stock Exchange (JSE) over the five years having grown by 512% between August 2014 and August 2019. However, it is important to highlight that though investors in the fund would gain exposure to a wide cross-section in the manufacturing and distribution sector ranging from companies manufacturing food products, beverages products, construction inputs, or the distribution of office equipment, automobiles, etc., the fund does not offer investors true diversification across sectors, currencies or regions.

Overall, we have a neutral outlook on the manufacturing and distribution sector. We expect the larger players in the industry to continue to thrive, however, we are less optimistic about the smaller companies. These companies are likely to suffer from operating in more fragmented and highly competitive industries and, relative to their larger peers, are less capitalised. The relatively smaller capital base limits these smaller companies capability to invest (i.e. expand) in their business (i.e. growing their business) and it also leaves them more exposed to potential shocks. These shocks could cause significant volatility in their ability to earn profits, which by extension could cause volatility in share prices. These shocks could stem from volatility in the foreign exchange market, a shift in regulations, weather events or industrial action on the part of labourers. However, these risks are counterbalanced by the fact that the fund composition is not solely comprised of those smaller firms (on a market cap basis) who are more susceptible to the aforementioned shocks. Instead the fund is a mixture of those firms are larger firms which are more capable, though not completely inoculated, of navigating the aforementioned risks.

It is also important for investors to keep in mind that there is a possibility that the fund’s NAV will diverge from the market price of the fund. That is to say, the NAV is often higher than the market price, therefore indicating that the true value of the fund is not being reflected in the market. It is our opinion that such a scenario is not impossible, as our local stock market in our opinion is not perfectly efficient (i.e. reflect all relevant and readily available data in the price of the security). It is our opinion that this market inefficiency has been demonstrated by other listed funds such as Mayberry Jamaica Equities Ltd, QWI Investments and even Sagicor Select Fund’s Class B Shares.

Despite our overall positive reception of the IPO, it is our opinion that it is not for everyone. It is our opinion that an investment in Sagicor Select Fund Class C Shares (i.e. an investment in the Manufacturing and Destruction Fund) may be more suitable for investors who may not have a fully fleshed out portfolio who are seeking to gain passive exposure to the Jamaica Stock Exchange’s Manufacturing and Distribution Sector. Additionally, investors who lack the technical expertise to select best in sector stock, or who would rather to not keep track of the performance of multiple securities, may be better served investing in the MDSF. Conversely, investors with a fully fleshed out portfolio or a portfolio with sufficient exposure to the aforementioned sector may opt to refrain from investing in the MDSF. Likewise, technically savvy investors who are of the opinion that they have the capability to be a stock picker, and who possess the discipline to monitor the performance of their stock portfolio, may also opt not to participate in the MDSF. Nonetheless, it is our opinion that perspective investors consult with their wealth advisor to garner further insight to see if the security is appropriate for them.

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