Home' Trinidad and Tobago Guardian : June 20th 2013 Contents JUNE 2013 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
STOCKS | BG15
How does one measure the
success or otherwise of a
product or service? Referring
specifically to the Clico
Investment Fund (CIF) and
based on the comments of
Wainwright Iton, chief executive officer of the
T&T Stock Exchange, who is quoted as saying
that this listing has contributed to "strong and
welcome activity" on the TTSE. This is true
from a very limited perspective. However, does
it represent "success" in a more holistic way?
It was reported that, up to the later part of
May 2013, the CIF units saw 1,200 transactions
involving 12.6 million units with a total value
of $279 million. This works out at approximately
$22.14 per unit or almost 11.5 per cent below
the NAV of $25.00. While this is good news
for traders in terms of commissions earned,
unitholders would be concerned about the
lower and lower prices that they have received
for their holdings.
Could it be that the authorities (Ministry of
Finance and/or Central Bank of T&T) may not
have gone far enough when they developed
and listed the CIF?
Customer profile and tendencies
This product was designed so that holders
of the 11-20 year EFPA/Clico bonds would
exchange those bonds for CIF Units. The chief
disadvantage of the 11-20 year bonds was that,
in order to realise immediate cash, they could
only be sold at a considerable discount to their
face value. This was not an acceptable position
for many bondholders.
How many of these unitholders considered
that if they decide to sell their units quickly,
then they were not likely to receive the full
asset value. This is because the greater supply
would tend to outstrip demand and cause the
price to fall.
A review of the beneficiaries of this fund
would suggest that most would not consider
themselves as investors. More likely, they are
mainly familiar with the basic savings activity
of depositing a certain sum of money on which
they would earn a fixed rate of interest, be it
two per cent or 12 per cent. The possibility
that they would or could experience a capital
loss was probably alien to almost all of them.
How many of these individuals are familiar
with the differences between insured and unin-
sured deposits? More particularly, what is the
difference between deposits (or savings) activ-
ities and investing?
Perils of supply and demand vs value
Most open-ended mutual funds tend to trade
at or very close to their net asset value. Due
to the fixed number of units created for a spe-
cific purpose, CIF had to be designed as a
closed-end fund and allowed to trade on the
The urgent need for many unitholders to
sell would be much greater than their ability
or willingness to wait for the long-term benefits.
This reality set the stage for an almost con-
tinuous fall in the unit price. Despite the urgings
from both the Clico Policyholders Group and
the chairman of Republic Bank Ltd, many
unitholders continued to sell their holding at
lower and lower prices.
So, while the CIF units are a significant
improvement over the 11-20-year bonds, the
quick sale in which many participated also
represented a loss for these former EFPA par-
What measures could have been implement-
ed to help avert this rapid depletion in value?
Could the Securities Dealers Association, the
Securities and Exchange Commission and the
TTSE have come together and agreed to allow
these units to trade within a narrow band and
closer to their NAV? Perhaps, this was con-
sidered and rejected since it would have been
contrary to the operation of "market forces",
that is supply and demand. Surely, in special
situations, market forces could be "tamed" in
order to achieve a greater social, public and
How would this alternate system have worked
in practice? Perhaps, it could have been agreed
that trading of these units would follow the
system used by the Unit Trust Corporation.
The bid price, which corresponds to the net
asset value (NAV), would be the price that the
seller receives for his unit.
On the other side of the trade is the asked
price; this is two per cent higher and would
be the price at which the buyer would pay for
The spread between the two prices would
give the broker his commission, thus eliminating
the need to charge this as a separate item (and
simplifying his administration). For example,
if CIF had a NAV of $25 on a particular day,
then sellers would receive that price, while
buyers would pay $25.50 (two per cent more).
What would be the benefits of this system?
The brokers would continue to enjoy a good
commission, while the sellers would enjoy
better price stability. This is a win-win situation.
It is even conceivable that, under this arrange-
ment, brokers could earn a slightly higher rate
Is a credit union solution possible?
In the context of almost six months of trading
activity, this variation or suggestion cannot
now be implemented without causing serious
disruptions. So, what alternatives might be
possible to help mitigate the ill effects of a
declining unit price?
The credit union movement is often referred
to as the "people s sector." Would they agree
to grant loans to these unitholders under the
following concessionary terms: (1) Using 100
per cent of the NAV (NOT the share price) of
the units as collateral and (2) apply a lower
rate of interest, for example, 0.5 per cent on
the reducing balance, instead of the customary
1.0 per cent on the reducing balance?
Just as the stockbrokers have gained new
clients, the Credit Unions would increase their
membership and grow their loan portfolio.
Considering that most credit union members
also have shares and deposits balances, this
would help mitigate any risks. In an era when
many lenders are still fighting for good loans
with solid security, is this an idea that credit
unions can develop and implement to the full?
One possible drawback is that many of the
unit holders may not be interested in assuming
Even so, the loan might be structured as an
"interest only" debt. Under this arrangement,
the member/borrower would only pay the
interest monthly (or quarterly). A few years
from now, if the loan becomes non-performing,
the credit union can sell the units, probably at
a profit, and recover the full amount (or more)
on their loan. The implementation of this
scheme would require flexibility and innovative
A less cumbersome option is to have the
credit union buy the units from the unitholders
at its NAV. They can simply hold on to the
units for a couple of years and sell them at a
profit. In the meantime, they will earn semi-
annual dividends. Again, this would require a
variation in the credit union s investment policy
together with other administrative approvals.
We should be aware that, in the case of the
banking industry, they typically use only 75
per cent of the market value of any traded
security as collateral for a loan.
Know your customer
We often hear about the "know your cus-
tomer" concept, usually in reference to the
financial services sector. Essentially, this guide-
line attempts to restrain representatives of
firms (stockbrokers, insurance agents and even
lenders) from selling a product that is either
unsuitable for the customer or about which
s/he does not understand the risks. In other
words, it attempts to set a fiduciary standard
of care for companies in their dealings with
Could the same standard be applied to either
the Ministry of Finance or the Central Bank?
Specifically, did they make sufficient effort to
anticipate the likely consequences (flaws) when
they created the CIF mutual fund product?
Would it have been very difficult to anticipate
that many former policyholders would want
to sell their CIF units as soon as they received
Did they develop a profile of the EFPA hold-
ers, similar to what financial companies are
often required to do, before they foisted the
CIF units on to unsuspecting parties? This is
a product that was supposed to achieve the
government s (implicitly) stated policy to "make
whole" policyholders exposure to a large portion
of the EFPA product.
Perhaps, they were trying to transform
depositors into investors?
Postscript: In the context of Republic
Bank s recent additional investment in HFC
Bank in Ghana, one might consider that
the price of both Republic Bank s shares
and the derivative CIF units could be cur-
rently " undervalued".
the price issue
of CIF units
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