Jack Smith - Managing Director (Datvest)

Introduction

The operating environment in 2016 continued to deteriorate as the country’s economic growth slowed down significantly. It is pleasing to note that in spite of this the Company performance remained positive. The operating environment in 2016 was characterized by a number of key factors.

Environment

The political environment in the country continued to evolve in 2016. It was apparent however, that the challenges facing the Government were carried forward and as the year drew to a close, the country was still facing acute liquidity levels and low foreign investment levels. Government revenues also continued to fall with civil servant bonuses remaining largely outstanding by the end of the year. This was indicative of what was occurring in the wider economy, which continued to deteriorate. It would seem at this stage that investor sentiment towards the country remains largely negative.

The country continued to experience deflation with the official year on year deflation as at the end of 2016 being projected at just under one percent at (0.93%). Deflation in this instance was symptomatic of a deeper problem. A significant cause behind this deflation was the overall low liquidity levels within the economy, which were symptomatic of a slow down in economic activity. This liquidity shortage affected the public and private sectors alike. Aggregate demand levels were clearly falling and in the absence of some sort of intervention it is likely that this will continue.

Markets

The Capital Markets returned mixed performances during 2016. The stock market was extremely volatile during the year with significant losses being experienced during the first nine months of 2016 which were then totally erased in the last quarter as the market experienced a recovery. The industrial index rose by twenty five percent (25.84%) for the twelve months ended 31 December 2016. There are key elements to this volatility that must be highlighted.

Firstly it appears that the fall was driven by the difficulty experienced in remitting foreign investment income outside the country. Secondly the introduction of the bond notes into circulation drove some investors out of the money market into the stock market. This movement in the equity markets positively influenced the performance of funds under management. The Fixed Income market experienced significant reductions in the general level of interest rates, which fell to levels below 5% for most of the Company’s counterparties.

Finances

The Company’s funds under management rose during the year from $131.3 million to $ 147.6 million. This represented an increase of 18%, which was commendable under the circumstances.Consequently, a total of US$1.9 million in fees was earned by the Company in 2016. This represented an increase of two percent from the prior year and reflected how growth in funds under management was offset by declining fee rates.

Additionally a significant portion of the growth in funds under management happened in the last quarter of the year depriving the Company of the full benefit of this movement on its fees. The Company’s proprietary investments also delivered a reasonable performance in 2016 with an amount of US$126 503 being earned during the year. A drop in investment rates of about 44% and a negative fair value adjustment with respect to the Company’s property investments of 11% all contributed to investment income falling by about 34% when compared to the prior year. Alternative Investment income which is a new area of income for the Company grew to 14% of Fee and Commission income. This demonstrates that the Company’s efforts to diversify income streams are starting to bear fruit.

The Company’s cost containment efforts continue to meet with success where through a raft of measures the Company was able to contain its costs at US$2 million. This represents a 4% increase in costs from the prior year but when viewed against the transfer pricing adjustments made by the Company in 2016 this figure is truly commendable. Consequently, the Company achieved a profit before taxation of US$137 905. This compared favorably with the Company’s budget.

Cost containment will continue to be a key goal in the year ahead and the management team is already in the process of putting in place measures to more closely monitor and control the company’s cost base. The Company’s capital position remains strong with total equity of over $2.6 million against the required Capital of US$500 000.

Clients

The Company’s client base was largely stable during 2016 and grew significantly during the last quarter of 2016 due to the significant positive performance on the investment markets. The Company’s portfolios performed relatively well during the year returning a performance of 18.0%. This compared favorably with the industrial index benchmark of 25.84%.

The Company’s investment philosophy is premised on delivering positive investment performance on a rolling three-year period and to remain in the upper quartile of performance during such periods. We believe that this allows portfolio decision making to be done with a long-term view and thus not be distorted by short-term volatility. Our client portfolios have achieved a performance of 231.44% during the 93 months since dollarization allowing us to remain in the upper quartile of investment performance for this period.

Diversification and product development remain a core part of our investment strategy in the year ahead. Pressure on management fee rates remain a key concern for the industry in general.

Systems

Risk management is a key consideration in our daily transactions especially with the significant volatility being experienced in the country’s capital markets. The Company’s flat organisational structure has meant that the management team has been intimately involved in all key Company transactions reducing the overall level of risk.

The Company’s two Board committees;- the Investment and Risk Management Committee and the Audit Committee have played a vital moderating role in ensuring our overall systems are compliant in all respects. Audits carried during the year confirmed that the Company’s systems remain robust and compliant with regulations.

Outlook

The Company returned a strong performance for 2016 under the circumstances. This performance hinged on a disciplined approach to the Company’s key strategic objectives as well as a recognition of the importance of our clients to us. As such all key actions carried out during the year were aimed at delivering strong returns to our clients whilst ensuring risk was kept to appropriate levels. This is a delicate balancing act at the best of times but one, which we are confident we fully understand. The Company is optimistic about the year ahead and will continue to safeguard and build on those funds placed with us. The same matters raised in my introduction will continue to be topical and therefore affect the investment climate as before. Our goal is to ensure that our clients’ portfolios continue to show real growth in 2017.

Appreciation

I would like to take this opportunity to thank the Board of Directors who have been very supportive of all our initiatives in 2016 and have given the Company direction in these turbulent times, our staff who have toiled endlessly through the year showing tremendous loyalty and belief in the Company and last but not least our clients who have allowed us the great privilege of participating in the management of their wealth.

I am confident that the company is firmly moving forward and will continue to do so in 2017.

Jack Smith
Managing Director
23 February 2017

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