Whether investors are choosing bonds or shares or money markets to invest in, there are many factors that should guide investors' decisions, especially when investments are not risk-proof. "No investment is devoid of risk, but some are more risky, like the speculative industry, but in these you would expect a higher return. Other risks can be political or even a change in technology that could affect your investment." This was the advice given by Leslie St Louis, manager, First Citizens Brokerage and Advisory Services Ltd, at First Citizens' investment seminar at the Trade and Investment Convention (TIC) last week Friday at the Hyatt Regency Trinidad hotel, Port-of-Spain.
Investment vehicles
Paige Gillette, investment adviser, First Citizens Brokerage and Advisory Services Ltd, gave a number of investment choices and their benefits. She described a bond simply as a loan to finance a project.
"A prospective borrower issues this debt instrument, which is purchased in parts by consumers in the bond market. Bond holders are paid a rate of interest at pre-specified interval. The bond is paid on the maturity date," she said. Bonds can be used to finance projects. "If you have a business and you are looking to finance a specific project and you need the funding, you go out there and issue a bond and you can talk to us at First Citizens about issuing bonds for you. Of course, there is also the opportunity to go public which we can help with, where you can go from being a private to public company, and have your exchange treated on the stock exchange," she said.
The benefit of issuing bonds is that is provides stability, Gillette said. "In terms of the benefits from bonds, for fixed rate bonds, there is stability, as you know, you receive a fixed rate for a specific period of time," she said. Government-issued sovereign bonds are also safe, she advised. "In terms of sovereign bonds, there is a certain safety in certain governments because you know you are going to be repaid the money but there is no such thing as a completely safe investment. "Sovereign bonds tend to be safer; that is why you get lower percentages. You know that the Government will pay out to you over a fixed period of time. They are much more unlikely to go bankrupt," she said.
Derivatives
Derivatives are financial instruments based on underlying assets or a set of underlying assets and the main types of derivatives are futures, forwards, options and swaps, Gillette said. Derivatives are named so because they depend on the values of other assets. Futures are one of the most common types of derivatives and has its advantages, she said. "Futures and forwards are contracts to lock in a price for a period of time, with the difference being you generally have to purchase it. So you may be in an oil-based industry and you have transportation cost and you want to know what your cost will be in a year's time.
"So what you do is enter a future contract where you know the order is going to cost you in a certain amount of time because you make a contract with a third party to lock in that price, so you'll know your transportation cost in the next three to five years," Gillette said.
Repos and returns
She called the repo a repurchase agreement that occurs when a dealer sells securities to an investor with an agreement to repurchase them at a specified price on a predetermined date. This translates to a fixed rate of return for the investor. "Essentially, the dealer takes out a loan from the investor, using the security as a collateral. So if you have a T&T Government bond, you might receive a repo of lower percentage than if you had a fepo from Venezuela because of the political situation there. That fixed rate of interest should be a constant, and then the investors give the security back and everyone goes their own way," Gillette said. There are benefits of using the repo, she said.
"The benefits is that the repo is a big thing in T&T and it should get bigger. The Securities and Exchange Commission (SEC) has a lot more regulatory oversight in the market, which means that they have an idea of what's going on and consumers are not being cheated. So if you want to get in the bond market and you don't want to make a purchase outright, you can purchase a repo," Gillette said.
Mutual funds
Mutual funds are accessible to smaller type investors. "These pool money from many small investors and then invest in a portfolio of these assets. The name of the mutual fund is derived according to its objectives in terms of risk and returns, like money market growth and balanced funds. "Some securities trade in very high volumes and the average individual can't purchase these securities, so what mutual funds do is pool investors money and then purchase the attractive securities that are not available to the individual investor." She said that money markets also tend to be safer. "Money market funds tend to be relatively safe, like in other places like the US treasury, for example. Growth funds then to look at higher returns. They go out there and try to find attractive yields and purchase it for the funds that are not readily available for the average investor."
Macroeconomics factors
St Louis said in looking at investment vehicles, investors also have to consider the macroeconomic conditions of the country they are investing in. "When you look at the industry, it has an effect on the stocks of the company that you have. Construction has almost been dead in the Caribbean and we see the effects on companies like Trinidad Cement Ltd." He said that energy prices internationally have been booming, so consumers who have stocks in energy companies would be doing well now.
Interest rates also have an impact on bonds, St Louis said.
"There is an inverse relationship where the higher the interest rate, the lower the price and the higher the price the lower the interest rate." He said that foreign exchange also has an impact on investments.
"If you want to invest in a Jamaican company and there is a change in the relationship between the Jamaican dollar and the US dollar, then it will affect your investment," St Louis said.