INVESTMENT house Sterling Asset Management headed by Charles Ross celebrates its tenth anniversary this year and continues to go from strength to strength.

A decade ago Ross was more into the economics field but together with a close friend was looking for an investment management opportunity. Ross was already looking at investment management for the Private Sector Organisation of Jamaica (PSOJ). His friend’s fiancée was also working in the financial sector and they saw a gap in how the market was being served in the medium to long term as far as the investment spectrum was concerned.

The managing director of Sterling Asset Management noted the excessive spreads in the US dollar fixed-income category. Ross and his team ran the numbers and evaluated the capital they had to put up and concluded that this was a viable proposition worth pursuing.

At the time Sterling Asset Management acquired its licence, the country was still recovering from the high interest rate regime that saw many local businesses founder and the collapse of the financial sector. Interest rates remained very high and were fairly volatile, but this only served to stiffen Ross’ resolve to look to US dollar investments.

THE EARLY YEARS

“Back in those years the US interest rates were far less volatile and the government started to issue bonds in the international markets at very attractive rates in US dollar terms. Not many people in the retail investment space were aware of these securities or knew how to access them. It may have seemed a bit risky, but we were pretty confident in the numbers that we had run through. In fact, we discovered many more opportunities in that space than what we had anticipated,” recalls Ross.

A significant hurdle to surmount was convincing the local market that Sterling was a good bet. Jamaicans became and to some extent still are wary after seeing household-named financial institutions brought to their knees in the nineties which elicited a flight to quality, ie Scotiabank. Fortunately for Sterling Asset Management, the choice was a clear one for investors — do you want to take the Government of Jamaica risk in Jamaican dollars or do you want to take it in US dollars? Do you want to get three per cent on a repo or 12 per cent on a Government of Jamaica bond tax-free? Fortunately there were a number of Jamaican investors looking for securities that would provide medium to long-term investments with good US dollar yields, thus creating a market for the fledgling Sterling Asset Management.

Those times saw many people looking to make a quick buck on 30-day repos, but here was Sterling bucking the trend.

“Absolutely, but we took the conscious decision not to go that route because in that space was volatility. You could be operating one day at 15 per cent interest rates and the next day it could be 30 per cent and that can do tremendous damage to your balance sheet and bring you under enormous liquidity pressures. Also it can prove costly from an administrative point of view, and we were mindful as a start-up of keeping our operating costs down because, as you know, in Jamaica particularly in the financial sector your fixed costs are high. We were about the medium to long-term market and we found enough business there to sustain us,” said Ross.

Sterling Asset Management struck gold with US government agency structured notes which carried zero credit risk. This at a time where following the events of September 11, 2001, the world’s financial markets turned upside down. Here it had interest rate risks which could be quantified to a significant extent, with yields approaching Government of Jamaica bonds. That instrument proved to be a tremendous success in the marketplace.

THE THREAT OF THE UFOs

However in 2003, another mini-crisis cropped up on the local scene, again making local investors jittery and creating a great degree of uncertainty. Fortunately people saw those US government agency-structured notes as a great alternative and helped Sterling Asset Management to have some golden years between 2003 and 2005.

But as they say, all good things must come to an end, and 2006 proved particularly challenging for the young company with the Unlicensed Financial Organisations (UFOs) ruling the roost as Jamaicans flocked in droves to them in search of returns of 10 per cent per month. Olint, Cash Plus and Worldwise were among the leading rogue outfits that at one point threatened to usurp the more traditional financial institutions.

Ross reflects: “Looking back, I think many people will conclude that it is possible that something can be too good to be true. I would hope that we will not see that phenomenon raise its head again any time soon. As a regulated institution we were very concerned about the regulatory response because it was very frustrating for us as securities dealers to see people setting up shop all around town and engaging in activities without licensing or any sort of accountability. All the while we have to pay millions of dollars in regulatory fees yet we get no protection.

“Under the IMF agreement there is a requirement that specific measures should be taken to strengthen the regulatory environment and give the powers to stop these unregulated organisations from springing up. It certainly was a couple of trying years but again it didn’t really hold us back. We still maintained a very high rate of growth.”

THE GLOBAL FINANCIAL CRISIS

The last few months of 2008 saw the fall of Bear Stearns and Lehman Brothers and the beginning of a global financial crisis the likes of which had not been seen since the 1920s. Initially the government said the crisis would not affect Jamaica and many local financial houses denied exposure to Lehman Brothers. The fact remains that it did impact Jamaica, and many local financial institutions had to re-examine their operations.

“Again we were extremely fortunate. We were concentrated in the US government agency paper and that paper was callable. Most of our notes were issued by federal government banks as opposed to Freddie Mac or Fanny Mae. What happened was, and at the time we thought it was dreadful, the notes got called. Between late 2008 and 2009 our entire portfolio of agency arrangements were called. The real challenge for us at the time was, what are we going to do and how are we going to be able to replace those securities? But it turned out to be a blessing in disguise because at that time everything was discounted heavily so you had double A, single A institutions in the United States whose paper was written down to yields that you couldn’t even get on Government of Jamaica securities before the crisis.

“We were able to build and diversify a portfolio of securities at very discounted prices and as the crisis waned, the notes rose in value. There was another period of renewed issuance of the agencies so we got some good quality paper, and good yields. Between that and the capital gains we made we actually had our best two years ever in 2009 and 2010.”

GROWTH OVER A DECADE

Ten years ago Sterling Asset Management was established with a capital base of around J$19 million, just under four times the stipulated capital requirement of J$5 million. The lead principals have not had to inject any further capital and in fact have been able to pay dividends and grow their initial investments. Today its capital base stands at just under J$700 million. For the first year of operations the company did budget for a small loss, one that did come to fruition. However, every year since then it has reported a profit year over year. Sterling Asset Management offers asset-backed loans, financial planning, VR-leveraged notes, custodial accounts, a foreign exchange service, mutual funds and repurchase agreements.

So how do investors compare today with when Sterling Asset Management got started?

“Today many more people are looking at securities but there is still this repo focus. I must say that today people are asking many more questions about securities, whether it be their maturity, yields and they are much more informed. I think there is still room to broaden that knowledge base. The returns on the repos are now so low and people have seen the returns on securities, so there is a lot more interesting investing as opposed to saving in a bank account. One of the trends I have noticed, even on the Jamaican dollar side: investors are looking to buy directly into a security because there is no additional risk and they are getting much better returns. Jamaicans are planning their finances a lot better these days. and there are more choices as to how they make their investments.”