Sagicor Select Funds Limited is set to approach its shareholders in the coming weeks on the possibility of converting two of its publicly listed equity funds (LEF) into unit trusts, a move which would unlock greater value for all shareholders and the funds in question.

Sagicor Select Funds made the disclosure Friday to the Jamaica Stock Exchange (JSE).

Sagicor Select Funds was formed in January 2019 to allow investors to gain exposure to a fund that tracked the performance of specific sector indices on the JSE.

For example, its SelectF tracks the performance of the JSE Financial Index while its SelectMD tracks the performance of the JSE Manufacturing and Distribution Index.

Both LEFs earn dividend income from its portfolio of assets and rebalance their portfolio to closely match the sector index it tracks, which makes them passive funds. As a result, neither fund could deviate from the mandate of closely aligning its activity with the corresponding indices and could not purchase other asset classes in the corresponding sector.

Apart from 2019 when SelectF and SelectMD’s share price traded above the net asset value (NAV), both LEFs have been trading below their NAVs with SelectF trading at a 17-35 per cent discount to its NAV while SelectMD trades at a 40-45 per cent discount to its NAV.

SelectF closed at $0.44 on Thursday relative to its NAV of $0.568 while SelectMD closed at $0.66 relative to its NAV of $1.062. This represents a 22-38 per cent discount between the market price and the NAV.

NAV is the value of a fund’s assets minus the value of its liabilities, divided by the number of shares outstanding. It is the price at which the fund shares are traded and used to measure fund performance and value.

“The reorganisation of the two funds operated by the company to unit trusts with the result that the manager of a unit trust will stand ready to redeem units at their prevailing NAV means that the units should no longer trade at a deep discount compared to the NAV of the unit trust. I am hoping that all shareholders of a fund will support the reorganisation and come out and vote for this change and, those who cannot attend the meeting, will appoint proxies to vote on their behalf in favour of the resolution,” said Sagicor Select Funds Chairman Colin Steele in the disclosure.

The release stated that the Sagicor Select Funds board of directors approved the strategic reorganisation on May 8, two weeks before its May 22 annual general meeting (AGM) where a shareholder impasse developed. Several shareholders inquired about the mandate of the respective Select Funds, dividend income and the ability for the fund to generate more income.

This dissatisfaction came to a breaking point when shareholders voted against the re-election of directors en-bloc, a move which required each re-election to be taken individually as per section 178 (1) of the Jamaica Companies Act. Daniella Silvera and Faith Vincent were re-elected as directors even with some shareholders voting against their re-elections.

Both JSE sector indices started at 100 points when they were created in 2019. The JSE Financial Index closed at 68.79 points and the JSE Manufacturing and Distribution Index closed at 103.86 points on Thursday.

According to the Select Funds tracker on the JSE website, the top five stocks for SelectF made up 69.64 per cent of the fund’s weighting up to Wednesday, with NCB Financial Group making up 18.16 per cent of the fund with a $1.13-billion unrealised loss. The top five stocks for SelectMD made up 63.37 per cent of the fund’s weighting up to Wednesday, with Wisynco Group making up 16.61 per cent of the fund with a $75.88 million unrealised loss. The Select Funds have paid dividends since 2019 but have only paid annually since 2022.

A unit trust is a collective investment scheme whereby an investor can gain exposure to a particular asset class or classes without having to actively manage the assets or finding a high minimum investment amount for that asset class. The unit trust is managed by an investment manager that is compensated with a management fee and a bonus fee if the fund outperforms the benchmark for that specific fund. The units in the trust are priced at the NAV for investors who would want to buy or sell from that particular fund. Thus, if the Select Funds are converted into unit trusts, investors could instantly benefit from an immediate gain from the Select Funds being priced at the NAV than at the general market price.

“A shareholder who wishes to sell his shares in a fund therefore has to reduce his asking price to attract buyers. If the funds were unit trusts, investors would have the option to purchase or redeem units in the unit trusts at the NAV subject to possible fees and any other restrictions. The benefit to shareholders is that the units held in the new unit trusts would be priced with reference to the NAV, thereby reflecting the underlying ‘real value’ to investors,” the JSE disclosure stated.

Sagicor Investments Jamaica Limited(SIJL) currently earns up to 0.5 per cent of the average daily assets in each fund. SIJL manages 12 Jamaican dollar (JMD) and six United States dollar funds which had a collective value of $153.96 billion in December 2023. The management fees on these funds range from 0.75-2.00 per cent as per the most recent circular document. Most of the JMD unit trusts require $25,000 to subscribe to a fund and $3,000 for subsequent subscriptions.

Although the board has proposed this move to convert SelectF and SelectMD into unit trusts, there are still several steps that must be completed before the move. The Financial Services Commission (FSC) would have to approve the two new unit trusts before Sagicor Select Funds approaches the Supreme Court to convene a meeting with the shareholders of each fund to vote on the conversion plan.

If a majority of shareholders in either fund holding in aggregate of at least 75 per cent of the votes vote in favour of the resolution to convert the fund, it would be approved. Sagicor Select Funds would then return to the court to seek approval of the conversion and subsequently have the assets and liabilities of either fund automatically transferred into the unit trust which would be registered with the FSC. The shares held by shareholders in either fund would be cancelled, and they would receive equivalent units in the new corresponding unit trusts.

The new unit trusts would be non-diversified unit trusts which means they’d stick to their mandate of investing in the specific sector they correspond with but would be able to invest in other asset classes and seek a higher return by being more actively managed. The unit trusts would also be able to actively expand their investor base as they could take in new capital from investors. All of these developments hinge on the shareholder vote at the convened meeting to happen later in 2024.