The Financial Services Commission (FSC) has proposed new guidelines for collective investment schemes (CIS) which cover unit trusts and mutual fund offerings in a bid to enhance regulatory oversight and better govern the $345-billion CIS industry.

These newly proposed guidelines are set to take effect on December 1, subject to transitional arrangements for some investment managers, with comments being heard up to August 22 by the FSC’s senior director for securities. The last major update for the CIS industry occurred in 2014 when the Securities (Amendment) Act, 2013, became the superseding regulations for all unit trusts and mutual funds.

“In our continued effort to improve our regulatory oversight, the Financial Services Commission is seeking to introduce new guidelines for Collective Investment Schemes (CIS). These Guidelines should be adhered to in conjunction with the Securities (Collective Investment Schemes) Regulations, 2013, the Securities Act and any relevant guidelines,” said the FSC consultation document.

CIS are investment vehicles whereby members of the public can purchase shares or units in the fund which will then purchase assets based on the mandate of that fund. These CIS’ are managed by a fund manager whose team of professional members manages the investments of the fund’s mandate. An independent trustee protects the interests of the unitholder by ensuring that the investment goals and objectives of the fund are carried out as prescribed by the fund manager. A custodian or registrar may also be involved in the process.

CIS effectively enable an investor to get exposure to an asset class they might not have ready access to based on minimum capital requirements. It also effectively results in the fund manager taking on the work of monitoring the investment since their management fee is tied to the value of the fund improving. Thus, an investor can get exposure to real estate at a fraction of the cost without needing millions to get exposure while not having to spend an extended amount of time on monitoring.

Under the newly proposed guidelines, the FSC will implement a new maximum 20 per cent unitholder limit that applies to any individual investor or investment manager in any fund or portfolio. This is meant to address the possible liquidity risk and viability of the fund which could be jeopardised if a large investor decided to leave the fund. The only exemption to this new rule will be for the seeding of a new fund which would be allowed for two years which could be extended if approved by the FSC.

A conflict-of-interest policy will also need to be established and ratified by the board which would outline how the investment manager proposes to manage any potential and existing conflicts of interest that arises with their relationship and alignment with investors. While an investment by a fund manager might signal confidence to fund participants, these investments present a conflict of interest for the beneficial management of the fund between the investment manager and investors.

The valuation of assets also need to conducted in a transparent manner to prevent conflicts of interest by observing at least six principles outlined in the consultation document. The use of an independent pricing service along with valuation policies and procedures are some of the ways to address potential conflicts of interest. This matters since the valuation of an asset being overvalued would be in the interest of the fund manager and not that of the investor.

Investment managers will also need to implement a detailed policy addressing the fund’s risk and liquidity management which should be ratified by the board of directors. The policy should include stress testing for different scenarios, risk limits, a risk and liquidity management process and the roles of senior management and the board in the risk management process.

According to the FSC’s March 2023 report on CIS, there were 12 local CIS managers with only 10 being operational. Nine of these managers handled unit trusts while only one was a mutual fund manager. These managers operated 19 funds with a combined total of 79 portfolios.

Fixed income securities made up the bulk of the CIS assets with $201.40 billion or 58.39 per cent of the $344.90 billion. Equities totalled $93.9 billion, real estate $31.20 billion, cash at $7.20 billion and other assets at $11.30 billion. The CIS sector has seen its total assets decrease six per cent relative to the $365.80 billion seen in March 2022.

Sagicor Investments Jamaica Limited is the largest unit trust manager in Jamaica with $159.93 billion at the end of 2022 or 46.09 per cent of the $347 billion in assets. There are 18 Sigma funds with six in United States dollars (USD) spread across asset classes such as equities, bonds, real estate and other assets. It recently changed the minimum requirements for the initial subscription to a fund from $500 Jamaican dollars/US$50 to $25,000 JMD/US$250 last November. Subsequent investments would be subject to a minimum of $3,000 JMD/US$50.

NCB Capital Markets Limited (NCBCM) managed $34.84 billion at the end of September 2022 while other unit trust managers include JMMB Fund Managers Limited, Barita Unit Trust Management Company Limited, Scotia Investments Jamaica Limited, VM Wealth Management Limited and Proven Wealth Limited. JN Mutual Funds is the only Jamaican dollar mutual fund in the market.

Most equity unit trusts are down year-to-date (YTD) with the Barita Capital Growth Fund down 21.58 per cent up to last Friday with VM Wealth’s Classic Equity Growth Portfolio, Sagicor’s Sigma Equity, Cumax Equity Fund down as well. Only the MoneyMasters Limited Equity Fund was up 5.99 per cent.

The Barita real estate portfolio was up 59.89 per cent YTD with NCBCM’s JMD Real Estate Fund, JMMB Optimum Capital, Proven Wealth’s Real Estate and MoneyMasters Real Estate funds being up. Sagicor’s Sigma Real Estate fund was down 4.75 per cent. JMMB’s JMD Income Fund was up 5.96 per cent with Scotia’s Premium Money market Fund, Barita’s Money Market, Sagicor’s Money Market and the other money market funds being up YTD.