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October 23, 2014

Benedicte Gravrand ( thought of you and forwarded this article to you:

The Big Picture: Opportunities in the Caribbean and 'Newer’ Latin America

Dr. David Pollard
Dr. David Pollard
Benedicte Gravrand, Opalesque Geneva for New Managers:

In this interview, Dr. David Pollard, Managing Director of Pollard et Filles Capital Management, explains why he invests in the Caribbean and parts of Latin America. His new fund, Pollards Et Filles Capital Management SICAV plc, employs a systematic strategy. Dr. Pollard has actively managed portfolios of frontier, emerging market assets since 2006 with a strong track record of investment returns. He worked at top tier banks (Director at Salomon Brothers and Citigroup) and hedge funds (led HFT alpha trading at AHL at the Man Group) before starting Pollards Et Filles in 2011, in London.

Opalesque (Op): What is your rationale for investing in the Caribbean and 'Newer’ Latin America?

David Pollard (DP): The Caribbean represents an area in the frontier space that we thought is unrepresented in terms of opportunities for the global investor. The Caribbean itself is not the whole geography we cover; we are also interested in what we call 'Newer’ Latin America which is to say early frontier markets in the Spanish speaking Caribbean, Central & South America.

But in the English speaking Caribbean, in particular, there has been something of a common history in the period since independence in the 1960s, where many of them, with the noticeable exception of Barbados, went through a period of left wing thought and left wing governance, during which economics was a relatively low priority in the scheme of things.

In the last two or three decades, however, many of these territories have been coming around to understand the importance of economic development as a key national objective. For some territories there is the potential for growth. That generally means that they have either an educated and skilled workforce, and / or, in some cases, natural resources and a viable, agricultural land mass allied with a small population to allow headroom for sustained economic growth. In some such countries that growth has started to happen and is happening.

In addition many of these territories individually or within CARICOM, the Caribbean regional economic community, have established an environment of liberal trade and business promotion policies. For example, one of the reasons that our Fund has its operational office (SPV) in Guyana, which is a part of CARICOM, is that there is no capital gains tax on stock market investments within CARICOM. Nor are there any withholding taxes on dividends.

There are other things that the more successful economies are doing to promote growth and improve their mix of economic activity. Of course they are trying to develop their natural resources. Trinidad & Tobago has been an oil province for a very long time, since the 60s, and from that they have developed a LNG (Liquefied natural gas) sector and have pushed into agro chemicals. Light manufacturing is growing as is the business sector and they have even established a sovereign wealth fund. Meanwhile they continue to find new oil and gas fields.

Guyana is a country on the northern coast of South America, with the size of the British Isles but a population of less than a million with 95% literacy. Its economy is based on agriculture (still mostly primary) and natural resources including gold, bauxite (currently being mined by Russian and Chinese companies) and timber. Three new industrial scale gold mines (Canadian and Australian companies) are due to open in 2015 / 2016. Its vast hydroelectric potential has not even been tapped yet. (By way of comparison the neighbouring, geographically similar, Suriname generates 60% of its electricity from one large hydroelectric dam.)

So there is a lot of economic potential there in the Region that has only started to be tapped in the last 20 years and is still in the early stages of development.


Op: It’s a real frontier universe. Are there many fund managers who are looking into that region?

DP: There really aren’t that many Funds active there. In the region, there are established, public Equity and Bond markets but much of the institutional activity on them comes from local insurance companies and some pension funds. There are a number of mutual funds that are active especially in Trinidad, Barbados and places like that.

There is also the Spanish speaking Caribbean, of course. Somewhere like the Dominican Republic with its Bond market, is probably one of the best examples of a territory where the whole political body just suddenly got the whole thing about economic development 20 years ago. Even though there have been changes of parties in power, they have all been trying to develop the economy, building up their business sector, light manufacturing and tourism. The DR too also has gold resources.

Then there are places like Panama, where they are expanding the Panama Canal and really cementing their place as a significant regional economy.

Op: The banks are moving to Panama, aren’t they?

DP: Yes, exactly! Panama is definitely the financial services powerhouse in Central America now and well on its way to becoming the professional services powerhouse as well. They have a dollarized economy (the business currency in Panama is the US Dollar) so that they basically have to run a budget surplus and maintain USD reserves. In a sense the US Federal Reserve is their Central Bank but because they are not an American state, they have to either run a surplus or keep reserves in order to keep using the dollar. That imposes a very strict financial discipline. Last year, Panamanian real economic growth was about 8.4% and a couple of years ago it was the highest in the whole of Latin and South America. That’s one of the countries we are looking to go to. Inflation there is well controlled at about 4%.

Guyana (with 5 % - 6% real growth) has been the fastest growing economy in the English speaking Caribbean for the last six years, on the back of starting to develop its agriculture and natural resources. Inflation is actually below 1%, if you can believe that, and still well controlled as opposed to signaling the onset of a deflationary phase.

Op: What are the other economic drivers in the region?

DP: Nature resources and agriculture are important. Energy too, in the sense that there are some countries that are energy rich. Venezuela, even through it is not a country that fits into our criteria at all, is an example. Trinidad is another energy rich country as I mentioned before. We are invested there at the moment, albeit still in small size.

But apart from the natural resource story, there is the "desire to build the economy" story. So that means manufacturing and trying to improve business efficiency, even though they are starting from a low base in some cases. Of course there are sectors like tourism, which has been what some islands have depended on all along.

The story includes currency convertibility, which is clearly important to people like us who are looking to invest in the local markets. And generally also there is an element of political stability, not in the sense that governments don’t change but that the ideology of what they are trying to do has remained stable. The more successful countries are all trying to grow and develop and that’s what provides a long-term underpinning for the investment thesis.

Op: David, how do you acquire the data for your analysis?

DP: We have spoken about the potential of these countries but the thing that our fund brings that is different from the people who are currently investing there is the application of a systematic and quantitative approach.

That systematic approach permeates everything from deciding on which territories we go into, we use macro-economic screening; to the choice of the assets that we would buy in particular markets, where we use time series analysis; and on to the construction of our portfolios, where we use modern portfolio theory and optimal portfolio construction. These are the kinds of quantitative techniques you would find being used by some firms trading the NIKKEI, the NASDAQ and other top tier markets.

For those methods to be applied, you need data. One of the key components in the technology infrastructure we have built is a database where we can get proper data from the local source, the exchange usually, about the performance of the stocks that we have been looking at so far.

The fund itself is a total return fund, so we will in due course look to have a mix of equities and bonds, but we are just starting to look at bonds now and to acquire bond data. Basically we have had to put the data together ourselves. It’s an ongoing process.

For the Newer Latin America theme, by which we mean countries perhaps like Colombia, possibly places like Peru etc., in those markets it is easier to get data feeds and the business of acquiring data will be simpler.

For some of the smaller markets that we are in, we have to acquire data off of exchange websites, published reports and sources like that. So yes, we are expecting the data acquisition job to get easier as we go to more liquid countries, which will happen as FUM get to higher levels.

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