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Shareholders of Sterling Investments Limited (SIL) continue to be rewarded by the company’s prudent management of its portfolios. With strong indications of a robust economic recovery in developed markets gaining momentum, SIL exercised both patience and foresight through the first and second quarters of 2021, leading to a 40 per cent year-on-year increase in profits.

VP, Trading and Investments at the investment manager, Sterling Asset Management, Marian Ross said that: “Increased interest income, arising from lower margin costs as an outturn of US Federal Reserve rate cuts, boosted profits for the company in 2021, with ongoing salutary impacts on SIL’s balance sheet.”

Revenue increased by 23 per cent over the corresponding period in 2020 to a total of J$161.8 million. Similarly, net income was 40 per cent higher than the corresponding period in 2020. A total of $104.4M for the first six months of 2021. Several other key performance indicators all showed considerable gains, reflecting the benefit of both increased asset values and lower cost of margin funding. Net interest income grew, from $52.3 million in the second quarter of 2020 to $64.1 million in Q2 2021.

A 5.15 per cent decline in forex gains for the first half of 2021 over the same period in 2020 meant that second-quarter revenue was slightly lower than that of the second quarter of 20—J$81.4 million for 2Q21 as against $81.9million for 2Q20.

The company’s balance sheet remained sound for the period. Total assets increased from JM$1.7 billion as at June 2020 to JM$2.2 billion as at June 30, 2021. This reflects the growth in value of the existing portfolio as well as the additional fixed-income assets acquired over the period. Total equity similarly improved, from $1.2 billion to $1.6 billion year on year.

Arising from the company’s buoyant position, the directors, at a meeting held August 13, announced a dividend of US$0.0058 to be paid to shareholders on record as at August 27, 2021, with the intended payment date September 13, 2021.

Concerning the outlook for the remainder of the year and beyond, Ross said that the mark of diligent monitoring of market conditions and prudent, value-driven positions would continue to be the hallmark at SIL. “SIL is well-positioned to benefit from the global economic recovery. We will remain focused on minimising the duration and looking to take advantage of any increases in volatility or changes in environment – and the resultant opportunities.” 

COVID-19 impact and outlook

Throughout 2020, SIL was able to generate significant increases in its income, US$ dividends and capital gains. During the first quarter of 2021, SIL took advantage of brief spikes in volatility and intermittent market declines to acquire attractive assets and lock in good income and yields for the future.

However, during the second quarter of 2021, SIL remained patient and prudent in its portfolio positioning. The company slowed the pace of asset acquisition and took profits on some positions in the portfolio.

The result was:

• A 33.52 per cent year-on-year (YOY) increase in the value of investment securities held by the company. This was primarily the result of continued appreciation in the value of securities in the portfolio and new asset purchases.

• A 40 per cent YOY increase in profit resulting from: A 23 per cent YOY rise in interest income, reflecting the year on year growth in the size of the portfolio as well as the devaluation of the Jamaican dollar, as well as, a 43 per cent increase in realised gains on sale of debt instruments
• A low cost of funding. SIL is well-positioned to benefit from global economic recovery. The US economy is projected to grow at a rate of 6.4 per cent in 2021. Jamaica’s economic recovery is likely to lag the recovery in discretionary consumer spending in North America. SIL’s exposure to the developed countries suggests that it will be among the first companies on the local stock exchange to benefit from a global economic recovery.

The investment manager remains focused on minimizing duration and positioning the portfolio to take advantage of future volatility that may arise. Central Banks in developed economies have committed to accommodative monetary policy for the near term. This is likely to continue to drive asset prices higher as investors hunt for yield. In the event that inflation or interest rates rise, the portfolio is well-positioned to take advantage of the resultant opportunities.

As the battle against COVID-19 continues, the company continues to exercise caution and diligence in its activities. SIL performs enhanced due diligence on the credits within the portfolio and hunts for undervalued securities to enhance shareholder value.

Financial overview

Fixed Income US$ portfolio yield*	9.8 per cent in US$ terms
Total assets up 33.5 per cent	J$2.23 billion as at June 30, 2021
Total equity up 35.9 per cent	J$1.59 billion as at June 30, 2021
Total revenue up 23 per cent	To J$161.8 million for the 6 months ending June 30, 2021
Total profit up 40.2 per cent	To J$104.33 million for the 6 months ending June 30, 2021
Earnings rer share	J$0.25

Income statement

• First six months of 2021

Revenue totalled J$161.8 million for the first six months of 2021, or 23 per cent higher compared to a profit of J$131.3 million for the same period in 2020. This was driven primarily by increases in interest income and gains on sale of debt investment securities, the latter a result of increased profit-taking in the portfolio.

Total foreign exchange gains rose from J$64.3 million for the 6 month period ending June 30, 2020 toJ$77.7 million for the 6 month period ending June 30, 2021.

The Jamaican dollar depreciated by four per cent in the first half of 2021 moving from J$142.10 per US$1 as at December 31, 2020, to J$148.51 as at June 30, 2021. Net income totalled J$104.3 million for the first 6 months of 2021, 40 per cent higher than the J$74.4 million for the same period in 2020. Total expenses for this period increased from J$36.92 million to J$50.31 million as a result of higher management fees, owing to the increase in value of the asset base and higher professional fees.

•  Second quarter of 2021

Net interest income rose by 23 per cent year on year from J$52.3 million in the second quarter of 2020 to J$64.1 million in the second quarter of 2021. This reflects the benefits of a lower cost of margin which is the direct result of a reduction in US interest rates by the Federal Reserve. Revenue totalled J$81.4 million for the three months ending June 30, 2021, 0.76 per cent lower than the J$81.9 million generated in the second quarter of 2020.

This was the result of a 5.15 per cent decline in foreign exchange gains quarter on quarter. Foreign exchange gains declined from J$51.9 million in the 3 months ending June 30, 2020, to J$49.3 million for the same period in 2021. For the second quarter of 2021, the company recorded total profit of J$49.1 million vs. J$69.8 million for the same period in 2020.

This was primarily the result of unrealised fair value losses on investment securities through profit and loss which totalled (J$6.8 million) for the second quarter of 2021 compared to gains of J$21.1 million in the same period of 2020. The unrealised fair value losses observed in the second quarter of 2021 were primarily the result of temporary declines in the marked to market prices of structured note investments. These securities are generally held until maturity or call at 100.

Balance sheet

Total assets increased 34 per cent from J$1.7 billion as at June 30, 2020, to J$2.2 billion as at June 30, 2021, reflecting the growth in value of the existing portfolio and the acquisition of additional assets during the COVID-19 downturn.

Total margin loans increased 31 per cent from J$471.5 million as at June 30, 2020, to J$617 million as at June 30, 2021. The company increased its use of low-cost margin to finance the acquisition of attractive fixed-income assets over the period.

The growth in the value and profitability of the investment portfolio contributed to a 35.9% increase in total equity, from J$1.2 billion as at June 30, 2020 to J$1.6 billion as at June 30, 2021. The share capital also rose due to inflows from the CSPP and DRIP programmes that concluded on March 31, 2021.