UTC focuses on long-term value

The Unit Trust Corporation (UTC) recorded $269 million in net changes in fair value in the first quarter of 2019 – a huge leap from the $154 million hit they took for the same period last year.

But, executive director Nigel Edwards emphasises, unitholders shouldn’t be overzealous when they see these upswings, nor should they despair when the trend is down.

“We at the UTC are far more interested in the long term value created than the fact our stock moves up or down in a given day or a given month. So what you will see coming forward in our financials, you will see changes in net fair value of our securities and we want to make sure that unit holders are aware those changes will come and what they mean and understand that because we have an interest in long term investment performance that it’s okay for those values to change day-to-day or on a quarter-to-quarter basis because we are looking at more long term value,” Edwards told Business Day last week as he presented the company’s first quarter financials as well as sought to allay any concerns unit holders might have with the corporation’s performance.

The seemingly drastic distinctions in performance have to do with the corporation’s adoption of International Financial Reporting Standards 9 (IFRS 9). UTC, like most financial institutions around the world last year, had to adopt the new accounting measure, which requires assets to be reported at fair value and all changes to be reported in the net income or profit and loss statement, as opposed to the balance sheet, as the UTC had previously done. The reason for these changes was to correct deficiencies that led to the 2008 financial crisis.

This restating of income was the reason the corporation recorded a $30 million loss last year for the first time in its 37-year history. Edwards, however, wants to assure clients that nothing has fundamentally changed in the way the fund is being managed.

“The message is equally – don’t be alarmed if you see a loss in that column but also don’t be overly excited if you see a gain. We really are managing to ensure that our unit holders get consistent stable value over time. Even the way you interpret a loss is what we need people to understand.”

The corporation’s goal then, is to ensure unitholders are getting value.

The corporation also has $1.4 billion in reserves, in addition to the reserves factored into each of its funds to buffer all claims.

“We’ve taken a decision that we are not interested in growing those reserves any further. That already provides a robust framework to secure all our unitholders.

The UTC was incorporated in 1981 by an Act of Parliament, with a mandate to “foster a culture of saving and investment through education and innovative solutions that allow everyone access to the capital markets.” The aim was to make access to investment opportunities more open and available to the average citizen.

Its structure is unique, Edwards notes, in that, whereas other financial institutions have shareholders and are therefore driven by profit in order for shareholders to get value, the UTC has other obligations – namely ensuring their unitholders are the ones who see the benefits.

“I think unitholders were more interested in what we did for them as opposed to the corporation making a loss. We moved from $197 million in distributions in 2017 to $249m in 2018, and I think that was pretty satisfying to them. A $52m increase in distribution which is where they get their value so that is significant to them. We could have just as easily said we were going to distribute less money to our unitholders and the corporation would have made a profit but the unitholders would not have been $50m richer than they are today.”

It’s a similar situation for the first quarter of 2019. Distributions increased to $42.6 million compared to $41.4 million in the same period.

“In any given period if we wanted to we could increase the net income of the corporation by reducing the amount of the distribution. The question we have to ask is ultimately what is in the best interest of the unit holder.”