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Popular Securities launches new fund

New, one-of-a-kind fund offers local investors the diversity of investing in U.S. equities plus added tax advantages


March 31, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Innovation seems to be the name of the game at Popular Securities. Having been the first to offer funds that invested 80% in U.S. equities while complying with local investment requirements of investing 20% in Puerto Rico assets, now the group is launching Popular Core Equity Fund. This innovative fund is one-of-a-kind on the island according to Kenneth McGrath, president & CEO of Popular Securities.

"One of the primary things we are looking for is to offer the local investor alternatives similar to investing in the U.S. equities market with all the tax advantages of investing in Puerto Rico," explained Javier Rubio, manager & chief investment officer of Popular Asset Management. The fund offers investors access to large market capitalization stocks, that for the purpose of the fund are defined as companies worth $3 billion or more. Investors will have equal access to value and growth stocks. Value stocks are generally those of large and stable companies such as Disney and Coca-Cola. Growth stocks are those of companies delivering rapid growth results. Technology stocks such as Apple, are good examples of growth stocks.

The composition of the Popular Core Equity Fund will be 40% large cap value, 40% large cap growth, and 20% will be invested in Puerto Rico assets that are tied to the S&P 500 Index futures contracts. Retaining the 20% local investment standard is in line with the requirements of the Office of the Commissioner of Financial Institutions, so that investors in the fund can qualify for Puerto Rico tax benefits.

Among those benefits are exemption from paying the local and federal inheritance tax, for bona fide residents of Puerto Rico, 10% tax rate over long-term capital gains, and preferential tax rates for dividends. The new fund will be sold only in Puerto Rico since investors must reside on the island.

The fund will be partially managed by Salomon Brothers Asset Management, which will manage the 40% large cap value portfolio of the fund. "Salomon Smith Barney said they would be interested in managing a sub portfolio, the value portfolio of the fund. However, Popular Securities will still be the overall manager of the fund. It’s kind of a unique relationship we have with them," explained McGrath, adding that the expertise at Popular Securities is investing in growth portfolios which is why they sought the collaboration with the other management team.

"The combination is powerful because you have two managers outperforming the index. The idea is to outperform the S&P, and together over the same period we have outperformed by about 150 basis points over the S&P 500," added Rubio. They further explained that since value and growth grow opposite each other, having experts that specialize in each subportfolio will help the fund gain more on both fronts.

Traditionally, most mutual funds in Puerto Rico are bond based, however both McGrath and Rubio were emphatic about the proven long-term benefit of investing in stocks, saying that historically over any 20-year period, not once have bonds managed to outperform stocks. McGrath also pointed out that the increasing interest rates of today’s market aren’t favorable for bonds. In terms of questions addressing the security of investing in the present economic environment, Rubio presented studies prepared by Ibbotson Associates showing timing has very little to do with the long-term returns on any stock investment, accounting for as little as 1.8% of investment returns over a 10-to-15-year period. The study also showed the primary factor in portfolio performance turns out to be asset allocation, which accounts for as much as 91.5% of returns. The other factors that minimally affect returns are security selection and interest rates. However, McGrath also pointed out that the fund is not a money market fund and that it should be considered as a core investment for long-term returns.

The launch of the new fund is the beginning of many new things to come at Popular Securities according to Rubio, who commented, "What we want to do is offer a family of bonds. This is the first one we are coming out with but we plan to offer a broad spectrum of alternatives, so everyone can invest here and enjoy all the benefits."

Other funds currently offered at Popular Securities are the Popular Total Return, which was the first to use the 80 to 20 ratio of U.S. equities and Puerto Rico assets, and the Popular High Grade Fixed Income fund, which is an open-end bond fund with an AAA rating.

Popular Core Equity Fund

The new fund will offer 100% exposure to the US equities market while investing at least 20% of the fund’s assets in Puerto Rico assets linked to the S&P 500 index through futures contracts.

Large Cap Growth: 40%

Large Cap Value 40%

S&P 500 20%

This Caribbean Business article appears courtesy of Casiano Communications.
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