Puerto Rico mutual funds niche market will enter a new era this week with the public offering of the first open-end fund under Act 93 of 2013, a statute that ended the requirement to invest most of a fund total assets in Puerto Rico securities.
The offering of the Atlas US Tactical Income Fund (ATLASAX: US) is scheduled for later this week, and intends to position itself within the local market by excluding Puerto Rico municipal securities from its portfolio, said Paul Hopgood and Jaime Pandal, co-founders of the recently created Atlas Asset Management.
The offering is marketed by Oriental Financial Services, Oriental Bank's investment banking division.
"This product wouldn't have been possible five years ago," said Pandal. He noted that the decline in the island's closed-end mutual funds has served to give rise to local investors who ask more questions and are interested in diversifying their assets.
Liquidity and Diversification
"We wanted to design a product that would benefit from local tax opportunities without investing in Puerto Rico government securities," Hopgood told El Nuevo Día’s Puerto Rico Business Insight in a recent interview, while highlighting the qualities of the new fund.
Hopgood explained that, after analyzing local investors' expectations, there was a growing need to invest in assets outside the island, especially in liquid investment vehicles, and to combine fixed-income securities with capital appreciation. "We believe that this fund breaks all paradigms."
According to Pandal, the creative exercise had as a starting point a formula that excluded Puerto Rico municipal securities. Beyond moving away from Puerto Rico government securities due to the correction on those and the risk of potential losses during the island’s public debt restructuring process, Hopgood maintained that their main reason for not investing in those securities is a matter of liquidity.
"In a portfolio there should always be proper diversification. It all depends on the investor and his or her risk tolerance, and what we see is that this product can complement other existing funds in a portfolio with proper diversification," said Hopgood.
"As a matter of fact, there was no enough diversification in Puerto Rico, because closed-end funds are basically homogeneous products, and now, we find ourselves at this historic juncture. The good thing is that investors now understand that they need to make diversified investments outside the island," Pandal insisted. Under Act 93, investment companies will employ their capital following an 80%-20% distribution. Eighty percent of a fund’s total assets are required to be invested outside the island, and the difference should be invested in Puerto Rico assets, for instance, as either a debt issued by the government or shares of public companies.
Althoughthe new geographic asset composition established by Law 93 no longer favors the island's securities, investors who have the fund will receive preferential rates in dividends and capital gains. Furthermore, since it is an investment based in Puerto Rico, it is tax free in the case of inheritance.
Aiming for ETFs
In general, ATLASAX will invest 20% of its fixed-income assets specifically in Puerto Rico mortgage backed securities (Fannie Mae and Freddie Mac), as well as locally well-known GNMAs. The remaining 80% of the funds asset will seek worldwide exposure by means of exchange-traded funds (ETFs) and corporate debt from large cap companies.
Hopgood and Pandal expect the fund will yield between 4% and 6%. It will be an open-end fund with a daily closing, which means that investors will be able to sell or buy shares whenever they are interested.
Above all, the respondents assured that the fund complies with the transparency and independence requirements established by Act 93, a set of requirements that did not exist under previous statutes.
ATLASAX has an independent board of directors composed of Puerto Rico-based Universal Insurance's former chief financial officer, Jaime Padilla, academic and economist Mario Iturrino, and the former head of investment banking in Santander Securities, Eduardo Inclán. BDO serves as auditor, and Gemini as fund manager, while Union Bank will be the custodian bank.
"This product has almost all the criteria of a fund registered in the Securities and Exchange Commission (SEC), since our long-term goal is to be able to export this type of product."
According to Hopgood, Oriental will be in charge of distributing the fund. The share price has been set at $10, and investors may join with $2,500. The goal is to raise about $20 million and to double this figure within approximately two years.