Mrs Tonyi Sanni, CEO, Emerging Africa Capital Group, who is also the president, Corporate and Individual Investment Advisers, spoke to Financial Vanguard on activities of the Collective Investment Scheme, CIS, and how to make it more viable and attractive to investors. Excerpts:
By Nkiruka Nnorom
AVAILABLE data has shown that investors have continued to demonstrate low interest in collective investment scheme, CIS. What do you think is the reason for the low appetite to CIS by investors and consequent poor performance of this asset class?
Let’s start from the health of the underlying economy and the market. Collective Investment Scheme, CIS, does not exist in a vacuum; it exists within the context of the market and our market has taken a significant bashing year-to-date and in recent times, so it becomes very tough to market for investors.
Value of mutual funds
All the segments of the market are taking that heat and are feeling the impact of it. Investors need to understand that assets are cyclical in nature. The fact that prices are depressed now actually gives the opportunity for bargain hunting and ultimately the value of mutual funds will go up as the shares of the underlying companies begin to perform well.
All the same, investors are naturally wary.
Another factor that we need to consider as a market is the need to encourage the presence of financial planners. The financial planners are the ones that will relate with investors on one-on-one basis and explain to them the need to invest in mutual funds.
As at today, we do not have enough financial planners, but the Corporate and Individual Investment Association, which was recently recognised by the Securities and Exchange Commission, SEC, is actually in the process of encouraging and mid-wifing the emergence of professional financial planners and SEC registered investment advisers, the idea being that investors will have advisers who will midwife them into the market and guide them as to what they should be investing in, help them to recognise the risk profile of individual investors and their risk tolerance level and all that will help to create a stable domestic investors base.
Compared to Fixed Income Funds and Money Market Funds, the net asset value of the Equity Based Fund has been on continuous decline this year, recording about 12 percent decline between January and October. Again, why do think the other mutual fund are outperforming the equity based funds?
The first thing is that when the equities themselves, the underlying equities invested in equity fund are under-performing, the value of the funds, of course, will shrink. The second thing is that when, generally, the market is under-performing and there is volatility in the market, then there is a flight to safety. When investors are flying to safety, they will fly to assets that are regarded as less risky and, of course, fixed income investment and money market investment are at a very low end.
These are investments that essentially guarantee the principal fund invested as well as some element of income. So, at times like this, there is flight to safety and assets that are perceived as less risky will get more patronage and the assets will swell in size.
Some retail investors are pointing to lack of law to protect their investments as well as low returns as part of the reason for lack of interest in CIS. What is your take on this?
First of all, I think that we have a robust body of laws in Nigeria and laws constantly require reform to enable them catch up with development within the market because markets are dynamic and constantly evolving.
The other side of it is that when you said that retail investors prefer to invest directly in stocks rather than going through mutual funds, they need to understand that, ideally, a retail investor should invest with the benefit and help of experts and professionals and these collective investment schemes are managed by SEC registered fund managers.
They also have the protection of SEC registered trustees and SEC registered custodians. It would be my recommended avenue for a retail investor to enter the market. Yes, it will cost a little extra because the retail investor will pay the fees that cover the work of groups of the professionals, but it is safer mode to enter the market.
What do you think should be done to increase the attractiveness of mutual funds in general and the Equity Based Funds in particular as well as make domestic retail investors more receptive of them?
I am always in favour of incentives, including tax incentives from the regulators in terms of reduced fee regime that would encourage retail investors to participate in collective investment scheme. I also believe that the entire market has to come together in a unified manner and continue to educate the investing public.
Like I mentioned earlier, we need to encourage the financial planning industry to grow because they have a big role to play in informing and guiding investors, essentially ensuring that investors are properly guided as to the appropriate investment to make bearing in mind their individual risk appetite, their investment horizon and the stage of life where they are.