Fixed income leads with 85.6%
Bonds rise 69.4%, as equity-based Funds lag
By Nkiruka Nnorom
ACTIVITY in Mutual Funds, otherwise known as Collective Investment Scheme, CIS, rose by almost 30 percent in the first quarter, Q1, to March 2019, following increased awareness on the part of the investing public of the importance of including this asset class in their portfolio.
The equities market had fallen by 1.2 percent during the three month period as the All Share Index, ASI, the major equities indicator, depreciated to 31,041.42 points from 31,430.50 points, accentuating the flight to safety by foreign portfolio investors in the wake of the general elections.
Specifically, activity in the 82 mutual funds registered by the Securities and Exchange Commission, SEC, rose to N686.5 billion in Q1 2019 as against N529.3 billion recorded in the preceding quarter in 2018, representing an increase of 29.7 percent. Only 74 mutual funds were registered as at Q1’18.
Though this could be adjudged an under-performance compared to Q1’18 when the mutual funds rose by 109.6 percent, investment experts explained that the drop in performance was as a result of the political tension in the run up to the February polls that resulted in uncertainty in the economy and huge withdrawals by FPIs, especially in the equities segment of the market.
Recall that within the quarter, foreign portfolio investors withdrew N124.24 billion as against N97.63 billion inflow.
Financial Vanguard’s analysis showed that investors were favourably disposed to Fixed Income Funds, Bond Funds and Money Market Funds, that have risk-free instruments as their underlying assets.
This is opposed to the Equity-based Funds and other Mutual Fund assets, (Real Estate Funds, Mixed Funds and Ethical Funds) that all headed southward during the three month period.
Breakdown of activity within the period showed that the Fixed Income Funds emerged the leader, rising by 85.6 percent, while the Bonds Funds and Money Market Funds achieved 69.4 percent and 33 percent increase respectively.
The Equity-based Funds, EbFs, on the other hand, led the laggards, depreciating by 21.4 percent to N11.94 billion from N15.20 billion in Q1’18.
Other laggards include Mixed Funds, Ethical Funds and Real Estate Funds, which fell by 12.1 percent, 9.5 percent and 2.2 percent respectively.
Investment analysts attributed the increased interest in mutual funds to more awareness of the existence of the asset class by domestic retail investors and readiness to explore other investment option. They, however, explained that the same fate that befell Equities-based Funds that resulted in reallocated to fixed income funds is exactly what is still played out in the underlying assets.
According to them, pre and post-election political tension, which increased uncertainty in risky instruments, forced foreign portfolio investors to shift their portfolio to more guaranteed instruments.
Fixed Income Funds
Fixed Income Funds, which typically includes debt instrument that provides returns in the form of regular or fixed interest payments and includes assets such as Treasury Bills, TBs, bonds, Mortgage-Backed Securities, savings bonds and other categories of bonds, recorded the highest patronage within the period, led by Stanbic IBTC Dollar Fund (271.4%), Lotus capital Fixed Income Fund (197.4%), Stanbic IBTC Guaranteed Investment Fund (74.1%), SFS Fixed Income Fund (66.7%) and Coral Income Fund (38%).
Only four of the 16 Fixed Income Funds – Coronation Fixed Income Fund, Stanbic IBTC Conservative Fund (Sub Fund), Vantage Guaranteed Income Fund and CEAT Fixed Income Fund, declined during the period.
Bond Funds
The Fund, which numbered eight, rose by 69.4 percent, led by United Capital Euro Bond Fund, FBN Nigeria Euro Bond USD Fund (Retail) and FBN Nigeria Euro Bond USD Fund (Institutional), which rose by 223.6 percent, 81 percent and 59.5 percent respectively. All Funds in this category recorded price appreciation.
Money Market Funds
The Fund, which has commercial papers (CPs), Repurchase Agreement (Repos) and Treasury Bills among others as its underlying assets, jumped by 33 percent within the period.
Chapel Hill Denham Money Market Fund, led others, rising by 785.1 percent. This was followed by United Capital Money Market Fund and PACAM Money Market Fund, which appreciated by 604.7 percent and 301.6 percent respectively. Zenith Money Market Fund and Axa Mansard Money Market Fund moved up by 142.1 percent and 69.7 percent respectively to close as the top five performers.
On the other hand, EDC Money Market Fund Class B, Cordros Money Market Fund and Greenwich Money Market emerged decliners in the group, falling by 32 percent, 8.9 percent and 7.6 percent respectively.
Equity-based Funds
Typically, all the registered Funds in this group declined with FBN Nigeria smart Beta equity Fund (-48.4%), Axa Mansard Equity Income Fund (-44%), Stanbic IBTC Nigerian Equity Fund (-24.3%) and Meristem Equity Market Fund (-17.5%), recording the worst performance.
NSE increases Mutual Funds visibility
Speaking recently at the launch of Mutual Funds trading platform at the Nigerian Stock Exchange, NSE, as part of its effort to provide a solution that will enhance visibility for listed funds, Oscar Onyema, CEO, NSE, noted that the asset class is fast gaining recognition in the market, but said that its contribution to the nation’s Gross Domestic Product, GDP, is still low at less than one percent.
“In recent years, there has been significant increase in the number of mutual funds in Nigeria, an indication of the growing interest in this investment vehicle.
“However, there is significant room for growth in mutual fund assets, as the ratio of these to the Nigerian GDP is estimated at less than one percent,” he said.
He expressed optimism that the launch of the new distribution platform would buoy the listing of more mutual funds on the Exchange.
“We are delighted to provide a solution that will enhance visibility for our listed Funds and promote financial inclusion, while stimulating retail investor participation in our market. This distribution platform is a new channel for accessing mutual funds which are listed on the NSE.
“This restates our commitment to provide market operators, issuers, fund managers and investors with a reliable, efficient and an adaptable platform to create a more transparent, liquid and accessible market in line with global best practices.
“Investors have the benefit of a single view of their mutual fund investment while being able to invest with multiple fund managers through a single broker,” he said.
Operators’ take
In his explanation, Kayode Tinuoye , Head, Portfoio Management, United Capital Plc, said: “Retail investors are beginning to recognize the numerous benefits that mutual funds offer. With as little as ten thousand Naira or even lower, investors can enjoy the benefit associated with the professional management of their funds. There is also free entry and exit for mutual funds. Returns are not taxable while capital investment is guaranteed for money market funds.”
He explained that the performance of equity mutual funds mirrors the trend in the overall equity market, saying that the market has been very bearish starting from the previous year (2018). “Last year was not a good year for equities and this reflected in the performances of all equity funds in the market. Also, subscription growth was sluggish across the industry as most retail investors remained risk averse. Typically, nothing has changed this year, but we believe that remaining part of 2019 will be better now that political risks have subsided drastically.”
Investment window
Tinuoye encouraged more investors to take advantage of the investment window, saying that CIS allows retail investors to pool funds together and get better deals than they would have gotten if they invested individually.
“There is free entry and exit as most funds are open-ended, hence there is sufficient liquidity,” he said and encouraged the regulators and fund managers to engage more in public awareness to encourage retail investors to consider investing in mutual fund assets.
David Adonri, Managing Director/CEO, Highcap Securities, explained that the equities and fixed income market are in perpetual competition, saying that when one goes up, the other one trends downward.
He explained that a distressed economy moves asset allocation in favour of the fixed income market, while there would be a flow to the equities market at moments of economic progression.
He said: “All these are because of the state of the economy. When the economy is depressed, the fixed income market becomes more attractive; financial assets flow into fixed income when the economy was depressed. However, when the economy starts recovering and interest rate is declining, assets will naturally migrate from fixed income to equity.”
