Mutual Funds: Equity-based funds buckle under political pressure – Vanguard

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Money market funds, fixed income blossom

By Nkiruka Nnorom

AS the equities market continues to buckle under the pressure emanating from Nigeria’s tensed political environment ahead of 2019 general election, investors are extending their phobia for risky assets to the equity-based funds, EBFs, leading to a worsening performance in the asset class.

Consequently, the Net Asset Value, NAV, of EBFs has declined by 12 percent as at beginning of this month.

Financial Vanguard’s analysis of activity in the 72 mutual funds registered with the Securities and Exchange Commission, SEC, for the eight month period from January, 2018 to September 7, 2018, showed that just like the equities market where investors have been off-loading their investments, leading to over 15 percent decline in the All Share Index, ASI, the EBFs, are not spared in the sell-off trend shedding N1.7 billion.

The EBFs are also seen lagging behind other mutual funds like the Money Market Funds, MMFs, and Fixed Income Funds, FIFs. Recall that following the ensuing political event in the country and the uncertainty surrounding the 2019 general election, foreign portfolio investors, FPIs, who constitute a large percentage of investors in the stock market had taken flight to safety, resulting in 78.26 percent decline in commitment by FPIs to stocks as at the end of first half, 2018.

The losses in EBFs, has however, led to gains in the other classes of investments where the MMFs and FIFs have recorded massive growth. MMF has government securities such as the Nigerian Treasury Bills, NTBs, Commercial Papers and Repurchase Agreements, among others as its underlying assets.

Financial Vanguard’s investigations show that MMFs recorded 61 percent increase to N502.3 billion from N312.173 billion in January and accounted for 70.82 percent of the total investments in mutual funds which stood at N658.855 billion in September, while the EBFs contributed paltry 3.25 percent of the total investment in mutual funds.

The FIFs – investment class which covers instruments such as sovereign bonds, sub-national bonds and other debt instruments –  moved up by huge 103.9 percent to N54.469 billion from N26.718 billion, though it represents just 8.3 percent of the total NAV of all mutual funds in the market.

Investment experts that spoke to Financial Vanguard said the fall in mutual funds, especially the EBFs, mirrors the trend in the overall equity market. They also attributed the poor performance to lack of adequate awareness on the part of the investing public, saying that there is the need to better educate investors on the benefits of investing in mutual funds.

However, minority shareholders said that mutual funds would never be attractive to an informed retail investor as not all the benefits accruing from investing in mutual fund like capital appreciation, bonuses and dividends would get to the investor at the end of the day.

Equity-Based Funds

All the ten EBFs registered with SEC and analysed by Financial Vanguard recorded downward move during the eight month period with FBN Nigeria Smart Beta Equity Fund, managed by FBN Capital Asset Management, a subsidiary of First Bank of Nigeria, Stanbic IBTC Aggressive Fund (Sub-Fund), managed by Stanbic IBTC Asset Management and United Capital Equity Fund, managed by United Capital Asset Management, led the negative trend with a decline of 44.5 percent, 36.4 percent and 23.5 percent respectively in their NAV.

Axa Mansard Equity Fund, managed by Axa Mansard Investments placed fourth, dropping by 22 percent, while Stanbic IBTC Nigeria Equity Fund, also managed by Stanbic IBTC Asset Management and ARM Aggressive Growth Fund managed by Asset & Resource Mgt Company followed with 15.4 percent and 12.1 percent decline respectively.

Others are Frontier Fund managed by SCM Capital, Legacy Equity Fund managed by First City Asset Management and Paramount Equity Fund, managed by Chapel Hill Denham Mgt, which slipped by 4.9 percent, 3.7 percent and 2.3 percent respectively.

United Capital Plc told Financial Vanguard in an emailed response that the decline in its equity fund was in line with market trend, adding that it is same for about every other Fund in the market. “However, we were rated as one of the best performing equity funds in the first quarter of this year. Our equity fund is currently outperforming the market with a return of -8 percent compared to -15 percent for the All Share Index,” the investment banking firm said.

Money Market Funds

With the exception of EDC Money Market Fund Class B managed by EDC Fund Management, all the MMFs witnessed appreciable increases in their NAV. Chapel Hill Denham Money Market Fund, Greenwich Plus Money Market Fund, EDC Money Market Fund Class A, Abacus Money Market Fund and Axa Mansard Money Market Fund emerged the top five best performing funds in MMFs category, rising by 293.7 percent, 217 percent, 205.2 percent, 139.2 percent and 131.4 percent respectively.

Fixed Income Funds

Of the 16 fixed income funds registered in the market, the NAV of only three of them depreciated in value. Stanbic IBTC Absolute Fund (Sub-Fund), Stanbic IBTC Guaranteed Investment Fund, Legacy Debt Fund, Stanbic IBTC Dollar Fund and Coral Income Fund topped the rest, appreciating by 233.4 percent, 132.6 percent, 113.4 percent, 111.8 percent and 60.4 percent respectively.

On the flip side, Acap Income Fund managed by Alternative Capital Partners led the decliners with 8.2 percent, followed by Coronation Fixed Income Fund by 3.4 percent and Stanbic IBTC Conservative Fund (Sub Fund), which went down by 1.6 percent.

Investors are better informed to need mutual fund manager –Shareholders

Gbadebo Olatukunbo, former National Publicity Secretary, Nigerian Shareholders Solidarity Association of Nigeria, NSSA, speaking on retail investors’ aversion for mutual funds, said: “There is no way for you to know whenever your units were speculated on and how the gain made was shared. As an investor, you are never in a position to monitor your holdings. Therefore, you might be short-changed on bonuses because you relied on whatever your fund manager told you.

“After paying the necessary tax on your dividend, you still have to pay for the services of your fund manager from your dividend income. Therefore, it could never be attractive to informed investors with enough cash to trade.”

According to Eric Akinduro, chairman, Ibadan Zone Shareholders Association, investors have become more experienced than ever before and the regulators in recent times have created a very conducive and friendly environment that investors might not need the service of fund managers to understand the market compared to cost involved in engaging them.

Operators’ position

Mrs Toyin Sanni, Chief Executive Officer (CEO) Emerging Africa Capital Group, who is also the president, Corporate and Individual Investment Advisers attributed the poor performance to the present state of the market and absence of financial planners, who are meant to guide investors in their investment process.

She stated that the presence of financial advisers would help in creating a stable domestic investors base in mutual funds.

She said: “Collective Investment Scheme, CIS, does not exist in a vacuum; it exists within the 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. All the segments of the market are taking that heat and are feeling the impact of it.

“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 who 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.”

According to Kayode Tinuoye, Fund Manager, Institutions & Private Clients, United Capital Plc, lack of adequate awareness on the part of the investing public is the major factor. “There is a collective investment scheme or mutual fund for almost every major asset class in the market today, including real estate but the level of awareness is low.

“CIS offer investors opportunity to invest in diversified portfolios managed by experienced fund managers. They do not have to worry about selecting the best securities for their portfolios as the fund managers take care of that. Returns are also tax-free, among other benefits,” he said.

On the performance of the EBFs, he said: “The performance of equity mutual funds mirrors the trend in the overall equity market.  The market has been very bearish this year. The All Share Index is down 15 percent year-to-date. This decline has been majorly driven by political uncertainty due to the upcoming elections. As a result, we have seen massive outflows by foreign investors who traditionally account for the bulk of transactions on the Exchange. The last foreign portfolio investment report released by the stock exchange showed that foreign portfolio inflows accounted for just 25 percent of total volume of transactions compared to over 50 percent two years ago. The increased interest rates in advanced economies has also led to capital outflows, which has depressed our market.

Way forward

Mrs Sanni of the Emerging Africa Capital Group advocated for tax incentives as well as reduced fee regime from the regulators in order to encourage retail investors to participate in mutual funds.

She called for regulators in the capital market to unify in educating investors on the benefits of mutual funds. “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 investing horizon and the stage of life where they are,” she added.