Bond funds jump N10bn as investors hedge naira volatility, inflation

In search of high yielding investment instruments with the potential to hedge against inflation and exchange rate volatility, investors increased their bet in bond funds by over N10 billion in the first nine months of 2021.

Investors’ interest in bond funds pushed the net asset value (NAV) of the dollar-denominated instrument from N222.59 billion at the beginning of the year to N233.24 billion in September.

This placed the bond funds ahead of its peers as it reported the highest asset growth among the seven mutual fund instruments listed on the Securities and Exchange Commission (SEC).

Bonds, fixed income, equity, money market, real estate, mixed and ethical funds are all types of Mutual funds.

A mutual fund is a professionally managed investment scheme, usually run by an asset management firm that pools funds from a group of people and invests their money in securities such as bonds, short-term debt and stocks.

Also referred to as a debt fund, a bond fund is a pooled investment vehicle that invests primarily in bonds (government, municipal, corporate, convertible) and other debt instruments that are mainly dollar-denominated.

“In a bid to meet up with the increasing interest of investors to hedge their savings and investment against any devaluation of the naira, several investment outfits (registered with SEC) have set up dollar-denominated mutual funds,” Ayo Ebo, senior economist/head, research & strategy, Greenwich Merchant Bank said.

While ten funds under the bond mutual fund were listed on the Securities and Exchange Commission’s website at the beginning of the year, the number increased to 12 at the end of September.

Although the analysis of the SEC data revealed that the NAV of bond funds shed N2.43 billion year-to-date due to what market analysts called sell-off from high returns from the investment, the average unite price of the instrument increased by 7.41 percent to N25,115.11 in September from N23,382.44 in January.

Eight out of the ten bond funds listed on SEC website reported an increase in their unit price, a sign of the increase in the demand for the instruments, analysts said.

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Why the buss around dollar-denominated instruments?

Nigeria’s foreign exchange crisis which has persistently fuelled the depreciation of the naira and the high inflation rate that put the real return on investment in the negative are key reasons dollar-denominated investment is attractive for Nigerian investors, according to investment analysts.

Depreciating currency

A weak naira means that investors who hold their savings and investment in the local currency may continue to lose value in dollar-denominated terms.

This is one reason that necessitates the need for investors to have a portion of their investment portfolio in dollar-denominated assets, especially dollar mutual funds, which are more accessible due to the low entry amount required, analysts said.

“Without any major attempt to increase or diversify Nigeria’s FX proceeds through the export of non-oil products, we believe the FX crisis will continue to linger, specifically when crude oil prices drop significantly,” Ebo said.

Meanwhile, the naira at the unofficial market, the channel many Nigerians access the dollar from, has depreciated by 18 percent in 2021 from N465/$ on December 31, 2020 to N568/$ on September 30, 2021.

The Central Bank of Nigeria’s FX reserves rose by 1.35 percent to $36.60 billion as of September 29, 2021 – the highest level since February 12, 2020 – signifying the sixth consecutive weekly accretion.

The current level of the reserves, according to analysts at Coronation Merchant Bank partially reflects the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) allocation to Nigeria coupled with the successfully raised S$4.00 billion in Eurobonds last month.

It should be able to “provide the apex bank with enough ammunition to defend the naira in the short term. Nevertheless, FX turnover on the official markers remains relatively low. Thus, there may be continued pressure on the official and parallel exchange rates if the CBN does not increase supply,” the research analysts said.

High inflation rate

Although Nigeria’s inflation rate has slowed for five successive months to August, the country’s high cost of living is still above the CBN’s desired 6-9 percent.

The headline inflation number released by the National Bureau of Statistics (NBS) shows that inflation for August 2021 slowed to 17.01 percent year-on-year from 17.38 percent.

While the inflation rate in August is the lowest in seven months, it was, however, not enough to overturn the negative real return on the Federal Government’s less risky short-term Treasury Bills (T-Bills).

While average inflation-adjusted returns on the shorter 91-day and 182-day bills were -9.77 percent and -8.48 percent, respectively in 2020, the real return on the bills so far in 2021 has not been close enough to match the performance of last year.

The real return on T-Bills investment is still in the double negative figures. Factoring the 17.01 percent inflation rate in August against the interest rate reported in the last T-Bills auction result showed that the shorter 91-day and 182-day bills gave investors a real return of -14.51 percent and -13.51 percent, respectively.

The trend was the same for the longer 364-day bill. From a -6.96 percent real return on investment last year, the bill gave investors -9.51 percent in September.

“The real return is still clearly negative because inflation is still very high,” Yinka Ademuwagun, investment management analyst at ValuAlliance Asset Management, said.