Nigerian mutual funds shrink first time in 5yrs
The Nigerian economy may have enjoyed growth last year following the ease in COVID-19 impact, but the mutual fund industry suffered its first decline in five years in 2021.
Asset managed by the industry has been increasing every year since 2016.
In the 12 months ended December 2021, the total assets under management shed N209.11 billion, according to data compiled from the Securities and Exchange Commission (SEC).
A mutual fund is an investment vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments and other assets.
While fund managers were tasked with the challenge of managing N1.49 trillion worth of investors’ funds at the beginning of 2021, the low-interest-rate environment fuelled capital outflow as the asset managed by the mutual fund industry closed 2021 with N1.28 trillion.
Most of the fund outflow came from money market and bond mutual funds as the low-yield environment, particularly in treasury bills, dampened investors’ appetite in the review period.
“Majority of mutual funds in Nigeria have been built on money market funds. Unfortunately, money market yields have plunged in recent time, this has led to declining investments on these funds,” Ayorinde Akinloye, associate, Investment Research in United Capital plc, said, adding that investors have consequently continued to pull out their funds in response to the low return for higher-yielding alternatives.
Analysis of the SEC data showed that money market-based funds fell from 48.98 percent of total mutual funds at the start of 2021 to 42.10 percent of total funds by December last year.
The fund led the losers’ chart as it shed N702.714 billion in 2021 from N731 billion at the beginning of the year to N28.92 billion at the end of last year.
This was followed by a 98.89 decline in the asset managed by bond funds. The mutual fund asset class closed the year with a total of N2.88billion, N220.11 billion lower than the N222.59 billion it reported at the beginning of the year.
With 14.05 percent asset decline in the review period, the fixed income fund reported the least decline among the three funds that recorded a dip in their asset. From starting 2021 with a total asset of N439.12 billion, it shed N61.68 billion to end 2021 with N377.44 billion.
According to the SEC data analyzed by BusinessDay, equities, missed/balance, real estate and ethical funds were the asset classes that gained in the review period.
Mixed/balanced funds attracted the most to its net asset value, adding N518.63 billion to close the year with N548.43 billion from the N29.799 billion it started the year with.
Equity-based funds, which started the year with a net asset value of N15.11 billion, attracted the second-highest asset in 2021 as it recorded 1631.5 percent jump to close the year with N 261.53billion.
The real estate fund attracted the third-highest asset in 2021 as it reported a 15.65 percent increase in its net asset to N50.17 billion from N N42.32 billion.
With N2.48 billion growth in its net asset value, the ethical fund earned a spot on the gainers’ chart to close the year with N15.54 billion from the N13.06 billion reported at the beginning of the year.
“On the real estate and equities, I suspect this is due to lower patronage in 2020, hence the increase can be linked to the low base effect,” Ayo Ebo, head, Retail Investment, Chapel Hill Denham, said.
Going forward, the Lagos-based analyst said, “We expect to see renewed interest in bond funds given the potential higher return the funds may deliver over N-T-Bills.”
Meanwhile, Treasury-Bills (T-Bill) rates, the interest the Nigerian government pays investors for borrowing their money, crashed to an 11-month low in December 2021.
After crashing to a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free TB jumped to more than 17 months-high of 9.75 percent on May 14. The rate, however, plunged to an 11-month low of 4.9 percent at the last auction of 2021, as compiled from Nigerian treasury bills’ primary market auction results for December 29, 2021.
If the interest rate, what government pays investors for borrowing their funds, on the longer 364-day bill had maintained its 9.75 percent reported in May, fixed income investors would have earned a negative real return of 5.65, almost 50 percent higher than the actual inflation-adjusted return of – 10.5 percent that was recorded in the review period.