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Nigeria’s fast growing but opaque N728 billion industry

Recently I couldn’t shake the feeling that I wasn’t receiving the appropriate/correct interest payments on an investment made in a money market fund with one of Nigeria’s financial services providers.

Trouble is there was no real way to accurately tell if the right interest earned, minus (often hidden) fees and expense ratios (the amount companies charge investors to manage a mutual fund or exchange-traded fund ETF), was being remitted to my account for further re-investment as requested.

A call to the customer care desk of the firm was largely unhelpful as they couldn’t provide a clear answer to questions regarding my money market fund investment.

Money Market funds have grown fast in Nigeria in recent times, because for as low as N5, 000 (five-thousand naira), they provide an attractive alternative to savings or fixed deposits with banks, due to higher interest rates (between 10% and 13%) investors can earn, compared to savings deposit rates of about 3 percent or fixed deposits at 8 percent on average.

Mutual funds work as collective investments that join various individual contributions of investment capital to create a large pool of funds.

It spreads the pool of funds across dozens of investment instruments in the stock market and other predetermined investment targets.

The investment target where the fund will be invested is clearly stated, which enables investors select the funds that meet their own desired investing characteristics.

Total assets under management (AuM) by Mutual fund providers in Nigeria including ETFs hit N728 billion ($2 billion), as at April, 2019, according to latest data from the Securities and Exchange Commission (SEC).

Of this amount Money market funds made up a hefty 76 percent of the total, followed by fixed income funds 9.45 percent, Real Estate 6.26 percent, mixed funds 3.39 percent, Bond funds 2.4 percent, and Equity based funds 1.6 percent.

The first modern-day mutual fund, Massachusetts Investors Trust, was created on March 21, 1924. By 1929, there were 19 open-ended mutual funds in the U.S.A competing with nearly 700 closed-end funds.

In 1971, William Fouse and John McQuown of Wells Fargo established the first index fund, a concept that John Bogle would use as a foundation on which to build The Vanguard Group, a mutual fund powerhouse renowned for low-cost index funds.

Today in the U.S. alone there are more than 10,000 mutual funds.

In Nigeria, there are about 90 different types of Mutual Funds and ETFs currently available for investors to buy into, however scant data (on expense ratio, relative performance or fund manager history) is available, which prospective investors can use to rank or rate these funds to enable them make informed buy decisions.

Take the expense ratio which represents all of the management fees and operating costs of a fund.

A mutual fund’s expense ratio is very important to investors because fund operating and management fees can have a large impact on net profitability.

It is calculated by dividing a mutual fund’s operating expenses by the average total naira value for all the assets within the fund.

Currently a lot of funds do not have this data readily available for prospective investors.

Another major issue that confronts prospective investors is relative performance of a fund.

Assuming an investor wants to put N100, 000 into an equity based mutual fund because he/she does not trust his/her stock picking abilities.

Today there are eleven (11) such funds available on the market from fund managers that include Stanbic IBTC Nigeria Equity Fund, Chapel Hill Denhams Paramount Equity fund, Meristems Equity market fund, FBN Smart beta equity fund and Axa Mansards Equity Income Fund to name a few.

The problem lies in the inability of the prospective investor to make an informed choice from these set of funds.

Questions such as which equity fund manager outperformed its benchmark or other funds in its class over a 1, 3 and 5 year period or comparing expense ratios to gauge cost of investing in each fund is pretty much impossible to discern.

Nigeria’s fund management industry must step up and make sure these data sets are available in a public, timely and easily accessible manner, to enable the investing public make the best possible investment decisions.

As for my mutual fund investment? I continue to retain my current mutual fund provider, not for any major reason such as superior returns, or lower expenses, but intangibles like familiarity.

This is something the fund management industry as a whole should be worried about as FinTechs gradually sweep the financial services space, bringing a promise of innovative services that can lead to churn for entrenched providers.

 

Patrick Atuanya

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