Nigeria’s assets under management (also mutual funds) expanded almost four times its size in four years buoyed by strong investor appetite for less risky funds with safe returns.
The country’s AUM of N231 billion as at August 19, 2016, has surged 250 percent to N807 billion as at August 16, 2019, a space of 48 months. Data sourced from the Securities & Exchange Commission (SEC) show.
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The primary advantages are that they provide economies of scale, a higher level of diversification, provides liquidity, but investors are required to pay various fees and expenses to manage the fund.
The strong growth in Nigeria’s AUM is driven by robust growth in low risk investment funds – money market, fixed income and bond funds, which reflects the conservative investment strategy of investors packing cash to mutual funds as they believe Nigeria is somehow a risky market.
“Fund managers are aggressively marketing their debt and money market funds since equities are not doing well. This explains why less risky assets are appreciating faster,” said a Lagos-based analyst who preferred to be anonymous.
The fundamentals of Africa’s biggest economy, which is heavily dependent on crude oil for revenue and foreign exchange, is still weak. The economy is susceptible to shocks in the global oil market, and even trapped in low growth cycle, making investors demand higher returns to hold naira assets.
This perhaps put Nigeria’s central bank in a tricky situation when it meets next week to either cut policy rate to spur growth or hike rate to attract foreign capital.
Money market funds led the pack of other asset classes as its portfolio value appreciated to N609.6 billion mid-august 2019, six times more than N115.9 billion it valued four years earlier. These short-term funds now accounts for 75 percent of Nigeria’s total AUM, as against with 50 percent four years back.
This significant appreciation is largely as a result of banks piling large chunk of customer deposits in government’s treasury bills to leverage high yield of around 14 percent to 18 percent at that time, which made lenders neglect their primary duty of financial intermediation.
However, Nigeria’s central bank has been aggressive to return banks to core lending function in recent times, by placing a cap on the amount lenders can invest in government securities and mandating them to loan out at least 60 percent of their deposits to real sector.
Taking the second seat is fixed income funds, which has grown its portfolio value by 387 percent in the last four years. Bond funds tripled to N25.4 billion from N7.9 billion. Real estate funds remained almost unchanged at N45 billion. Ethical funds lost 6 percent of portfolio size. Mixed funds is down by 8 percent, while equity funds came last with 23 percent reduction in asset value.
Since the start of the year, Nigeria’s AUM has appreciated by a quarter, even as low risk investment scheme expanded in double- digits. Bond funds expanded portfolio by most ( 76%) since January 2019, followed by fixed income funds (55%), money market (25%), real estate ( 5%), with equityfunds bottoming with 12.6 percent decline in value.
The Nigerian equity market continues to print lackluster performance on account of weak investor confidence over limited growth potentials of the broader economy combined with softer crude oil prices and fears of global recession.
Analysts say not until the fiscal authorities come up with bold policy reforms that are deemed investor friendly, equities might not see significant upside in short to medium term. But some stocks have attractive valuation and holds potentials to deliver returns to investors.
