• Wednesday, April 17, 2024
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High yielding bond funds drive mutual fund asset to 9yr-high

Bonds

In the hunt for high yields, investors increased appetite for bond funds amid a low-interest-rate environment, pushing Nigeria’s mutual fund industry to a record high of N1.37 trillion in September.

Rising from N1.04 trillion in January, the total asset controlled by fund managers increased by N325.79 billion as at the third quarter of 2020. The asset under management at N1.37 trillion is the highest the industry has reported since 2011 when the Securities and Exchange Commission (SEC) started publishing the data.

The rapid growth in the mutual fund industry was skewed towards the high yielding Bond funds as it reported a net asset value (NAV) increase of 358 percent. That’s over eight times more than the 31 percent growth in the net asset value of the entire mutual funds market in the country.

The NAV of bond funds, a measure of the level of investment in the asset, added N176.58 billion year-to-date from N45 billion recorded at the beginning of the year. The Fund’s contribution to the asset managed by the industry increased from 4.73 percent in January to16.50 percent.

Fund managers have made the most of a bond rally this year driven by dovish central bank policy, said Omotola Abimbola of Chapel Hill Denham.

The relative attractiveness of bond funds this year stems from the higher yields they offer compared to other types of mutual funds. While a one-year Treasury bill is yielding 3.5 percent, the 10-year bond is at 8.5 percent.

“The fact that interest rate is low and unattractive in the money market space is the major reason why a lot of investors are buying bonds,” Yinka Ademuwagun, Research Analyst, FMCGs, United Capital Plc said, adding that it is the reason why there is “rotation of fund from the money market funds to the Bond funds. Lower interest rate means higher and higher prices of Bond.”

With a NAV increase of N176.58 billion, the investment channelled into Bond funds in the review period is 15.88 percent higher than the combined N152.38 billion that was attracted by the six other mutual fund instruments.

“The low-interest-rate environment has helped fixed income fund managers to record strong appreciation in their Net asset values. This has been the key driver,” Ayo Ayorinde Akinloye, a Research Analyst at CSL Stockbrokers Limited said.

Although the 10-year bond fund is below the inflation rate, which quickened to a 29-month high of 13.22 percent in August, it still offers higher yields than any other mutual fund and that has caught the eye of investors.

Bonds, money market and equity 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.

In the case of bond funds, the fund manager only invests in bonds while an equity fund invests solely in equities/stocks of listed companies and a money market fund invests in short-term debt instruments like Treasury Bills.

Bond funds are also less risky than other mutual funds and as such the increased appetite could well be a reflection of the lack of investor confidence in the economy, as survey has shown that investors are only interested in resilient investment instruments.

Analysis of the bond funds that attracted the most asset in the first nine months of this year shows that Stanbic IBTC Bond Fund which is managed by Stanbic IBTC Asset Mgt. Limited with a net asset appreciation of N93.29 billion was top on the gainer’s list.

From net asset value of N14.09 billion in January Stanbic IBTC Bond Fund grew its asset to N107.39 billion as at September 2020.

With a NAV that increased by N60.59 billion in nine months, United Capital Bond Fund which is managed by United Capital Asset Mgt. Ltd was the second on the list as it was able to grow its asset of N4.33 billion reported in January to N64.92 billion in September.

Other gainers include United Capital Euro Bond Fund which added N7.5 billion to its NAV and FBN Fixed Income Fund with a NAV increase of N7 billion.