Investor appetite for bond funds have tripled since the beginning of the year as investors rotate from money market and equity funds to the higher-yielding bond funds.
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.
The Net Asset Value (NAV) of Bond funds, a measure of the level of investment in the asset, has grown by a record 264 percent year to date to N165 billion as at July 3 from N45 billion at the beginning of the year, according to data from the Securities Exchange Commission (SEC).
That’s nine times more than the 30 percent growth in the net asset value of the entire mutual funds market in the country.
The relative attractiveness of bond funds this year stem 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.
Although the 10-year bond fund is below inflation rate, which quickened to a 26-month high of 12.56 percent in June, it still offers higher yields than any other mutual fund and that has caught the eye of investors.
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.
“Money is flowing to bond funds and away from some money market funds that can barely outperform the 3.75 percent paid on savings accounts,” said Egie Akpata, a director at UCML Capital.
“Mark to market gains are massive on bonds due to the drop in interest rates,” Akpata added.
Eurobond funds outperform local bonds
Of the nine bond funds in Nigeria, the best performers in terms of year to date returns are the dollar funds which mainly invest in Eurobonds as against the local bond fund which invests in local bonds.
The dollar funds, excluding the First Bank Nigeria Eurobond USD Fund (Institutional), which is down 89 percent year to date, have returned 11 percent compared to 6 percent for the local bonds.
The best performing bond fund year to date is the Legacy USD Bond Fund which is managed by First City Asset Management Ltd. The Fund’s unit price is up 17 percent from N306.5 at the beginning of the year to N360.5 as at July 3.
In second place is the United Capital Eurobond Fund, managed by United Capital Asset management, the unit price of the fund has gained 9 percent year to date to N44,660 from N40,746 in the period under review.
The PACAM Eurobond fund, managed by PAC Asset management Ltd is in third place with a 8.9 percent increase in its unit price to N41,506 from N38,101.
The Nigeria International Debt Fund, managed by Afrinvest Asset Management is in fourth place and has seen an 8.2 percent rise in its unit price to N218 from N210.
The United Capital Bond fund is the only local bond fund in the top five best performers in the year to date period. The fund’s unit price is up 8 percent to N1.83 from N1.69.
“The rally in Eurobond funds is driven by investors seeking high yields in a market marred by low returns, but more importantly, it is also becoming popular among investors seeking an hedge against the naira,” said Wale Okunrinboye, head of investment research at Lagos-based pension fund managers, Sigma Pensions Ltd.
“While equity-based funds have been punished by Nigeria’s weak economic fundamentals, bond funds offer a safer option for investors,” Okunrinboye added.
Asked for his outlook for bond funds this year, Okunrinboye said the asset class is expected to perform better than other mutual funds as uptake continues to increase.
