Money market outshines others in battle for investors’ fund

Interest rate movements and investors expectations have generated opportunities for the money market funds in the first half of the year, leaving equities and bond funds in the dust.

As investors took advantage of high yields from the interest rate movements, the money market fund saw an influx of cash, pushing their assets to N1.008 trillion in May 2024, according to the Net Asset Value report by the Security Exchange Commission (SEC).

Also, the recent weekly report by Coronation Securities Limited, an asset management firm stated that Nigeria’s Naira-denominated mutual fund industry grew by seven percent in the first five months of 2024 owing to money market performance.

“The good news being that money market funds grew by 14 percent. As T-bill rates hold up in the months ahead, Money Market fund yields are set to improve and attract more money, likely making 2024 a vintage year for the industry,” the report stated.

The percentage change in the money market fund, equities and bond fund are 14 percent, 13 percent and a negative 15 percent respectively between January and May according to data from the report.

Samson Owolabi, research and portfolio manager Zedcrest Group said, “The benchmark interest rate was increased, which in turn made yields on commercial papers high too.

“The money market fund is made up of a set percentage of fixed deposit, treasury bills, commercial papers and other money market instruments all of which have witnessed higher returns due to rate hike,” he said.

BusinessDay analysis of the change in net asset value (NAV) of each fund, used as a proxy for investor flows, reveals a shift towards money market funds in the first five months of 2024.

Money Market Fund

Data obtained from the SEC shows that the net asset value of the money market fund grew to N1.008 trillion in May 2024 from N799 billion in the same period last year. The fund also grew by N50 billion from N950 billion.

A money market fund is a kind of mutual fund that invests in highly liquid, short-term instruments, usually 365 days and below.

Such instruments include treasury bills, commercial papers, fixed deposit accounts, and other bank placements.

The last 12 months, and particularly the past five months, have seen a transformation in naira fixed-income yields. Not only are T-bill yields realised at the CBN’s auctions high, they are consistently high.

Historically, high interest rates have been good for Money Market Funds as savers are attracted by yields.

The Cardoso led Monetary Policy Committee hiked interest rates by 750 basis points this year to 26.25 percent from 18.75 percent last year.

In the first quarter of this year, the Cardoso led Monetary Policy Committee raised the MPR by 400 basis points to 22.75 percent in February which was the first hike this year from 18.75 percent.

By March, there was another 200 basis point hike to 24.75 percent, and another 150 basis point in May to 26.25 percent.

According to the CBN, the interest rate hike was in consideration of the persistent rise in the inflation rate and fragile growth. Nigeria’s headline inflation accelerated to 33. 69 percent in April 2024.

Opeyemi Babalola, a portfolio manager at Comercio Partners Asset Management, said that the money market has gone from single-digit yields to strong double-digital yields between December and May.

“Also, unlike the Equity Funds and Bond Funds (which invest heavily in securities subject to price volatility), Money Market Funds are yield-driven and offer little risk from a capital depreciation point of view. Investors will naturally tilt towards this sort of capital preservative investment, offering ‪15 – 20‬ percent net yields,” Babalola said.

Hence the average yield of 91-day T-bills at auction so far this year has grown to 15.0 percent annualised, as opposed to an average of 5.2 percent in 2023, while the average yield for 1-year T-bill has been 23.3 percent against an average of 13.3 percent in 2023.

Similarly yields on commercial papers have risen with companies like VFD and Chrisland offering yields of 30 percent and 28 percent respectively.

The growth in returns on Money Market funds matters to Nigeria’s fund management industry because it makes up the biggest slice of its naira-denominated assets under management (AUM), accounting for 63 percent of the total.

The yields of Money Market Funds do not move up immediately to match those of T-bills. Money Market Funds hold T-bills from previous auctions that have lower yields than those on offer today, so these need to mature before Money Market Funds fully reflect the yields on offer in the market.

“As time goes on (and as long as T-bill rates remain high) the advertised yields of Money Market funds will continue to improve,” Coronation report stated.

Similarly, Babalola said that for the rest of the year, the performance of money market funds will depend on how long yields in the domestic money market space remain elevated.

“Rates in the Treasury Bills space have already started waning, so it is possible the inflows into that space might slow down in the latter parts of 2024,” Babalola said.

Equity Fund

An equity fund is a type of investment fund that pools money from investors to trade primarily a portfolio of stocks, also known as equity securities.

In January Investors flooded the equities fund, which saw its net asset value increase by 82 percent to N31 billion from N17 billion the previous year data from SEC shows.

In the first month of the year, the NGX sustained a bullish momentum with a month-on-month gain of 35.3 percent as investors showed enthusiasm ahead of earnings season. As such, year-to-date return printed at 35.3 percent while market capitalisation advanced from N14.4 trillion to N55.4 trillion.

The fund dropped to N28 billion in February and remained at that in March before dipping to N26 billion in April. The four-month positive run on the bourse halted in February as unimpressive corporate releases, CBN’s regulation on bank’s net open position, MPC pronouncement, and repricing in the fixed income space weighed on market performance. Year-to-date return slowed to 33.7 percent from 35.3 percent in January.

The equities fund saw investors’ interest grow in May as the value of the fund grew to N28 billion, although the market decreased by 0.53 percent month-to-date while the year-to-date return decreased to 30.67 percent as at Monday May,13.

Toye Oyelakun, portfolio manager at PAL Pensions said fixed income investments such as bonds have maturities of more than one year and the Money market has lower risk and shorter tenure hence it is very rational for investors to put funds there as most investors are conservative about taking risk.

He said that the chances of losing money on money market funds are very low.

“Also, high interest rate will attract more investments if the fund is performing in tandem with the high rate of return on money market,” Toye said

He further said in a low interest rate environment investors go for equities.

Fixed income/Bond Fund

The fixed income/ bond fund is slowly becoming a ghost town for investors. It saw its net asset value depreciate by 82 percent to N239 billion in January 2024 from 324 billion in the same period 2023.

The fixed income/ bond fund performed a negative of over 15 percent year-to-date.

The fund has seen a consistent decline in the last one year ending May 2024.

In February the bond market extended the dominance of the bears as market participants geared up for Debt Management Office(DMO) historic N2.5 trillion auction and hawkish outcome of the long-anticipated MPC meeting.

At the month’s auction, the DMO issued fresh 7 and 10-year bonds to raise N2.5 trillion, seven times the N360 billion offered in January and ahead of March’s N720.0 billion maturity.

However, demand fell short of offers as liquidity-constrained investors pre-empted DMO’s reluctance to raise yield to a more fundamentally reflective level.

In the end, the DMO was only able to allot a total of N1.5 trillion (representing a 59.8 percent success rate), with yield clearing at 18.5 percent for the seven year and 19.0 for percent 10-year respectively as against a bid range of 18.0 percent – 30.0 percent for both tenors.

Doing this the government frontloaded most of its borrowings in the first quarter hence subsequent auctions have become smaller in size with it yielding thinning yields.