Nigeria’s mutual fund industry shed N202bn in 10 months

Dampened investors’ appetite for low yielding mutual fund instruments has cost the industry N202.39 billion in assets between January and October 22 2021.

Investors’ decision to redirect and reduce their stakes in five of the mutual funds instruments amid the search for high yielding assets fuelled the 13.42 drop in the total asset managed by Nigeria’s mutual fund industry to N1.29 trillion as of October 22 from N1.49 trillion in January, as analyzed from the data by the Securities and Exchange Commission (SEC).

Money market, bond, fixed income, ethical, mixed/balanced, real estate and equity-based funds are all types of Mutual funds.

While the net asset value (NAV) of the real estate and equity-based funds reported a combined increase of 23.79 percent, investors reduced their investments in the money market, mixed/balanced, bond, fixed income and ethical funds by a joint 33.69 percent.

“The decline in the AuM of bond funds is due to higher yields in other fixed income products compared to last year,” Ayo Ebo, Head, Retail Investment, Chapel Hill Denham said.

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities such as stocks, bonds and short-term debt. The primary advantages are that they provide economies of scale, a higher level of diversification, and provide liquidity, but investors are required to pay various fees and expenses to manage the fund.

“Majority of mutual funds in Nigeria have been built on money market funds. Unfortunately, money market yields have plunged in recent time, this has led to declining investments on these funds,” Ayorinde Akinloye, Associate Investment Research in United Capital plc said, adding that investors have consequently continued to pull out their funds in response to the low return for higher-yielding alternatives.

A breakdown of the data by the Securities Exchange showed that the real estate fund reported the highest increase in its NAV. The fund that invests mostly in property-related instruments grew its assets by 18.17 percent to N50.01 billion as of October 22 from N42.32 billion at the beginning of the year.

The equity-based fund on the other hand also reported an increase by 5.62 percent to N15.97billion in the review period from N15.11 billion in the first week of January 2021.

“On the real estate and equities, I suspect this is due to lower patronage in 2020, hence the increase can be linked to the low base effect,” Ebo said.

Read also: Real estate fund beats peers to post highest asset growth year-to-date

Going forward, the Lagos-based analyst said “we expect to see renewed interest in bond funds given the potential higher return the funds may deliver over N-T-Bills.”

Further analysis of the data by SEC showed that bond funds shed N8.42 billion, 3.79 percent drop to N214.17 billion in October from N 222.60 billion at the beginning of the year.

Mixed/balanced, bond, fixed income and ethical funds reported a decline in their net asset value by 1.41 percent, 3.79 percent, 1.05 perecnt and 0.45 percent, respectively.

Accounting for 41.37 percent market share of the total mutual fund asset, the money market fund shed the highest asset that was worth N197.47 billion.
According to an Abuja-based market analyst, money market funds are built on T-bills investments and so low yields on the short term government instrument lead to massive withdrawals from money market mutual funds.
T-Bills rates, the interest the Nigerian government pays investors for borrowing their money, has remained relatively low this year.

Breakdown of the last T-bill primary market auction (PMA), revealed that the CBN through the DMO allotted N235.04 billion worth of bills across all tenors. Accordingly, stop rates remained unchanged on the 91-day (2.50%) and the 181-day bill (3.5) 3.50 percent and the rate on the 364-day bill fell from 7.250 percent to 6.99 percent.

Analysis of the auction result showed that investors’ appetite for the less risky federal government instrument has dropped to one of its lowest levels on record.

While fixed-income investors usually oversubscribe for the short-term investment instrument by hundreds of billions of naira, analysis of the result for the week traded October 27 2021, showed that they only reported N92.08 billion worth of unsuccessful transactions.

The failed bids, the amount investors were willing to invest but were not accepted by the CBN, stood at a record high of over N282 billion in June 2021.

With a total subscription of N235 billion worth of T-bills, the demand at the last auction was relatively weak.

Dampened investors’ interest in the risk-free government instrument amid failed attempts to get high returns from the short-term papers forced investors to redirect their funds to the more attractive banks’ placement and commercial paper (CP), according to BusinessDay findings.

Investors bid at rates as high as 5.5 percent, 6.75 percent and 8.5 percent on the 91-day, 182-day and 364-day bills, respectively at the last auction but the apex bank lowered rates across the three tenors to 2.5 percent, 3.5 percent, and 6.99 percent, respectively.

The Breakdown of the auction result for the last transaction in the tenth month of this year showed that investors’ appetite for the longer 364-day bill remained higher than the 91-day and 182-day bills.

While the 364-day bill with a higher interest rate was oversubscribed by N89.47 billion the shorter 91-day and 282-day bills were oversubscribed by a combined N2.61 billion.

The CBN planned to raise N3.17 billion for the shorter 91-day bill but investors said they were willing to subscribe with N3.99billion. The apex bank eventually issued N 2.68 billion, N490 million less than the CBN’s initial offer.

Investors were willing to bid with N 3.32 billion for the N2.02 billion raised for the 182-day bill, N1.3 million more than what the CBN planned to raise. The amount raised by the apex bank, however, was lower than its initial offer of N6 billion by 3.98 billion.

While the CBN offered to raise N140.87 billion through the longer 364-day Treasury bill, investors said they were willing to invest more with N 432.81 billion. The apex bank later raised N230.34 billion. The apex bank issued N89.47 billion worth of more bills.

According to market analysts, the decline in the unsuccessful bids reported by fixed income inventors is proof that the volume of funds interested in the short-term debt instrument is finding its way into other investment assets.

Citing where investors are redirecting their investment, Ebo, said: “a lot of corporates have been issuing commercial paper at attractive rates.” This is coupled with “placement with banks that also comes at an attractive return.”

On the yield’s expectation, Akinloye said “we expect heavy government borrowing to keep the long-term yields tracking higher.”

However, the likely increase in the demand for the government short term treasury may lead to further rate decline, according to analysts.

Checks by BusinessDay show that Nigeria risks reporting its biggest budget deficit on record next year and the government’s borrowing to fill the gap may fuel a spike in interest rates.

Like in the past five years, if Nigeria’s unrealistic revenue trend persists next year; the cash-strapped largest economy in Africa would need to increase its debt profile, an opportunity for investors whose real return on investment has been in the negative.

The Federal Government is targeting revenues of N10.13 trillion and a deficit of N6.258 trillion in 2022.

Since 2016, Nigeria has attained an average of 55 percent revenue performance, the reason why analysts have criticized the government for raising the bar each year despite obvious challenges in attaining revenue targets.

The shortfall between actual revenue receipt by the Federal Government and projected revenue worsened when a global collapse in oil prices happened in 2014.

The Federal Government’s actual retained revenues stood at N3.727 trillion in 2014, as analyzed from data by the Budget office of the federation. This value represented a shortfall of N4 billion from the N3.731 trillion projected in the 2014 budget.

The same trend followed in 2016, 2017, 2018 and 2019 when variations between actual and budgeted revenue stood at N2.03 trillion, 3.5 trillion N3.2 trillion and N5.58 trillion, respectively.
After the pandemic spurred a budget revision in 2020, the revenue shortfall hit N1.42 trillion with revised revenue of N5.365 trillion and actual revenue at N3.937 trillion.

If the case is the same next year, Nigeria could be looking at a revenue of about N5.57 trillion and a budget deficit of about N10.82 trillion at the end of the fiscal year, almost the size of the country’s entire budget in 2020.

“I expect the FG’s huge deficit finance plan will pressure the debt market leading to a spike in interest rates. However, investors who are avoiding long-term debt instruments (bonds) are likely to lock their funds at the short-end of the curve (NT-bills) which should spur demand and consequently decline in short term rates,” Akinloye said.

“money market fund shed the highest asset

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