Investors’ appetite for bond and fixed-income funds have more than doubled in the last year to March 2021 as investors rotate from money market funds to the higher-yielding instruments.
Bonds, fixed income, equity, money market, real estate, mixed and ethical 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. Fixed income funds mostly invest in government and corporate bonds.
The Net Asset Value ( NAV) of Bond funds, a measure of the level of investment in the asset, has grown by a record 148.67 percent year-on-year to N 255.66 billion as of March 27 2021 from N102.81 billion in the comparable period of the previous year, according to data from the Securities Exchange Commission (SEC).
That is almost 10 times more than the 21 percent growth in the net asset value of the entire mutual funds market in the country. The asset under management (AUM) of Nigeria’s mutual fund industry added N250 billion in the review period, from N1.19 trillion in the first three months of 2020 to N1.44 trillion in the same period of this year.
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The relative attractiveness of bond funds last year stems from the higher yields they offer compared to other types of mutual funds.
“It was due to the low-interest rate environment which was worsened by the high inflation rate,” Henry Ogbuaku, a Lagos-based investment analyst said.
The money market funds whose return is largely dependent on the performance of the less risky Treasury bill shed N214 billion year-on-year, from reporting a NAV of N802.45 billion in March 2020, recorded a 26.69 percent decline to settle at N588.29 billion at the end of the first quarter of 2021.
Even though there has been a gradual uptick in the yields on the less risky federal government short term Treasury bills, yields on the instrument was mostly zero for investors in 2020. And negative real return when adjusted against Nigeria’s rising inflation widened.
The low-interest environment also increased investors’ appetite for the fixed income funds as it reported a NAV appreciation of 139.6 percent. From N204.99 billion in the first quarter of 2020, it added N286.31 billion to reach N491.3 billion at the end of March 2021.
Although the 10-year bond fund was below the inflation rate, which quickened to a four year high of 18.17 percent in March 2021, 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.
Further analysis of the SEC data shows that ethical and mixed funds also caught the eyes of investors as they both reported a NAV appreciation in the review period.
Ethical funds added N10.83 billion in one year, from N4.16 billion in the first quarter of last year; it was up 261 percent to N14.99 billion. Mixed funds on the other hand added N7.36 billion to its NAV to settle at N29 billion in March 2021 from N21.69billino reported in the comparable period of last year.
“It was the low-interest rate environment that spurred investors to redirect their investments to these funds. Money market is now seen as a savings account, where you can just put your money,” Yinka Ademuwagun, research analyst, at United Capital Plc, said.
According to Ademuwagun, the equities market rallied in the fourth quarter of 2002 and that forced investors to reduce their exposure to the money market and redirected asset to bond, equities and other attractive funds.
Data from SEC shows that investors acted on the rally in the equities market as the equity-based funds attracted high NAV. From N9.27 billion in March 2020, the asset managed by the funds added N5billion to reach N14.34 billion at the end of the three months to March 2021.
According to Ademuwagun, the rally in the equities market was also one of the catalysts that fuelled reduced investors’ appetite for money market funds. “But we should start to see some recovery in the money market as interest starts to reprise higher,” he said.
After hitting a four year-low of near-zero percent in 2020, yields on the federal government risk-free treasury bills climbed to more than 16 month-high, as compiled from Nigerian Treasury bills primary market auction Results for April 14, 2021.
While investors bid at a rate as high as 8 percent for the 91-day bill, 9 percent and 13 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria (CBN) settled at 2 percent, 3.5 percent and 9 percent, respectively. The stop rates for the 91-day and 182-day bills remained sticky for the 4th consecutive auction but the 364-day bill increased by 100 basis points compared to the 8 percent reported in the previous auction.
Market analysts linked the increase in the stop rates to the hike in CBN’S Open Market Operation (OMO) rates some weeks ago. Investors are bidding at higher rates and the DMO also needs to raise the cut off rate to fill some of the orders, an analyst said.
Weeks after the CBN shocked the market with a 10.10 percent stop rate for the 362-day OMO bill, the highest levels seen in almost a year, fixed- income investors demanded higher rates for T-bills.
Analysis of the T-bills auction result for April 14 2021 shows that the CBN raised a total of N153.38 billion from the 91-day, 184-day and 384-day bills, N83.82 billion more than the initial N69.56 billion the apex bank offered to raise in this week’s auction.
“The increase in the stop rates can be linked to the hike in CBN OMO rates some weeks ago. Investors are bidding at higher rates and the DMO also needs to raise the cut off rate to fill some of the orders,” Ayodeji Ebo, Head, Retail Investment, Chapel Hill Denham, said.
The recent uptick in T-bills rate to more than one year-high is good news for fixed income investors as their real return on investment which appreciated to -9.17 percent in April is much better than the -13.89 percent report in November 2020 when investors were more concerned about losing their capital than return on investment.
But, even though a BusinessDay poll of five market analysts expect the rates on the less risky government Nigerian treasury bills to reach above 10 percent this year, the country’s inflation rate which is projected to maintain an upward trend remains a risk to investors real return.
Despite a 16 month-high uptick in the yields on federal government risk-free instruments, fixed-income investors are earning negative returns in real terms, thanks to Nigeria’s inflation rate which accelerated to a 49-month high in March 2021.
Nigeria’s rising cost of goods and services which does not have relief insight puts the country’s local investors investing in government instrument at a disadvantage when compared to their African peers.
With 13.26 percent T-bill rates in Ghana and 9.213 percent in Kenya, fixed-income investors in both countries are enjoying a real return of 2.96 percent and 3.31 percent,
