Guy Czartoryski, head of research at Coronation Asset Management speaks to IHEANYI NWACHUKWU on the company’s recently released Mutual Funds report, other related issues. Excerpts
Can we know why the Mutual Funds report this time?
As soon as we looked at the Mutual Fund industry we were struck by its remarkable growth. The size of its assets under management grew by 305percent during the period between 2015 and 2019, doubling in inflation-adjusted terms.
In the first half of this year – a year of recession – the total funds managed by Money Market Funds grew by 11percent and the total funds managed by Fixed Income Funds grew by 60percent. A transformation is underway, and it is about savers turning away from banks as the default destination for their money and turning to Mutual Funds instead.
In the report, you foresee Mutual Funds rival Nigeria’s Pension Funds in size. Why this optimism?
Pensions Funds were the growth story of the last decade: Mutual Funds are the growth story of the coming decade. There are several factors at work. The biggest is that Nigerian Treasury Bills no longer yield more than inflation, as they did for most of the period between 2010 and 2019, so investing has suddenly become much more challenging than before. This demands a spectrum of competing products which Mutual Funds offer. Second, banks tend not to offer attractive Savings Deposit rates because of a number of policy measures they endure, notably the cash reserve requirement and the loan-todeposit ratio. So, savers are looking for something better than banks’ savings accounts. Third, saving has become important to an increasing number of Nigerians as they come to understand retirement planning, whether or not they are members of a formal pension scheme. Put those factors together and we understand the rise of mutual funds.
In terms of regulation, what should improve as Mutual Fund industry hugely expands?
The Securities and Exchange Commission has laid down the ground rules for what Mutual Funds can invest in, measures to ensure that Mutual Funds act in their fund holders’ interests, and requirements for regular and accurate reporting of data. These rules are set out in ‘Amendments to Rules on Collective Investment Schemes’ which form part of ‘New rules and amendments to the rules and regulations of the Commission’ from December 2019, and which are due for enforcement now. We expect the SEC to continue developing these rules. At the same the Fund Managers Association of Nigeria provides a wealth of data, which is free online, on unit price performance of Mutual Funds over several years. We expect reporting standards to improve and this will facilitate improved comparison between funds.
Read Also: CBN to issue N821.8bn treasury bills in Q3 2020
Now that the era of high returns from Nigerian Treasury Bills has ended. Are you making strong case for investment in Mutual Funds?
There is a transformation underway in the way Nigerians save, and this is happening because Nigerian Treasury Bill yields have fallen and, we believe, may not rise above inflation again for some time because the monetary authorities no longer believe that inflation can be cured with interest rates.
So, savers and investors are having to think of different ways of obtaining adequate returns. Above all, this means accepting a degree of risk, because a Nigerian Treasury Bill is essentially risk-free while Mutual Funds cover varying degrees of risk. A Money Market fund involves very little risk; a Fixed Income fund involves a little more risk, then come Balanced Funds and Equity Funds. The risk/return principle has to be understood and indeed investment managers need to put it at the core of their processes.
How are Mutual Funds benefiting from lower rates on banks Savings Accounts?
In the past banks offered sufficient returns to attract Savings Deposits but at the same time presented themselves as subject to the CBN and NDIC, with the result that customers understood they held a guarantee. When it comes to Mutual Funds there is a high level of regulation from the SEC but no guarantees.
So the shift from bank deposits to Mutual Funds involves the prospect of a return in exchange for an acceptance of risk. And this is why we talk about a transformation, because the key emerging skills are risk management and educating customers about risk. Risk management is the key area we are investing in with our partners Cardano, a specialist Pension Fund risk adviser based in the Netherlands. Risk management techniques have become central to our investment process.
How are Mutual Funds managers helping to retain new generation of young savers?
The growth of the Mutual Fund industry reminds one of the tech industry. In fact, part of this growth is due to the tech industry. A generation of Nigerian savers expects to save from a mobile device, transfer money quickly, and have real-time information on investments. This is a significant driver across retail financial services and the Mutual Fund industry is no exception. However, this also means that the roles of asset-gatherer and investment manager are becoming separable. So some fintech platforms, which do not have their own in-house investment management capabilities, are become customers of fund management firms and are investing in Mutual Funds.
What other kinds of investors are you seeing moving lately to Mutual Funds?
All kinds of institutional investors that have been using bank deposits as their default option are now using professional fund managers such as ourselves, and it often comes down to offering exposure to different asset classes through Mutual Funds. The great thing about Mutual Funds is that they are open to everyone, whether a retail investor, a person who is building up a long-term retirement fund, or an institution. We see the key area of growth coming from people preparing for retirement, because it is possible to build up a diverse and balanced portfolio of long-term investments through Mutual Funds.
In Nigeria, there are not enough information on Mutual Funds performance to facilitate fund selection by investors and professional advisers? How can this situation improve?
As mentioned already, the Fund Managers Association of Nigeria offers a free online service with a wealth of historical data on the until prices of funds, going back several years. This is going to be developed over the coming years and the approach the levels of disclosure and fund comparison in markets like the UK. In our report we give examples of the comparisons that can be generated from the Morningstar UK website and the Financial Times Fund Comparison Service, both of which offer free access. One key development will be standardised measures of fund performance and this could come about through the adoption of Global Investment Performance Standards (GIPS).
Your report noted that one of the two major challenges Nigeria’s Mutual Fund industry faces is risk management. Why and what are we not doing?
In the era – take the years between 2010 and 2019 – when Nigerian Treasury Bills generally yielded more than inflation, investment management generally consisted of buying Treasury Bills and Federal Government of Nigeria bonds. There was little need for sophisticated risk management. Now this is changing because savers need a variety of different assets to invest in, each with their own risk attributes. Risk management involves accurate performance attribution, careful scenario modelling, back-testing and, at the end of the day, judgement. It is the heart of the investment management process.
What is your advice to existing and potential investors in Mutual Funds?
Our advice is to start with an acceptance of risk, because the days of risk-free inflation-beating returns with Nigerian Treasury Bills are over. Then learn about risk. This need not be technical, just an appreciation that difference categories of Mutual Funds carry different levels of risk. Next, gather information on fund performance from the free online sources that provide it. Gather information and insight from financial advisers. Decide on the desired term of your investment and work out a plan to reach your financial goals. Consider everything carefully and then invest.
