Dampened investors’ appetite for low yielding mutual fund instruments has cost the industry N220.77 billion worth of assets year-to-date for the period between January 8 to July 30 2021.
The asset managed by Nigeria’s mutual fund industry dropped by 14.77 percent to N1.27 trillion in July from N1.49 trillion in January, as analyzed from the data by the Securities and Exchange Commission (SEC).
Investors’ decision to redirect their funds “was due to the low-interest-rate environment which was worsened by the high inflation rate,” Henry Ogbuaku, a Lagos-based investment analyst said.
While the net asset value (NAV) of bond and fixed-income funds reported an increase of 4 percent and 1.2percent, respectively, investors redirected and reduced their investments in the money market, ethical and mixed/balanced funds by 33 percent, 5.59 percent and 2.88 percent, respectively.
Also topping the gainers’ chart was the real estate funds. It added N8.55 billion to its net asset value in the period under review. From N42.32 billion at the beginning of the year, the asset managed by the real estate funds increased by 20.18 percent to N50.87 billion in July.
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.
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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 relative attractiveness of bond funds in the review period stems from the higher yields they offer compared to other types of mutual funds.
The net asset value of the bond funds, a measure of the level of investment in the asset, grew to N231.02 billion as of July 2021 from N222.59 billion in the first month of this year.
Although Nigeria’s 10-year bond fund with 11.89 percent return was below the inflation rate, which quickened at a slow pace for four successive months to 17.38 percent in July, it still offers higher yields than any other mutual fund. This is what has caught the eye of investors, analysts say.
The money market funds whose return is largely dependent on the performance of the less risky Treasury Bill shed N241.51billion. From recording a NAV of N731.63 billion in January, the mutual instrument that accounted for 49.26 percent of the entire mutual fund asset at the beginning of the year declined to N490.12 billion in July. At the end of July, the fund’s share of the total asset declined to 38.51 percent.
The fixed-income funds reported an increase in its market share to 35percent from 29.10 percent in January.
In search for high yields amid Nigeria’s low-interest-rate environment, investors increased their appetite for fixed income funds due to its relatively high return on investment, analysts said.
The net asset value reported for the fixed income funds appreciated by N5.347billion to N444.47.89billion at the end of July from N439.12 billion in January.
Further analysis of the SEC data showed that investors’ appetite for real estate funds increased to one of its highest levels in years. While the ethical funds reported a drop in its asset from N13.06 billion in January to N12.32 billion the real estate funds expanded to N50.86 billion in July from N42.32 billion reported at the beginning of the year.
“It was the low-interest-rate environment that spurred investors to redirect their investments to these funds. The money market is now seen as a savings account, where you can just put your money,” Yinka Ademuwagun, Yinka Ademuwagun, investment management analyst at ValuAlliance Asset Mg, said.
With Nigeria’s 17.38 percent inflation in July, which is still above the single-digit return on the federal government less risky short term debt instrument, real return for fixed income investors remains in the negative.
After hitting more than 17 months-high at 9.75 percent on May 14, yields on the Federal Government less risky T-Bills dropped to 7.35 percent on August 11. Analysts expect the rate to decline further on account of the expected increase in demand. Stop rates had plunged to a four-year low of near-zero percent in 2020.
“We’ll continue to see that going forward. Rates are expected to continue to drop till at least the end of the year,” Ayorinde Akinloye, investment research analyst at United Capital, said.
According to the Lagos-based analyst, the recent T-Bills rate decline is in line with what the DMO and the CBN are trying to achieve. “They are trying to reduce the cost of borrowing for the federal government because the government‘s debt service cost is very high and they are trying to reduce that burden on the government.”
While investors bid at a rate as high as 10 percent for the 91-day bill, 12 percent and 10 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria settled at 2.5 percent, 3.5 percent and 8.67 percent, respectively.
Stop rates for the 91-day and 182-day bills have remained unchanged for most of this year, but the 364-day bill has been declining since the third week of May.
While inflation-adjusted returns on the shorter 91-day and 182-day bills were -9.77 percent and -8.48 percent, respectively in April 2020, the real return on the bills dropped further to -14.88 percent and -13.88 percent in July of 2021, thanks to Nigeria record-high 17.38 inflation rate.
The trend was the same for the longer 364-day bill. From a -6.96 percent real return on investment last year, the bill gave investors -8.71 percent.
As the interest rate is trying to play catch up, inflation is moving upward too, Ademuwagun, said.
“The real return is still clearly negative because inflation is rising faster. If inflation was still at, say, the 11 percent that reported before the border closure last year, then we would have been fine,” he explained.
While the slowdown inflation rate is good news for investors as it tends to increase real return on investment, the decline in Treasury Bills rates, which has dropped in the last six auctions to August 11, leaves investors with little to cheer for.
Nigeria’s high inflation rate coupled with the declining stop rates put the country’s local investors investing in government instruments at a disadvantage when compared with their African peers.
With 9.213 percent T-bill rates in Kenya, fixed-income investors in the East African country recorded a real return of 3.31 percent. March inflation in the region’s largest economy stood at 5.9 percent.
The inflation rate and T-Bills rate are counterbalancing each other. Inflation is slowing down and we are also starting to see the T-bills rate revert downward, Ademuwagun said.
According to the analyst, “for investors that have a closed-ended fund, they have taken advantage of the high interest of May when the rate was approaching 10 percent. Now that rates are dropping it is positive for such funds because it means prices are appreciating.”
But, for the open-ended fund, that continues to receive new investment, he said “it is negative because it means they will be getting a lower return on their investment.”
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 months-high in May 3032 as compiled from Nigerian Treasury bills primary market auction results for April 28, 2021.
Market analysts linked the increase in the stop rates to the hike in CBN’s OMO rates some weeks ago. Investors are bidding at higher rates and the Debt Management Office (DMO) also needs to raise the cut-off rate to fill some of the orders, an analyst noted.
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. But that has since reverted following the recent effort by the CBN to drive down rates. The increase in investors’ appetite for the less risky T-Bills has also contributed to the plunge in yields, analysts said.
