Dampened investors’ appetite for low yielding mutual fund instruments has cost the industry N123.64 billion in asset in the first four months of 2021.
Total asset managed by Nigeria’s mutual fund industry dropped by 8.05 percent to N1.37 trillion in April from N1.49 trillion in January, as analyzed from the data by the Securities and Exchange Commission (SEC).
While the net asset value (NAV) of bond and fixed-income funds reported an increase of 14.59 percent and 9.5 percent, respectively, investors redirected and reduced their investments in the money market, equities and mixed/balanced funds by 28.23 percent, 2.05 percent and 2.35 percent, respectively.
“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.
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.
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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 bond funds, a measure of the level of investment in the asset, grew to a record-high of N255.07 billion as of April 2021 from N222.59billion in the first month of this year.
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.
The money market funds whose return is largely dependent on the performance of the less risky Treasury bill shed N206.53billion. 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 decline to N525.09billion in April. It accounted for 38.33 percent of the total mutual fund asset, a few points more than the 35.10 percent share reported for the fixed-income funds, the share increased 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 N41.77 billion. From N439.12 billion in January to N480.89billion at the end of April.
Even though there has been a gradual uptick in the yields on the less risky federal government short term Treasury bills, the yield on the instrument is still low and gives a negative real return when adjusted against Nigeria’s rising inflation.
Further analysis of the SEC data shows that ethical and real estate funds also caught the eyes of investors as they both reported a NAV appreciation in the review period.
Ethical funds added N1.95 billion in four months, from N13.06 billion in January; it was up 14.93 percent to N14.99 billion. Real estate funds on the other hand added N7.17 billion to its NAV to settle at N50.04 billion in April from N42.32billino 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 18.17 inflation rate in March, the highest in four years, the real return on the federal government less risky short term debt instrument depreciated further when compared to March 2020 when the inflation rate stood at 12.26 percent.
While inflation-adjusted return 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 -16.17 percent and -14.67 percent in the comparable month of 2021, thanks to Nigeria record-high 18.17 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 -8.42 percent in the same period of this year.
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.
However, the recent uptick in the yields on the short term government instrument is helping to comfort investors against the rate at which the high inflation rate is impacting their returns.
“While the rising inflation has broadened negative real return, it’s comforting to know that yield on fixed income instruments is also on the rise which will bridge this gap,” Ayodeji Ebo, Head, Retail Investment, Chapel Hill Denham, 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 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.
While investors bid at a rate as high as 10 percent for the 91-day bill, 12 percent and 15 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria (CBN) settled at 2 percent, 3.5 percent and 9.75 percent, respectively.
Analysis of the T-bills auction result for April 28, 2021, shows that the CBN raised a total of N129.46 billion from the 91-day, 184-day and 384-day bills, N40.98 billion more than the initial N88.48 billion the apex bank offered to raise in this week’s auction.
Investors were less interested in the shorter 91-day and 182-day bills as they attracted a lower interest rate but were willing to subscribe to the longer 364-day bill, which rose by 75bps.
While the 364-day with a much higher interest rate was oversubscribed by N107.08 billion, the 182-day was oversubscribed by N3.1 billion but the 92-day bill was undersubscribed by N860 million.
While the CBN planned to raise N11.39 billion for the shorter 91-day bill, investors were willing to subscribe with N10.53 million. The apex bank was eventually able to allot N7.19 billion, N4.2 billion less than its initial offer.
Investors were willing to bid with N9.1billion for the N6.0 billion offered for the 182-day bill. The apex bank eventually raised the initial 6.0 billion it offered to investors.
While the CBN offered to raise N71.07 billion through the longer 364-day Treasury bill, investors said they were willing to invest N223.35 billion. The apex bank later raised N116.27 billion, N45.2 billion more than its initial offer.
Though the recent uptick in T-bills rate to more than one year-high is good news for fixed income investors whose real return appreciated to -8.42 percent in April from -9.33 percent in March, the expected high inflation rate remains a challenge.
Even though a BusinessDay poll of five market analysts expect the rates on the less risky government Nigerian treasury bills to reach 14 percent this year, the country’s inflation rate, which is expected to maintain an upward trend, means investors are unlikely to get a real positive return this year.
Ebo said he expects inflation to rise further in the coming months as the downside risk of fuel subsidy removal remained.
“The question is, as annual inflation moves above 18 percent, can one year (364-day) T-bills go as high 18-19 percent?” Ademuwagun asked.
Nigeria’s rising cost of goods and services, which does not have relief in sight, puts the country’s local investors investing in government instrument at a disadvantage when compared with their African peers.
With 9.213 percent T-bill rates in Kenya, fixed-income investors in the country are enjoying a real return of 3.31 percent. March inflation in East Africa’s largest economy stood at 5.9 percent.
With an inflation rate of 10.3 percent in March, the real return on Ghana’s 16.45 percent interest rate on 364-day Treasury bill stood at 6.15, over 10 times more than the inflation-adjusted -8.42 percent reported for a similar bill in Nigeria
While interest rates in Nigeria have always been high due to the monetary system in vogue since 2009, which sought to use FGN bonds/T-bills and OMO bills as a means of attracting US dollars into the country to stabilise the naira, but October 23, 2019, OMO policy by the central bank, which prevents domestic investors from participating in the auction, drove rates to its record low levels.
