If Nigerian funds want to play in the international league, they need to adopt Global Investment Performance Standards (GIPS), according to Coronation Asset Management.
In a new report on ‘Comparing Mutual Funds – Apples and Oranges’, the firm noted that very few Nigerian fund managers apply GIPS at the moment, as Mark-to-Market Accounting is one of the cornerstones of GIPS.
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Some funds use Mark-to-Market Accounting, meaning they report the market price of the bonds which they hold. This can mean that Unit Prices (UP) are volatile when interest rates change and bond prices rise and fall. This happened in 2020 and is happening in 2021. Other funds use Amortised Cost Accounting, which smoothes out the price performance of a fund. Some use a mixture.
GIPS opens the way to the future. Global investors have access to data on thousands of funds across the world and, thanks to the adoption of GIPS, the data is comparable and free. Anyone can use the Morningstar and Financial Times websites to compare thousands of funds, the firm stated.
The first step is to harmonise reporting among Nigeria’s Mutual Funds. GIPS has to be a long-term goal because introducing GIPS is expensive and takes time to enforce. Harmonising the reporting of Nigeria’s Mutual Funds is a necessary step to creating comparable UP data and helping the industry to achieve its potential.
The new report by Coronation Asset Management addresses developments in Nigeria’s fast-growing Mutual Fund industry where the total assets under management grew by 50 percent to N1.57 trillion last year.
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In the report, the Coronation Research team, headed by Guy Czartoryski, examines what happens when an investor seeks comparative information on Mutual Funds and takes the example of Naira-denominated Fixed Income funds. The results are surprising. The data reported by these funds is very diverse, with different accounting methods used to arrive at very different Unit Price performance data. This means that investors lack the kind of easy comparisons between funds that exist in developed markets, comparisons that can be found on the Morningstar and Financial Times websites.
“In our view, Nigeria’s diverse measures stand in the way of the development of the industry,” says Guy Czartoryski, head of Coronation Research. “Although it is growing rapidly, we believe that Nigeria’s Mutual Fund industry requires several more years of growth to reach the Naira 12.3 trillion total size of Nigeria’s Pension Funds”.
Harmonisation of its reporting may be a difficult task, making the effort now will lead to Mutual Funds becoming a significant force in Nigeria’s financial infrastructure.
On the experience of an ordinary investor trying to buy into a Mutual Fund, he said “We went through the experience of an ordinary investor looking to buy units in a Fixed Income fund. We compared the reported Unit Price (UP) performance of 17 different Fixed Income funds during 2020, even though past performance is not necessarily a guide to future performance”.
The problem is that Unit Price data is not comparable. “What we found was that Unit Price data, which is supplied by the funds themselves, is not comparable. Differences in reported performance are too large to be explained by differences in underlying performance in 2020,” he said.
