• Thursday, June 13, 2024
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Here’s how equity mutual funds defied inflation in 2023

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With a steady increase in inflation rates last year, only very few asset classes including equity mutual funds were able to fare better.

Mutual funds are created with the intent to pool funds from various investors who are willing to diversify holdings.

One of the best-performing asset classes in 2023 was the equity-based mutual fund with average gains of more than 40 percent thanks to the performance of the stock market, whose average return exceeded the headline inflation rate of 28.92 percent in December.

Although the equity market also outperformed inflation, popular investment advice is not to put all eggs in a basket.

Among the best-performing funds in 2023 were Futureview Equity Fund, with an 86 percent return; Stanbic IBTC Aggressive Fund, up 66.35 percent; and Axa Mansard Equity Income Fund, up 49 percent.

New listings, policy reforms fuel equity fund growth

Heading into 2023, the outlook for stocks was dim, with investors focused on the central bank’s interest-rate hikes, high inflation, and election instability.

But as the year went on, investors’ sentiment turned increasingly positive on policy reforms by the new president in June, paving the way for the stock market to deliver a 45.9 percent return.

In its economic outlook for 2024, the Bismarck Rewane-led Financial Derivatives Company said the Nigerian Exchange Limited has transitioned from a Lagos-based fringe player to a global player, adding that the Nigerian equities market outperformed others in 2023. “Performance boosted by new listings of capitalised stocks, policy reforms and lower interest rates.”

Equity fund ruled the market

BusinessDay analysis of the performance of different types of mutual funds last year showed that equity mutual funds and balanced funds outperformed both inflation and the stock market.

An equity fund is a mutual fund that invests principally in stocks.

Equity funds had an average performance of 49.62 percent in 2023, exceeding the average inflation rate of 24.5 percent.

Futureview Equity Fund led the pack with a return of 86.02 percent.

Other best-performing equity funds are Stanbic IBTC Aggressive Fund (Sub Fund), up 66.35 percent; Afrininvest Equity Fund, 64.39 percent, and FBN Nigeria Smart Beta Equity Fund, 63.75 percent.

The lowest-performing equity mutual fund also outperformed inflation with returns of 31.80 percent.

Balanced funds were not left out of the gains with an average performance of 32 percent, and the best-performing fund, ValuAlliance Value Fund, delivered a return of 83 percent last year.

A balanced fund is a type of mutual fund that owns both stocks and bonds.

Ayooluwade Ogunwale, a fixed income analyst at FBNQuest, said investors that diversified into mutual funds with equity funds last year would have got returns that outperformed the stock market without direct exposure.

Uncertainties in fixed income dampens growth

Unlike the other mutual funds, the fixed-income mutual funds performed poorly last year.

Coronation, in a weekly report last year, said: “We were surprised to find that the value of fixed-income mutual funds has fallen this year. Only a part of this fall is attributable to the use of mark-to-market accounting (which only some funds use for their published data and which records price losses on bonds when interest rates go up).”

They attributed the performance to the irregularity in the reporting of the fund, saying it was the unevenness of fixed income fund reporting – some funds report average yields while others report mark-to-market positions – that put people off.

Different strokes for different folks

Some of the mutual funds in Nigeria include the equity-based fund, money market funds, bond/fixed income funds, Eurobonds, infrastructure bonds, ethical funds, balanced funds and infrastructure funds.

Ogunwale of FBNQuest said investors with low risk can go for the fixed income funds, which still gave double digits returns last year. “Currently we are in a period of lower interest rate largely because of the liquidity profile for this quarter. For an investor with low risk appetite, the money market would have been your option but due to low interest and money markets are shorter-dated, so they are more reflective of whatever is happening at the intervals.

“You can put your funds towards the bond/fixed income mutual funds. If you have ethical bias, you might want to go for some ethical fixed income funds, the reason being that they are still able to stretch their returns compared to normal fixed income funds.”

Ethical funds are mutual funds where investment decisions are made after taking into consideration some agreed ethical factors. Such factors can be set from a religious, environmental, social, governance or other moral perspective.

Three-years performance of equity stock

Despite the defeat that equity-based funds took in 2021 and 2022, their strong performance last year helped many of them achieve double-digit growth over the last three years.

At the top of the list is the ARM Aggressiven Fund with a three-year average performance of 79 percent.

Futureview Equity Fund’s returns in 2023 helped maintain its spot at the top at an average of 29.15 percent.

Stanbic IBTC Aggressive Growth Fund also made it to the list of top performers. The fund performed an average of 29.15 percent in the last three years.