Harmonizing the reporting of Nigeria’s Mutual Funds is necessary in creating comparable Unit Price data and helping the industry to achieve its potentials. MOUNIR BOUBA, chief investment officer of Coronation Asset Management, in this interview with HOPE MOSES-ASHIKE, shares insights on the need for harmonized investment reporting in the industry and the adoption of Global Investment Performance Standards (GIPS). Excerpts:
Can you give some insights on what the harmonized investment reporting is all about? Is this a new initiative in the industry?
Harmonized investment reporting has to do with standardized requirements for calculating and presenting investment performance, and no, it is not a new initiative in the industry, it has been around for quite some time, since about 1999. It makes it possible for investment managers to compete on an equal footing in all markets. Investors can easily compare the past performance of asset managers. It is like what IFRS is right now in the accounting space.
How significant is this in the investing community and economy at large?
There are over a thousand firms that are GIPS compliant over the world and 48 markets claim compliance to a globally harmonized investment reporting. Also, all but one of the top 25 asset managers in the world claim compliance with the harmonized reporting standards for all or part of their business, so it is very significant globally.
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Is there a framework for this or how does it work?
Yes, as a matter of fact there is, it is called the Global Investment Performance Standards (GIPS).
Lack of GIPS in Nigeria is one of the factors that make international investment in Nigerian funds less common, than investments in other parts of the world
What is the Global Investment Performance Standards (GIPS) all about and what is the level of awareness in Nigeria?
Global Investment Performance Standards (GIPS) are the creation of the CFA Institute (Chartered Financial Analyst), which began publishing global standards for calculating and reporting investment performance over twenty years ago, back in 1999. Initially the CFA Institute permitted variations in reporting standards, to reflect local practices, but these were withdrawn in 2005, leaving all participating funds obliged to report according to exactly the same standards. There are now, according to the CFA Institute, 1,700 institutions across the globe that report according to GIPS, and these institutions run tens of thousands of funds.
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The level of awareness in Nigeria is low, in our view, but it can only grow. The key is the CFA Institute because the CFA qualification has become a level of excellence to which the majority of young financial professionals aspire. Regulatory and ethical standards are an important part of the CFA syllabus, so an increasing number of Nigerian financial professionals are learning about GIPS as a standard part of their professional qualifications. And this is being built into their expectations of how funds should report.
You mentioned about 48 markets around the world claim compliance with the GIPS standards. What is the level of compliance in Nigeria?
The level is low, but it has taken root. Among mutual funds (collective investment schemes) in Nigeria, the majority do not comply with GIPS. But, there are a few that state that they do, and these have emerged over the past few years. It is a question of leadership and perseverance. Complicating matter is that compliance with GIPS can only be claimed for the complete firm and requires a minimum of five years history or since inception of the firm.
It should be noted that compliance is based on firm not a fund. A firm (GIPS definition) consists of all portfolio in a business line or the total of the company.
What does the industry and Nigerian economy stand to gain by adopting the GIPS standards?
Do you want to remain a backwater, or do you want to join the rest of the world? This is the question. Lack of GIPS in Nigeria is one of the factors that make international investment in Nigerian funds less common than investments in other parts of the world, such as South East Asia. An investor who knows exactly what the underlying investment contains, has a higher level of confidence than if the reporting is ambiguous or unclear. That is what standards are about. And the same goes for the domestic investor because adoption of GIPS will make investment data directly comparable with each other.
What is Coronation’s stand on this?
We are patient and persistent. Adoption of GIPS is not going to materialize overnight. At the same time, and in the run-up to adoption of GIPS, it makes sense to nudge the industry in the right direction. So, for example, we are in favour of applying market-to-market accounting for measuring the performance of funds, rather than the alternative reporting method which is to amortise fixed income investments over time. The problem in Nigeria is that we have a mixture of the two reporting techniques, which can lead to confusion.
We analysed these in our report this year called ‘Comparing Mutual Funds – Apples and Oranges’ (Coronation Research of 11th May). We aim to persuade people of the benefits of harmonizing reporting standards across the asset management industry. As the requirement for GIPS compliance for five-year history is considered too expensive to build retrospectively, Coronation is building a compliant track record from January 2020 and thus can only claim GIPS compliance by January 2025.
Total Net Asset Values of the 106 mutual funds in Nigeria declined from N1.48 trillion as of 31st December 2020 to N1.36 trillion as of 30th April 2021. What is responsible for the decline and how can this be addressed?
It should be pointed out that the Total Net Asset value of these funds increased by 50.1 percent in nominal terms during 2020, or by 30.3 percent in inflation-adjusted terms. The compound annual growth rate of the Total Net Asset value of the industry between 2015 and the end of 2020 was 43.7 percent in nominal terms and 23.7 percent in inflation-adjusted terms. We are quite happy to be working in an industry with that kind of medium-term growth, which is why we are investing in it.
Investors are increasingly aware that they can earn superior returns by investing in mutual funds than they get from bank deposits, though of course the risks are slightly different. The reason for the decline early this year was that interest rates were rising and so the prices of fixed income investments fell. For those fixed income funds using mark-to-market accounting, this means reporting a lower Net Asset Value (or Unit Price) in April than at the beginning of the year. That is not the only reason, but in our view it is a significant factor. And it is not something we worry about, given a medium-term perspective.
What type of mutual funds are of more interest to investors and why?
In our peculiar investment environment in Nigeria, a long term investment horizon is practically a short horizon in an advanced market. While an investor in an advanced economy could have investment horizon of 5 to 10 years, a typical investor in Nigeria is looking below 1 year or 2 years max. So, in the Nigerian context, mutual funds with underlying assets that are below one year and without risk of principal erosion (even it is temporary) are favoured by investors.
Nevertheless, there is also a desire from some more sophisticated investors for alternative investment solutions that can reach the inflation level. Therefore, we are continuously working on increasing our investment solutions offering.
How do you see Nigeria’s environment currently and where do you think an Investor can invest money and make good returns?
Nigeria is recovering from the recession of 2020 and several industry sectors, for example the telecoms sector, are growing quickly. Economic activity is improving. As we wrote in a recent report, ‘Nigerian Bank, Resilience Built-In’ (24th of June) the profitability of listed banks appears to be remarkably consistent over time, which suggests that they are good investments. On the investment front, it is important to remember that the days of easily beating inflation by investing in Nigerian Treasury Bills (T-bills) appear to be over, at least for the time being.
If you look at the period from 2010 to end of 2019, the yield on a T-bill was generally higher than inflation by 2.47 percentage points. That happy period ended during the last months of 2019 and continued through 2020 and on to the present day. So, investors have to look broadly at investments and need to take on risk, which was not necessary before. We have invested significantly in risk management and investment research. You can see these in our fund reports and in our research reports.
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