Guy Czartoryski, Head of Research at Coronation Asset Management, speaks with COLLINS NWEZE on mutual funds market and investment opportunities in Nigeria.
What was the recently launched Coronation Research: ‘The Shifting Appetite of the Nigerian Investor: From Savings to Mutual Funds’ meant to achieve for the investors and Nigerian economy?
Mutual Funds are the next big thing in Nigerian finance and our aim is to explain why. The total assets under management of Nigeria’s Mutual Funds over the years 2015 to 2019 rose by 305% and more than doubled in inflation-adjusted terms. Even in this recession-hit year the value of Money Market Funds rose by 11% and the value of Fixed Income Funds rose by 60% during the first six months. Whereas banks used to be the default destination for savings, savers are increasingly turning to Mutual Funds.
If you had asked, ten years ago, what was the next big thing in Nigerian finance the correct answer would have been Pension Funds, because these have grown to manage in the region of Naira 10 trillion of assets. We believe that the correct answer to the same question today is Mutual Funds. These are set to grow to rival the Pension Funds in size in the years to come. And Mutual Funds will provide Nigeria with a pool of much-needed capital.
Coronation Asset Management has continually educated and informed the investing public about investment opportunities in the economy. Where do you think that the biggest investment opportunities can be found in the economy at present?
The outlook for Nigerian savers and investors is undergoing a complete transformation. During the period between 2010 and 2019 the average Nigerian Treasury Bill yield was 14.7% and this was, on average, 2.6 percentage points above the rate of inflation. Savers and investors had it easy during this period; essentially all they had to do was to invest in Treasury Bills in order to beat inflation. From the end of 2019 onwards this has no longer been the case. Savers and investors have to be a lot more subtle about what they invest in than they were before. And they have to take on a degree of risk, whether that means investing in Fixed Income Funds, Credit Solutions, Balanced Funds or Equity Funds.
In your presentations, you mentioned that interest rates are now low, that most savers are moving to Mutual Funds. Which risks do you think are prevalent in the Mutual Funds Market?
Part of the transformation that investors are experiencing has to do with risk. When investors bought Nigerian Treasury Bills they were buying essentially risk-free investments. And when they put money into savings deposits with banks, they had the implicit protection of the CBN and NDIC, leading most investors to believe they held a guarantee. With Mutual Funds the structure is different. A Mutual Fund is a collective investment scheme, meaning that investors own all the economics of the fund, less the fee charged by the fund manager. So, the economic structure is better than that of a bank deposit. However, Mutual Funds do not offer guarantees. So there is a scale of risk, starting with Money Market Funds, moving on to Fixed Income Funds, then Balanced Funds and Equity Funds.
With inflation rising and rates on savings coming down, what hope do you think is available to the grassroots investors and savers who usually bear the brunt of unfavorable economic indicators?
The point about Mutual Funds is that they are open to all-comers, and indeed several tech companies have created platforms that afford easy access. Of course, when the yield on a Nigerian Treasury Bill is close to 2.7% and inflation is at 13.2%, then it is not easy to close the gap between what is available in the market and what people would like to earn in the short term. However, there are a number of Mutual Funds available, with different product offerings and different levels of risk. It is important for people to familiarise themselves with the returns on offer and the level of risk that they are taking.
The rise by 305 per cent, the AUM for Mutual Funds between 2015 and 2019 shows that more people are embracing that segment of the market. What implication do you think this will have on the economy and people’s wellbeing?
As Mutual Funds grow they will create a growing portion of the nation’s overall savings. However, we not expect Mutual Funds to be passive investors. As we have seen, they stand in the middle between Treasury Bill returns which are low and savers’ desires for investment returns that beat inflation. That means that they will have to be active and will have to sweat their investments, whether those are government bonds, corporate bonds or equities. Remember that we are moving from an era when it was easy to beat inflation into an era when it will be difficult to beat inflation. There is a lot of work to be done.
Aside, Mutual Funds, there are also Fixed Income funds, dollar funds, infrastructure funds, etc which are not as popular as the Mutual Funds. How would you explain the edge that all the funds have on one another and what should determine where one puts his money?
So, let us look at the entirety of the Mutual Fund space. At the half-year stage in 2020, 61% of all Mutual Fund money was in Money Market Funds, 17% was in Fixed Income Funds, 10% in US Dollar Bond Funds, 4% in Infrastructure Funds, and 3% in Real Estate Funds. Those are the major categories. Where an investors puts his or her money depends on the currencies held (Naira or US Dollar) and the risk appetite desired. Money Market Funds are generally a little safer that Fixed Income Funds, for example.
Not many people have the right and enough information on the different types of funds. How has that impacted on the level of financial inclusion especially at the grassroots where majority of the unbanked and underbanked are?
The amount of information on funds is increasing rapidly. The Fund Management Association of Nigeria (FMAN) provides a large volume of data on fund unit price performance and this is an essential store of information. It is available for free online, so the sharing of information is egalitarian. Mutual Funds are increasing the depth and quality of the information which they publish, which is essential to creating a strong relationship with the investing public. Some have adopted the international standard, GIPS.
What future do you think that T-Bills have in the currency economy, especially with the declining yield curve. Is it possible for Nigeria to return to era of double digit yield from T-Bills?
We should not hold our breath for a return to double-digit yields from Nigerian Treasury Bills. The last communique from the Monetary Policy Council of the Central Bank of Nigeria made it clear that inflation is seen as a structural problem, rather than a problem that can be addressed with interest rates. At some point in the future Treasury Bill yields may need to back up, but the rise may be gradual rather than rocket-like. This is why we see a transformation in the way Nigerian savers invest, because there is no easy way back to Treasury Bills that yield more than inflation.
What is the level of risk management that is needed to protect companies and investors to boost confidence in the economy and promote sound investment climate?
Risk management is the key emerging skill from this year forward. Risk management was a relatively simple affair when Nigerian Treasury Bills yielded more than inflation. Holding a portfolio of T-bills has its challenges, but it is a lot easier than holding a mixture of different asset classes. Risk management starts with an acceptance of risk, which may seem strange, but until you accept that risk exists then it is difficult to understand how important it is to learn about it. It involves accurate performance attribution, careful financial modelling, scenario planning, back-testing and, in the end, judgement.
How has Coronation Asset Management been able to stay ahead of competition especially with the challenges that most investment firms faced in the COVID-19 era?
We have seized the issue of risk. For the past year we have worked closely with a Cardano, a firm of specialist Pension Fund risk managers in the Netherlands, and we have worked alongside three of their team located here in Lagos. We have learned, and continuing to learn, risk management techniques from them and they contribute to our Asset Allocation Committee weekly while giving us daily support. This is a very fruitful cooperation and we are embedding risk management at the core of our culture.
What are the things that make Coronation Asset Management tick, and what you are doing differently from your competitors?
We believe a lot in process, and in open and frank discussion of investment theses and risk management models. We have a research-based approach and believe that research works when allied to a rigorous investment management process. And we tend not to get fixated on one idea and are humble enough to acknowledge our mistakes. In addition, we are confident that we are in the right industry and that our industry is on the rise, so we are excited about the future.
Do you think that yields for the CP is competitive and in tune with today’s realities and demand for more returns by local and International investors?
These are great days for issuers of commercial paper, and for investors such as ourselves CP provides extra yield and diversification. So it does address some of the demands of investors. That statement, however, needs to qualified by saying that the associated risks of CP issuers need to be assessed carefully and in in the context of the overall return, so we tend to be a little less reliant on CP than some other fund managers.
How do you see the opportunities in investment banking, securities trading/brokerage, asset management, registrar services and consumer finance in today’s economy?
Coronation Asset Management is a sister company to Coronation Merchant Bank and between the two of us we cover most of those activities. We believe that all these services are on the rise as the private sector moves in to provide the investment returns that savers and investors demand. As the easy solution of Treasury Bill investing declines in importance, the private sector is going to step in to fill the breach.
How do you think the fixed income securities have performed this year and prospects for the remaining part of the year?
The performance of Federal Government of Nigerian (FGN) bonds this year has been exceptional with many long-dated bonds recording paper gains of 20% of more during the first nine months of the year. It seems unlikely that we will see such steep gains in the rest of the year, but our overall prognosis of interest rates is ‘lower for longer’ going into the fourth quarter, so we think that there is a reasonable chance that bond prices will continue to be supported.
What are the likely key drivers of the Nigerian equities market in the remaining part of the year considering the impact that COVID-19 has had on the market and also the opportunities it has created?
Equity markets tend to price economic developments between nine months to a year in advance, so the recent performance of the equity market is pricing in an exit from recession in early 2021. The impact of Covid-19 has been to bring forward certain developments that were already in progress, in particular the rise of the telecommunication and tech sectors. At the same time, the equity market was definitely over-sold by April this year, and the rebound has been good to watch.
What impact will the current depreciation of the naira at both official and parallel markets have on the Nigeria’s investment climate?
The Naira-based investor is in the majority and concentrates on Naira-denominated returns. The interesting thing about the situation in the currency markets is the parallel market foreign exchange rate usually trades less than 25% away from the interbank rate. That is a much better situation than we had during most of 2016 and the beginning of 2017, so we think that a resolution is not impossible.
What are your views on foreign portfolio investment into the economy, and what can be done to achieve a more stable investment climate for the country?
Quite a lot of foreign portfolio investment is likely to stay on the sidelines while the foreign exchange issues are sorted out. I would argue that the government is taking the right approach is tackling the structural issues in the economy. Once some of the significant structural issues in the power sector and the petroleum sector are sorted out then issues such as foreign exchange and interest rates become easier to manage.
What is the biggest challenge you see confronting the investment industry in Nigeria?
Our belief is that we are undergoing a transformation from an era of investing in risk-free and high-yielding T-bills to an era of diversified asset allocation and risk management. The major challenge is to educate the investing public and to win their trust. The Securities and Exchange Commission has laid the ground rules of the investment management industry and will continue to update the rule book, while the Fund Managers Association of Nigeria will continue to develop the fund performance and comparison data which savers and investors rely on. We will play our part in developing and advocating risk management.
