The Mutual Fund Market is a key investment platform for local and international investors. In this interview with COLLINS NWEZE, Managing Director, FBNQuest Asset Management Limited, Ike Onyia, says foreign investors are keen on investing in the economy which he says has great potential.
What is the state of Nigeria’s Mutual Fund market?
The Nigerian mutual fund industry is growing rapidly and this is evidenced by the growth in the amount of money (assets under management) managed by fund managers within the industry. The total assets under management (AUM) as recorded by the Securities and Exchange Commission (SEC) for mutual funds in Nigeria as at the April 20, 2018 was N551.7 billion (excluding Exchange Traded Funds).
This sector has grown 112 per cent since December 2015 where the total mutual funds AUM were N259.7 billion. The growth in the industry is driven by increased publicity/awareness around the need to save and invest. Saving and investing through mutual funds allows members of the public earn higher returns, create a contingency fund for emergencies, meet their other financial goals and save for retirement. Additionally, the Mutual Funds are regulated by the Securities and Exchange Commission, adding a layer of security and transparency to the use of investors’ funds.
What key products driving your performance?
We currently manage five mutual funds invested in a variety of asset classes and for various risk profiles. Our flagship funds include the FBN Money Market Fund, the FBN Nigeria Eurobond Fund and the FBN Nigerian Smart Beta Equity Fund.
The FBN Money Market Fund allows investors with as little as N5,000 gain access to the attractive returns available within the Nigerian money market space (fixed income investments that have a maturity of less than a year).
The FBN Nigeria Eurobond Fund allows investors with dollars access the Nigerian Eurobond market, thereby earning competitive returns on their dollar deposits. Investors need only have as little as $2,500 to access a market where bonds trade, on average, in lots of $200,000.
The relatively high trading volume in the Eurobond market typically serves to shut out smaller investors, meaning they are unable to access that attractive market. This Fund fills that void.
The FBN Nigeria Smart Beta Equity Fund is invested in the Nigerian equity market. Equities in the Fund are picked after the companies listed on the Nigerian market have been screened for a number of proprietary quantitative factors which we have identified as factors that drive performance in the local equity market. This Fund is the first of its kind in Nigeria and has developed a strong track record, as such, is a good vehicle for investors looking to gain exposure to the Nigerian equity market.
What is your portfolio size?
We currently manage funds in excess of N250 billion for a variety of investors and across various asset classes.
Why do grassroots investors find it difficult to go for Mutual Funds?
A large proportion of the population are underserved from a financial services point of view and this, in addition to low levels of financial education, high levels of poverty and financial exclusion, cause some segments of the population to find it difficult to invest in formalized mutual funds. Evidence suggests that a number of the financially underserved have experience investing via informal community based collective investment schemes (such as Ajo, eSUSUetc). However, the knowledge base around formalized mutual funds amongst the general population is relatively low. Many investors have not been exposed to the mutual fund industry and its benefits. This lack of awareness hampers investing in mutual funds.
Secondly, a lack of understanding of the products hinders investors participating in the industry. Many investors have not had the opportunity to have mutual funds (which is essentially a fund where various investors’ funds are pooled together and invested in various assets, depending on the type of Fund) and investing in general explained to them.
This makes it difficult for them to invest. Low income is another hindrance. Where the person in question is living hand to mouth, unable or barely able to meet their basic needs, he or she is unlikely to have the ability to invest as he or she has no excess disposable income. In such a situation, said person is not likely to access investment vehicles such as mutual funds.
How comfortable are foreign investors with Nigeria’s Mutual Fund market?
We believe that foreign investors are comfortable investing in the Nigerian capital markets. This is driven by the improving macro-economic fundamentals of the economy, the improved foreign exchange liquidity, the recovery in the Nigerian equity market and the increase in the number, complexity and diversity of the mutual funds available for purchase in Nigeria. Whilst we do not have access to data detailing the proportion of mutual fund assets held by foreign investors, we believe that the offering is attractive to foreign investors who wish to participate.
What steps have you taken to ensure security of investors’ funds?
First of all, all mutual funds in Nigeria are registered with the Securities and Exchange Commission (SEC) and all Fund Managers are required to be registered and regulated by the SEC. The regulatory oversight ensures the safety of investors’ funds and also ensures that the Fund Mangers’ are transparent with the methods investors’ funds are utilised.
In addition, all mutual funds are required to employ the services of a Trustee. The Trustee essentially represents the unit holders (the investors’) and their interests. Their role is to monitor the Fund Manager, making sure that the funds under their management are being managed in the best interest of the unit-holders.
Mutual funds in Nigeria are also required to have the monies deposited by investors as well as any assets purchased with the money held by a Custodian. A Custodian is an independent company that is solely tasked with maintaining the safety and custody of all assets of its clients. The Custodian’s role is to protect customer funds and investments. The different client (Mutual Fund) assets held by the custodian are held separately from each other as well as from any assets of its own the Custodian may own.
What impact does a drop in government securities’ yields have on Mutual Fund investors’ Return on Investment?
In reality, equity returns are driven by more than just the movements in government security yields. The impact of the decline in the yields on government securities will therefore have differing impacts on different products depending on the investments within Funds.
A result of this will also be the opportunity for real sector to borrow money at relatively low yields. The core of the economy is the real sector and easy access to credit should lead to improved business performance. This leads to economic growth and thereby benefits the equity market.
We expect Funds that include bonds to see better returns on their bonds because the declines in yields mean that bond prices are rising. Rising bond prices, in general, bode well for investors holding those bonds. Funds with equity investments should see their returns driven by the returns to the equity market. In theory, a decline in government yields, all things being equal, should lead to an increase in equity prices as investors look to equities for returns when yields decline. This would lead to increased demand for equities and therefore, increased prices.
What are the challenges facing the Mutual Fund Market?
Our position is that prospects are very bright. The industry is coming off a low base at this point and as a key player, we remain focused on advertising to improve awareness about the importance of mutual funds as the savings vehicle for the retail investor especially. Additionally, we are also focused on educating the population and providing a variety of products to meet the various needs of investors. With this in mind, we expect that we will see more investors choose mutual funds as their preferred vehicle to meet their various financial goals.
Though investors are generally risk averse and are often wary of investments where there is risk to their principal investment, it has led to growth in the industry – particularly in money market funds, the lowest risk fund.
Additionally, the low level of financial education about the importance of savings and the different vehicles tailored to an individuals’ risk tolerance is another hurdle. Many investors do not have the time, the market knowledge or the minimum investment, in some cases, required to participate directly in the capital markets.
What is your take on the I&E FX Window. Do you believe it has brought enough liquidity into the forex market?
The Investors & Exporters window has been a success so far and has improved the liquidity of the forex market. The window was officially established on the 21st of April 2017. The main aim was to increase the liquidity of the foreign exchange market, which was one of the ails facing foreign investors in Nigeria as well as local companies requiring access to the foreign exchange market in the normal course of their business.
The continued reduction in oil prices through 2016 had put pressure on the Nigerian economy, reducing foreign exchange liquidity and causing the parallel foreign exchange market to depreciate to a low of N520 to $1 by early 2017. Transactions on the new window began on the 24th of April 2017 and the establishment of the window provided an avenue for eligible transactions to be executed and settled. The Central Bank of Nigeria (CBN) is also a market participant at the window to promote liquidity and professional market conduct. Since the inception of the window, liquidity has returned to the foreign exchange market.
In the one year since the window began, a total turnover of $45billion was recorded. Over the year, foreign investors have gained increasing confidence in the system and we have seen a resumption of foreign portfolio inflows into Nigeria, totaling over $13 billion in the same period. Market participants also report average weekly turnover of $1 billion, with the exchange rate relatively stable around N360 to $1. The stability on the I&E Window has also caused the Naira exchange rate on the parallel market to appreciate from around N385 to $1 when the window was launched in April 2017 to stabilize around N363 to $1 currently.
The ease of transacting in the foreign exchange market has also driven some market watchers to speculate that the readmission of Nigeria into the JP Morgan Government Bond Index-Emerging Market (GBI-EM) is imminent. Nigerian bonds were removed from this index in October 2015 due to what J.P. Morgan termed the illiquidity and lack of transparency of the Nigerian foreign exchange market following the currency controls imposed by the CBN in response to the pressure on the Naira. All of these points speak to the success of the I&E Window.
