Attracting Retail Investors via Collective Investment Schemes

05 Dec 2012

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The Nigerian capital market stakeholders’ objective of expanding the reach of mutual funds to a greater percentage of the investing public will help to sustain stock market recovery, writes Eromosele Abiodun

When three Boston money managers pooled their money in 1924, the first mutual fund was born. In the subsequent eight decades, that simple concept has grown into one of the biggest industries in the world, now controlling trillions of dollars in assets worldwide and allowing small investors a means to compound their wealth through systematic investments via a cost-averaging plan.

Over the years however, this investment window has not been very much-appreciated in the Nigerian capital market. This, analysts said, was largely responsible for the massive loss recorded by retail investors.

They argued that if retail investors had entered the market through mutual funds managers the level of their exposure would have been minimised. Following the crash of the capital market in 2009 as a result of the global financial meltdown, most retail investors who had their fingers burnt had refused to come to the market. To reverse this trend, Securities and Exchange Commission (SEC) and Fund Managers Association of Nigeria (FMAN), recently rolled out a number of incentives to attract retail investors.

Among their plan is to expand access to collective investment schemes and introduce professional certification for the sector.

Expanding the Reach
At their quarterly meeting held in Lagos, they agreed to produce an all-encompassing strategic plan with the objective of expanding the reach of CIS to a greater percentage of the investing public.

The strategy document will project expected growth in assets under management over the next few years. The document will incorporate innovations into the market such as introduction of incentives to encourage retail investors back into the market through collective investment schemes, introduction of distribution and sales points, classification of schemes to cater for the investment appetite of the various classes of investors, review of minimum subscription levels for retail investors, reviewing the offering process for schemes, among other strategies to be considered.

The expectation is that the fund managers will have ownership of the document and two major drivers will be to increase total asset under management and total number of subscribers within an agreed time frame.

FMAN and SEC also agreed on the importance of improving professionalism in the sector and consequently the need to structure a curriculum geared to improving and updating the capacity of fund managers and the sales marketing staff, which would culminate in certification. In addition it was also agreed that continuous education would be a criteria to remain in the industry. A committee comprising members of the association, the commission and the Nigerian capital market institute are to work on the initiative.

It was also agreed at the meeting that there was an urgent need to raise the total assets of the funds through expanded participation in the schemes as well as reducing cost of participation in mutual funds to encourage more investors.

Speaking at the meeting, Director-General of SEC, Ms. Arunma Oteh, noted that the best investment window for retail investors in the capital market remains mutual fund. This, she added, would enable them avoid pitfalls of investing directly in the market as experts in mutual funds would professionally be investing on their behalf.

She however regretted that most retail investors were not aware of the existence of mutual funds as an investment vehicle thus resulting in low participation in the sector.

Represented by the commission’s Director, Collective Investment Schemes, Mrs. Liouse Eni-Umukoro, she directed that the all-encompassing strategic document and plans mooted at the meeting must be put in place within a short period.

Introduction of Certification
She also re-emphasised the need for prompt introduction of certification into industry. "On this, we have agreed that managers and marketers be trained while there would also be continuous training for the sector."

Corroborating her, the Fund Manager, StanbicIBTC Mutual Fund, Mr. Olumide Oyetan, said there ought to be adequate capacity building in the industry. "There should be minimum entry requirement, training for managers and marketers and continuous mandatory training.

Eni-Umukoro announced plans to develop the CIS sector of the Nigerian capital market against the backdrop of the fact that the CIS sector remained a thriving sector in major countries. She emphasised that it was important for stakeholders to make concerted effort towards developing the sector.

She explained that CIS remained a veritable tool for investors’ risk diversification. She added that there were plans to introduce stricter regulatory regime for the collective investment scheme sector, such as ensuring that custodians and fund managers submit half-yearly report of their various funds and benchmarking the performance of the various funds stricter.

She disclosed that the reviewed monthly and quarterly reporting formats were designed to ensure a more robust disclosure regime, adding that report on the level of compliance to the introduction (custodians were recently introduced to secure assets of the investing public and improve investor confidence) revealed 99 per cent compliance to appointing custodians and a high percentage had transferred the assets to custodians.

She added that the commission was also considering classifying funds into retail schemes (which have greater regulatory requirements) professional collective investment schemes and specialised collective investment.

She said managers of mutual funds in the capital market will be required to adopt the International Financial Reporting Standards (IFRS) for financial reporting of funds.

In view of the foregoing, she announced that the commission had arranged a capacity building programme for preparers of accounts, fund managers and their compliance officers.

SEC, she said, planned to review allowable expenses and fees' with a view to improving returns to investors stressing that doing so will eliminate unnecessary areas that contribute to the high expense ratios of the schemes.

Eni-Umukoro said the commission was also considering other initiatives to develop the sector, adding that the interactive session would afford it the opportunity to continuously dialogue with stakeholders

Mutual Funds
A mutual fund or Collective Investment Schemes (CIS) can be described as a pool of money provided by individual investors, companies, and other organisations.

A fund manager is hired to invest the cash the investors have contributed. The goal of the manager depends upon the type of fund; a fixed-income fund manager, for example, would strive to provide the highest yield at the lowest risk. A long-term growth manager, on the other hand, would attempt to beat an Exchange’s benchmark index in a fiscal year (very few funds actually achieve this).

Mutual funds are divided along four lines: closed-end and open-ended funds, meaning that an investor can exit at any time in the case of an open ended fund while the latter is a little bit rigid.

The closed-end type of fund has a set number of shares issued to the public through an initial public offering. These shares are traded on the open market. A closed-end fund does not redeem or issue new shares like a normal mutual fund. As a result, shares of closed-end funds normally trade at a discount to net asset value.

A majority of mutual funds are open-ended. In simple terms, this means that the fund does not have a set number of shares. Instead, the fund will issue new shares to an investor based upon the current net asset value and redeem the shares when the investor decides to sell. Open-end funds always reflect the net asset value of the fund's underlying investments.

Tags: Featured, Nigeria, Business, NSE, FMAN

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