The promise shown by the exchange traded funds segment of the Nigerian Stock Exchange may just be the impetus that will drive the next phase of capital market growth, writes Kunle Aderinokun
As the Nigerian Stock Exchange looks to bounce back from last year’s indifferent performance – the ASI lost 6.7 per cent in 2016 – the Exchange Traded Funds segment may be the key driver of the expected rally. There are still fears expressed that this year’s market performance may mirror 2016. Analysts at Dunn Loren Merrifield say investors’ outlook “remained mixed on the near term.” The mixed outlook is attributed mainly to unfavourable economic fundamentals.
Indeed, the fundamentals were poor in 2016. The economy went into recession, businesses went under while thousands lost their jobs, leading to a steep rise in unemployment, business and family incomes shrank, hit by rising costs and inflation, while interest rates remained in high double digit zone. And the unfavourable indicators have not let up. Latest official figures from the National Bureau of Statistics (NBS) showed, for instance, that Nigeria’s inflation rate has risen to 18.72 per cent from 18.55 per cent in December 2016.
However, despite the subdued expectations, one of the smart investment strategies this year would be for investors to consider the rich array of exchange traded products in the market to rebalance their portfolios and hedge their risks. The ETF asset class has continued to produce impressive performances year-on-year since the first one, Newgold ETF, was introduced in 2011, the market volatility notwithstanding. Over the past six years, the ETF market has grown by over 1,900 per cent, with assets under management (AUM) in excess of N4.2 billion as of September 2016 as against N287.5 million in December 2011. The global picture is equally impressive, suggestive of the appeal of ETFs. The ETF industry has achieved over 102 per cent cumulative growth over the last five years. Analysts believe AUM will reach $6 trillion by the end of 2020.
Of significance is the listing in January of the SIAML Pension ETF 40 by Stanbic IBTC Asset Management Limited, the first listing of any kind for the year. The NSE accepted the listing of 5.97 million units of SIAML Pension ETF 40 at a par value of N100 per unit. The SIAML Pension ETF 40 is expected to tract the NSE Pension 40 Index, a total return index that was launched by the Exchange in July 2015, which contains the top 40 most liquid and capitalised listed companies. According to the Chief Executive Officer of NSE, Oscar Onyema, at the listing, “The listing of SIAML Pension ETF 40, which marks our first listing in 2017, lends credence to our commitment to championing and advocating for growth of the ETF market in Nigeria.”
ETFs essentially track the performance of market indices. Last year, for instance, while the ASI lost 6.7 per cent, the NSE Pension Index gained 0.70 per cent, NSE Banking Index grew by 2.2 per cent and NSE Premium Index gained 7 per cent. What this means is that an investor, who invested in Vetiva Banking ETF, with the NSE Banking Index as its underlying asset, had a capital gain of 2.2 per cent. There were eight listed ETFs on the Nigerian Stock Exchange before the listing of SIAML Pension ETF 40, with more expected to be listed in the year. For instance, the Stanbic IBTC Dollar Fund is likely to be listed in the first half of this year.
The Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) granted approvals for the launch of the IPOs for Stanbic IBTC Dollar Fund and SIAML Pension ETF 40 late last year. According to Stanbic IBTC, the two funds were launched based on market need and investor demand. The Dollar Fund is expected to provide discerning investors with the opportunity to seek exposure in attractive dollar-denominated securities to serve as a devaluation hedge while the SIAML Pension ETF 40 will mirror the NSE Pension Index, which tracks the 40 most capitalised and liquid companies in the capital market.
Chief Executive, Stanbic IBTC Asset Management Limited, Mrs. Bunmi Dayo-Olagunju, said the funds will “foster the diversification of portfolios, which in turn will help in the preservation and appreciation of wealth for investors.”
Indeed, investors’ desire for innovative products like ETFs and other derivatives is clearly reflected in the strong performance posted by the Stanbic IBTC Dollar Fund IPO. A recent advertorial by Stanbic IBTC Asset Management Limited, issuer of the Fund, showed that the IPO was 95.4 per cent subscribed. Such strong showing is no doubt reflective of market sentiments. ETFs and other indirect products may just be what the NSE needs to jumpstart a strong market rally in 2017. The exchange seems to appreciate the impact of ETFs on market growth and has promised, in its strategic outlook for 2017, to “fast track efforts in developing exchange traded derivatives” as such products will “provide investors with tools to better weather economic realities in 2017.”
No doubt, ETFs, by their very nature of tracking the performance of indices, are great assets to hold in a sluggish economy. One of the more important benefits of an ETF is that it allows you bet on market winners while avoiding the sluggards in a cost effective way. So, for instance, you can buy a basket of the 40 most capitalised and liquid stocks that are favoured by institutional investors like pension fund administrators, insurance companies and others simply by buying the SIAMLPension ETF 40, which tracks the NSE Pension Index.
Also, ETF is flexible; it functions much like a stock and can be traded on at current market prices all through a trading day. Investing in an ETF gives the investor the benefits of dividends on all dividend paying stocks in the constituents of the index. Other benefits of ETFs include tax friendliness, low cost of transaction, simplicity and ease of transaction, among others.
NSE says it is “cautiously optimistic” of a more vibrant capital market in 2017. It expects “to see a revival of supplementary listings and return of the new issuance market.” Whatever happens in the market this year, the ETF market is expected to continue its strong growth trajectory as investors take advantage of its benefits.
There may be no better time to find value in the capital market than now and this is actually the time to be bullish by picking up stocks and other exchange traded securities at give-away prices.
Great investors like Warren Buffet, Philip Fisher, Benjamin Graham, Bill Gross, John Templeton and Peter Lynch became so successful at investing because they know a thing or two about market bargains. Warren Buffet, for instance, has a well-honed investment strategy that is simple yet highly effective: buy good quality stock trading at a discount and then wait for it to appreciate. The effectiveness of this strategy is evident in the fact that today Buffet is a billionaire, his wealth mostly amassed from stock market investments.
As investors reshape their portfolios, ETFs will arguably be among their top investment picks; considering ETFs’ impressive performances year-on-year over the past five years and the expected growth projections, it is an asset class that will enrich any portfolio and would be hard to resist. And the NSE has promised to continue to support the growth of the ETF market by ensuring “our dedicated product team working with existing and potential issuers to expand product universe, promote liquidity and transparency.”
However, the NSE, and indeed other stakeholders, need to do more to drill down to the retail investors the latent benefits in the sector. The NSE appears to understand the need for increased awareness.
At the listing of Stanbic IBTC’s SIAML Pension ETF 40, Onyema enjoined capital market operators, issuing houses, regulators, fund managers, stockbrokers and registrars, to come together and “collectively promote increased awareness and education on ETFs amongst the investor community in Nigeria.”