The Head of Research at Coronation Asset Management, Mr. Guy Czartoryski, in this interview speaks about the benefits of investing in mutual funds. Obinna Chima provides the excerpts:
You recently released a report on the Nigerian fund management market, can you highlight some of the major findings?
We have been looking at the way in which Nigerians save, and this is changing profoundly. One change is that people are turning away from banks and investing in mutual funds instead. Banks used to be the default destination for savings but this is no longer the case. There are a lot of reasons for this. One is that risk-free rates, or the rates available on Nigerian Treasury Bills have fallen sharply over the past twelve months, which is one reason why banks are not offering attractive rates on savings deposits.
Another reason is that banks themselves are subject to regulations that make them cautious about taking deposits if they cannot lend them on to clients, and they are also subject to a high cash reserve ratio. And there are deeper causes of the shift towards investing in mutual funds. After all, the rapid growth in mutual funds began some years ago, before treasury bill rates crashed and before the stringent loan-to-deposit ratio and cash reserve ratios were imposed. There is a cultural shift going on. Savers understand that a bank offers a guaranteed deposit but the bank also earns a spread on that deposit.
By contrast, a mutual fund is required to share all its economics with its fund holders, less the fee which the fund manager charges. So the economic structure of a mutual fund has some advantages over bank deposits. People who are making long-term savings towards their retirement appreciate the difference. Another reason is fintech. Banks are traditionally associated with impressive headquarter buildings, numerous branches and paperwork, with technology being largely out of sight.
They are in the process of moving over to tech-friendly platforms but fintech companies are already in the lead. Fintech appeals to a generation of bank customers and savers who expect to set up and have access accounts on their mobile phones. And they expect real-time information, engage in forums and exchange information on services and investments. Some fintech companies have proved themselves very successful at gathering savings, which creates demand for fund management services.
So, we are looking at extraordinary growth in mutual funds. The total assets under management of Nigeria’s mutual funds over the years 2015 to 2019 rose by 305 per cent and more than doubled in inflation-adjusted terms. The value of Money Market Funds rose by 11 per cent and the value of Fixed Income Funds rose by 60 per cent during the first six months of this year, and this is during a recession. A deep-rooted change in the way Nigerians save money is underway.
Comparing the mutual fund market with the stock market or even the fixed income market, which of these will you advise investors to stake their money in today?
In the first nine months of the year the Nigerian Stock Exchange All-Share Index almost broke even, and with dividends the return was actually positive. However, over the past ten years the stock market has generally delivered disappointing returns and fixed income has done much better. One reason for that was that Nigerian Treasury Bills on average yielded about two and half per cent more than inflation over the period from 2010 to 2019. Now that era is over and it appears unlikely that treasury bills yields are going to rise to levels above inflation any time soon. So, without a safe and guaranteed source of income from Treasury Bills, savers and investors are forced to take more risk than they did before. The four key elements in risk-taking are: accepting that risk exists; learning about the risks of investing; measuring risk; and diversifying.
So, for example, Money Market funds involve very little risk, fixed income funds involve a little more risk, then come Balanced Funds and Equity Funds. So, the answer to the question is that risk management is key to making successful investments. Different savers have different acceptance of risk, depending on the time horizon of their investments and their ultimate investment goals. At Coronation Asset Management we are fortunate to partner with Cardano, a leading risk management consultancy based in the Netherlands which advises European pension funds worth hundreds of billions of Euros.
They have been providing on-ground guidance to our investment managers and continue to give daily advice. Risk management techniques have become central to our investment process. The key skills are performance attribution, scenario modelling, back-testing and, at the end of day, judgment based on experience. So the future will look very different from the past. In the past interest rates were so generous that there was little need for sophisticated risk management.
In the future savers are going to take a mixture of asset classes based on their investment horizons and acceptance of risk – in fact they are already are doing this. The advantage of Mutual Funds is that they cater very precisely to different risk appetites. Savers can diversify their portfolios simply by holding a number of different types of fund. And the key thing is information, because investors need to keep abreast of their performance of their funds.
In terms of regulation, what do you think the SEC should do to encourage more participation in that segment of the market?
The Securities and Exchange Commission is laying the foundations for an expanding Mutual Fund sector by getting the ground rules in place. Last December we received the ‘Amendments to Rules on Collective Investment Schemes’ which form part of the SEC’s ‘New rules and amendments to the rules and regulations of the Commission’. These were due to be implemented by the end of last month.
The basic principles are that Mutual Funds must act in their fund holders’ best interests, avoid conflicts of interest and publish data accurately and regularly. You can look across at how the National Pension Commission (PenCom) built up the stature of the pensions funds over the past two decades and see something similar happening with the SEC and the Mutual Funds. The other key agency is the Fund Managers Association of Nigeria (FMAN) which provides for free, and online, unit price performance data on Mutual Funds going back several years. The standards of disclosure are rising and this going to build confidence in the Mutual Fund industry.
At the same time Mutual Funds are growing much more quickly that anyone could have predicted a year ago, and with more money coming into the system there will be demand for more fund products. The total number of Mutual Funds is around 30 but we expect this to rise quite rapidly. So, we are looking forward to the emergence of a well-regulated and competitive industry with numerous fund providers and plenty of useful and comparable information.
What are the risks in mutual fund investment?
A lot of the time i get this question when presenting my research reports. People would always want to find out if we can guarantee their investments, but the answer is no. In investment, you are taking different levels of risks. So, let me take a step back: When a bank says it is going to guarantee your money, which is because there is an insurance scheme in place by the Nigeria Deposit Insurance Corporation (NDIC) to guarantee your money. So, guarantee comes with a price. Now, when you go out of a bank deposit and move into a mutual fund, is that you are getting the best of returns.
The structure of a mutual fund is completely different from the structure of a bank. So, in a mutual fund you are taking on risks. That is, you are swopping a guaranteed fund for not such a great return with the bank, to a better return, but with higher risks. That is what happens when you pull out from a bank deposit and go into mutual fund. So, there are degrees of risks, but a money market fund should be extremely safe. And that is because as they are taking your money, they are investing it in treasury bills, commercial paper and other assets classes. There are also fixed income fund and equity risk.
In recent times, we have seen investors shift towards investing in dollar funds and the recent dollar restrictions further heightened the trend, what can you say about that?
Dollar funds provide quite a good returns. Over the years, if you are investing in FGN securities, over a 10-year period, let’s 2010 to 2019, you got a dollar return of 5.8 per cent on average, which is a pretty excellent return. Today, along African countries, the yields are lot less. For example – Zambia, Angola, and some other countries. The forex restrictions are part of the necessary currency management regime of the Central Bank of Nigeria. If that was not the case, we would have had a lot of capital flight, which could be difficult to manage. However, we must understand that about 40 per cent of banks’ deposits in this country are in dollar. So, the restrictions are there for a purpose
What is your medium term projection for the mutual fund market?
All already noted, we do not see a return to yields on Nigerian Treasury Bills above the level of inflation any time soon. Our outlook for the rest of the year is for sustained low interest rates while going into next year it is possible that there will be gentle pressure on rates to rise. In other words, we do not think that the steep fall in interest rates over the past year will be matched by a steep rise, far from it. The equity market had a steep fall after January and a steep rally from April this year.
We think there remains value in selected stocks and we continue to discuss this topic in our Nigeria Weekly Update in which we publish a model equity portfoliio. In the long-term we think that there are a handful of stocks that provide investors with good equity returns that are likely to result in good investment returns and we set out this argument in our publication last July, Navigating the Capital Markets. There are always investment returns if you look hard enough and are patient.
