Nigeria’s mutual fund investors are becoming increasingly risk averse as they continue to embrace money market funds inspite of decreasing yield.
The yield curve in Nigeria has been trending downwards since the beginning of the year with much of the decrease being at the short end of the curve. While the 2-Yr yield has lost 2.56 points YTD, the 7-Yr yield has lost 1.06, and the 20-Yr yield lost 0.56 points.
The 2-Yr yield is currently struggling to remain within the double-digit range at 11.79%, with the 5-Yr yield at 12.57% and 20-Yr yield at 12.76%.
Even money market funds are beginning to offer lower and lower yield. The Stanbic IBTC money market fund, the largest in the industry, now offers 13.96%, the lowest since September, 2016.
Likewise, FBN money market fund is currently offering 14.05%, a far cry from the 18% on offer a year ago while Arm money market fund offers 14.4%, the lowest since October 2016, and the list goes on and on.
Surprisingly, analysis of the latest available information on the SEC NAV Summary indicates that mutual fund investors have added an estimated N154.9 billion to mutual funds on a YTD basis. Out of that amount, N137.7 billion went to money market funds, with only N12.8 billion going to bond funds while Equity funds received just N2.0 billion.
Equity Market not offering much help
The concerns of the investors are quite understandable since the Nigerian Equity market has not been that stellar in 2018. It is true that volatility has moderated in the face of decreasing inflation and currency exchange rate that has relatively been stable, the Allshare index has only returned 6.79% YTD, much less than what is on offer by the money market funds.
In addition, there is hardly any equity security in Nigeria with dividend yield that is comparable to what the money market funds are offering. As at date, in 2018, only Glaxo Smith- Kline Consumer Nigeria Plc has a dividend yield that beats money market fund yields, Glaxo Smith- Kline Consumer Nigeria Plc has a dividend yield of 23.44% to be precise.
Flight to Safety:
The trend of flocking to or hanging on to money market funds is an indication that despite the downward trends in yields, investors’ appetite for flight to equity investments remain strong. The fear of losing their money may be the force driving investors to money market funds. Understandably though, the upcoming election in 2019 may also add to that fear and uncertainty prompting investors to prefer safety to increased performance.
The flight to quality is a situation in the markets when investors become more concerned about protecting themselves from risk than they are about making gain on their investment. However, the implication is that as more and more investors join in the flight, flight to safety investments like government treasuries and bonds will rally while yields fall, given the inverse relationship between bond prices and interest rate.
Time to diversify into bonds
It may be time to diversify into bonds because there are a number of bonds in the Nigerian market with yield to maturity (YTM) in excess of what money market funds are offering. The unfortunate thing, however, is that as yields fall, bond prices rise, so the bonds in question may be relatively more expensive to buy but having a portfolio that includes bonds with sizable yield to maturity (YTM) is not a bad idea.