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Debt Securities

What you need to know about target date funds

The Cordros recently launched what could be called Nigeria’s first target date funds and the media went agog with the news.

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The Cordros Asset Management recently launched what could be called Nigeria’s first target date funds and the media went agog with the news.

This is not only innovative, but it has also added to the number and variety of financial products available to Nigerians for personal financial and retirement planning. It will not be surprising if other fund managers follow the footsteps of Cordros Asset management in launching target date funds anytime soon. Like anything innovative and new, I am sure that the news of this new financial product comes with curiosity and excitement, but this piece is aimed at dealing with the former.

About Target Date Funds

Though target date funds are new in Nigeria, they are not new in more developed financial markets like those of America. Infact, Barclays Global Investors launched the first Target date fund in the US in the 1990s as a financial product that would help parents save for their children’s expected college expenses. Then, investors would select target date funds that would mature or end on the dates that they expected their children to enroll in the university or college. Thereafter, target date funds became financial products that could be used to plan and fund for any future event. However, they are used more today for retirement planning purposes than any other event and the target date has become almost synonymous with the date when an investor plans to retire.

Target date funds are therefore retirement mutual funds that allocate assets according to investors’ retirement period. Over time, the fund manager rebalances the fund so that it becomes more conservative, with less and less equities and more and more fixed income securities as investors move closer and closer to retirement.

This means that the asset allocation mix of target date funds provide exposure to high risk high return assets, like equities, in the early years of the fund and the investor, when such investors are presumed to still have a higher capacity for risk. As such capacity for risk decreases with age and passage of time, the asset allocation mix is gradually but incrementally tilted towards more conservative assets, like fixed income securities.

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In that case, exposure and fund objective is progressively moved from capital appreciation to capital preservation. The route that the process of moving assets through time from more risky assets to more conservative assets takes is called “glide path”.

Understand the Glide Path

Before you invest in a target date fund, understand the glide path. A glide path shows the gradual change in investment mix as time changes. A typical glide path is divided into three parts, accumulation stage which falls from 20 to 45 years prior to retirement, Transition stage that happens between target date to 15 years before retirement, and Distribution, that is from target date until death.

Most glide paths come in picture, but some are accompanied with a table that shows the asset allocation mix for each year until target date.

Know your Event Date

Before investing in or choosing a Target date fund, you should know the date of the event for which you want to save or invest. If you are aged 25, and you plan to retire at 55, a target date fund dated 15 years from now is not suitable for you, rather a target date fund that is targeted 30 years afar is most likely what you need.

Know What Happens After Target Date

Target date funds are classified as “to” or “through” glide path. This classification helps explain what happens to a target date fund after the target date.  Target date funds managed to the target date, (retirement) freeze the asset allocation mix at the target date.

Meaning that after the target date, the asset allocation mix ceases to change but target date funds that are managed “through” retirement or target date continue to adjust the asset mix by decreasing the allocation to equities for years after the target date. When choosing a target date fund, find out whether the asset allocation mix will continue to be changed after the target date or it will be fixed upon reaching the target date.

This is especially important if you are using the target date fund to save for retirement. “To” glide path structured target date funds tend to be slightly less risky during retirement periods than “through” target date funds whose asset allocation mix continues to change. However, the disadvantage is that, through glide path structure helps offset inflation and may provide further growth potential during retirement.

Know the Equity Landing Point of the Fund

Every target date fund must have an equity landing point, which is the point at which the target date fund reaches its lowest equity allocation. This differs from fund to fund and there is no right or wrong landing point. When you know the equity landing point, it will help you gauge the risk profile of the fund as it approaches target date.

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While the above are by no means exhaustive of what you need to know, it is hoped that it will help you choose among target date funds, get ready because they are coming very soon.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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Debt Securities

United Capital Plc lists N10 billion fixed rate bonds

United Capital Plc has listed its N10bn, 5 Year 12.5% Senior Unsecured Fixed Rate Series I Bonds.

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United Capital Asset Management explains mutual funds’ positive performance

Today, September 22, 2020, the Nigerian Stock Exchange (NSE) announced the listing of United Capital Plc’s N10 billion, 5 year senior unsecured fixed-rate series bonds due 2025, with a 12.5% interest.

In a statement made available on the NSE website, and signed by Godstime Iwenekhai, Head, Listings Regulation, the medium-term bond will be issued as part of the N30 billion Debt Issuance Programme.

The subscription for the offer will last for twelve (12) days, as the offer will open on the 4th of May, 2020, and close on the 15th of May, 2020.

READ: UBA Plc H1’2020 results, a true reflection of its rightsizing decision? 

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READ: Some experts are uncertain of what to expect from money markets in H2 2020

Summary of the offer

  • Issuer: United Capital Plc
  • Offer date: 28th of May, 2020
  • Maturity date: 28th of May, 2025.
  • Units of sale: 10,000,000
  • Price: N1000 per units offered
  • Coupon rate: 12.5%

Redemption: Semi-annually, and payable in arrears on 28th November and 28th May of each year, up to and including the Maturity Date.

READ: Savannah Petroleum secures $5 million initial tranche loan

Note: Senior unsecured bonds are a non-convertible corporate bond, that is not subordinated to any other unsecured indebtedness of the related issuer. Hence, it guarantees bondholders a quick payout in cases of default. While a fixed rate bond is a long-term bond, with an already specified coupon rate (Interest).

United Capital Plc, is a leading African financial and investment banking group, providing bespoke value-added service to its client. The firm was incorporated in Nigeria on March 14, 2004.

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Debt Securities

Nigerian Treasury Bill falls to 3.05% per annum

The DMO sold N2 billion on the 91-day paper and N8.385 billion on the 182-day.

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Implications of the new CBN stance on treasury bill sale to individuals, Nigerian Treasury Bills Market Witnessed Bullish Run on High Liquidity Last week

The latest data from the Treasury bill auctions concluded today revealed that Nigeria’s 364-day tenor dropped to 3.05%. On the other hand, Stop rates printed lower for the 91-day tenor at 1.09% and 182-day tenor, which went for 1.5%.

At the Treasury bill auction, the Debt Management Office sold N2 billion on the 91-day paper, N8.385 billion on the 182-day, and N148.361 billion on the 364-day bills.

Ladi Bello, a treasury dealer at Nigeria’s Tier 1 bank in a phone chat interview with Nairametrics, spoke on the just-concluded auction.

“At the Primary Market Auction conducted by the DMO yesterday, N159bn was rolled-over across the standard maturities on offer with demand skewed towards the new 1-Yr paper.

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“Stop rates on the short and mid-tenured maturities closed marginally lower than the preceding auction at 1.09% (↓1bps) and 1.50% (↓5bps) respectively, while the 1-Year paper remained unchanged at 3.05%,” Bello said.

Quick facts: The massive disparity between the subscriptions and the offers recorded suggests investors are willing to earn a negative real return, compared to the higher risk in other assets such as stocks and real estate.

Temitope Busari CFA, a leading investment professional in a note to Nairametrics also spoke on the low-interest rates the Federal Government of Nigeria was borrowing with. She said;

“Yesterday’s Treasury bills stop rates were not far off from expectation and yields will likely continue southwards in the near to medium term.

“Additionally, we might see increased pressure on the short-end of the curve due to the dearth of instruments in the market versus excess liquidity.

“Technically, it’s more beneficial for the Government to borrow at the current levels to enhance our chances of recovery post-pandemic recession. Anecdotally speaking, the current interest rate regime is deemed punitive for savers, considering inflation is currently at 13.22%.”

(READ MORE: Nigerian Treasury Bills plunge to 3.39% per annum)

Basically, the CBN sells T-bills on a bi-weekly basis to investors and it is one of the safest investments available. Interests are paid upfront, with the principal paid in full upon maturity.

Understanding Treasury Bills: Basically, when the government goes to the financial market to raise money, it can do it by issuing two types of debt instruments – treasury bills and government bonds.

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Treasury bills are issued when the government needs money for a short period, while bonds are issued when it needs debt for more than, say five years. The issuance of treasury bills is also used as a mechanism to control the circulation of funds in the economy.

Treasury bills have a face value of a certain amount, which is what they are actually worth. However, they are sold for less. For example, a bill may be worth N10,000, but you would buy it for N9,600. Every bill has a specified maturity date, which is when you receive the money back.

The government then pays you the full price of the bill (in this case N10,000), giving you the opportunity to earn N400 from your investment. The amount that you earn is considered as the interest, or your payment for lending your money to the government.

The difference between the value of the bill and the amount you pay for it is called the discount rate and is set as a percentage.

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Business

Nigeria’s total public debt stock increased by N2.381 trillion in 3 months

The Debt Management Office revealed that Nigeria’s debt stock increased by N2.381 trillion.

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President Buhari not to blame for increase in debt – DMO DG

Nigeria’s Total Public Debt Stock stood at N31.009 trillion as of June 30, 2020. The disclosure was contained in a press release by the Debt Management Office (DMO), on September 9, 2020.

The data shows that the Total Public Debt Stock which comprises the Debt Stock of the Federal Government, the 36 State Governments, and the Federal Capital Territory, increased by N2.381 trillion within 3 months when compared with the N28.628 trillion recorded on March 31, 2020.

READ: BOOM: Nigeria’s total debt portfolio hits at N27.4 Trillion

The N2.381 trillion increase was accounted for by the $3.36 billion Budget Support Loan from the International Monetary Fund (IMF), New Domestic Borrowing to finance the Revised 2020 Appropriation Act including the issuance of the N162.557 billion Sukuk bond, and Promissory Notes issued to settle Claims of Exporters.

Backstory: It will be recalled that the 2020 Appropriation Act had to be revised due to the adverse impact of COVID-19 on the Government’s revenues, and the increased expenditure needs on health and economic stimulus amongst others.

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READ: Debt Servicing: Nigeria pays $1.12 billion to World Bank, others in 10-month 

What to expect

According to the Debt Management Office, the Public Debt Stock is expected to grow, as the balance of the New Domestic Borrowing is raised, and expected disbursement is made by the World Bank, African Development Bank, and the Islamic Development Bank, which were arranged to finance the 2020 Budget.

Explore Economic and Financial Data on our Nairalytics Website

Additional Promissory Notes are also expected to be issued before the year ends. This and New Borrowings by State Governments are expected to increase the Public Debt Stock.

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