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Funds Management

Mutual Fund Prospectus explained – Part 1

a mutual fund prospectus is an investor’s owner’s manual for a mutual fund.

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Mutual Funds, Mutual Fund gone bad: Nigerian investor discloses his 10 years investment that nosedived , Nigeria’s mutual fund asset value reaches N1 Trillion

Whether you are a current or potential mutual funds investor, an understanding of a mutual fund’s prospectus is key to profitable mutual fund investing.

What is a mutual fund’s prospectus?

When we buy electronics, cars, or other electrical, electronic or mechanical appliances, they come with owners’ or operating manuals. These manuals provide information on the how, the when and where of such appliances. In the same way, a mutual fund prospectus is an investor’s owner’s manual for a mutual fund. It provides detailed information on a fund’s goals, investment strategies, risks, performance history, fund management, fees, and expenses. Prospectuses come as abridged or full.

The abridged prospectus provides a brief summary of the key information about a mutual fund. Though concise, the abridged version of the prospectus covers the basic information required to allow an investor to make an informed investment decision. The full or detailed prospectus as the name implies is the long-form prospectus that has information about the mutual funds in a more detailed form than the abridged.

Mutual Fund Prospectus: Need to know

Though the information contained in mutual funds prospectuses may seem overwhelming at first, the good thing is that they are presented in a format that provides key information in the same order, written without confusing legal jargons but in plain, easy-to-read and understandable English. This uniformity of presentation, format, and simplicity of language enables investors to make apples-to-apples comparisons of the mutual funds they may be considering. While it may not be possible to read line by line, it is important to pay attention to the following:

Investment Objectives

Because objectives or goals differ from one fund to another, it is important that an investor or potential investor understands each fund’s goals or objectives. While some funds attempt to generate income for their shareholders, others concentrate on capital appreciation. There are still some funds that focus on a combination of income and capital appreciation. It is the understanding of the objectives of a mutual fund that will help an investor chose those funds that are better aligned to his or her investment goal. So, try to understand the fund’s objective.

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Fees and expenses

It is essential that investors pay attention to the fees section of a prospectus. It is good to find out the type of fees and when they are payable. While some funds are load funds, others may be non-load funds. Non-load funds are those mutual funds in which shares are sold without a commission or sales charge. The reason for this is that the shares are distributed directly by the investment company, instead of going through a secondary party.

On the other hand, a load fund charges a commission at the time of the fund’s purchase, at the time of its sale, or as a “level-load” for as long as the investor holds the fund. Nigerian mutual funds are load funds, they charge flotation costs which are amortized over a five year period in most cases. It is, therefore, important to compare these charges among funds.

Investment strategies

Every fund manager has his or her investment strategy which is reflected in the investment strategy section of the prospectus. An investor needs to understand the strategies in order to figure out if such strategies will lead to the investor’s goal or not. In addition, knowing a strategy enables the investor to properly evaluate performance, adopt reasonable expectations, and build a portfolio of funds that work together to achieve the desired goal.

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Principal risks

Every investment, including mutual fund investments, come with different risks. The investment risks section of a prospectus explains the primary types of risks associated with the securities in a particular fund. It is important for an investor to understand or familiarise himself with the risks as the information helps to decide what level of risk an investor is comfortable with having in his or her investment portfolio.

Performance

Though it is said in the investment parlance that historical or past performance doesn’t predict future performance, it may be worth the while for investors to pay attention to how a fund performed in past market environments. Depending on the age of the mutual fund, investors should look at a fund’s one-, five- and 10-year average annual returns including a comparison with a fund’s benchmark index over the same period. If available, investors should also look at the monthly performance over time for consistency.

Investment and portfolio managers

The management section of the prospectus which provides a brief biography of the mutual fund’s managers should be meticulously examined by investors with extra attention to how long the fund manager has managed the fund or other funds.

Unfortunately, Nigerian mutual funds prospectuses do not provide information on the persons managing the funds rather the available information about the fund manager is at the management company level. Investment management company biography may be used as a proxy for the personalised biography assuming that there is little or no employee turnover rate in the company and there is continuity among the investment managers.

Lockup Period

A lockup period is a window of time in which investors of a mutual fund or other closely-held investment vehicles are not allowed to redeem or sell shares. The lock-up period helps portfolio managers avoid liquidity problems while capital is put to work. Investors should, therefore, pay attention to the section of the prospectus that details information on lockup periods. Most mutual funds in Nigeria have lockup periods of 90 days and charge a penalty of 1 to 2% if an investor breaks the lock.

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Purchase and sale of fund shares

This section provides information on how to buy and redeem shares of the mutual fund, along with initial minimum purchase information and information on subsequent investments. Paying attention to this helps the investor know how much to invest and for how many units of the fund in question.

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Asset Allocation

A mutual fund is as good as the securities it holds, and asset allocation plays a very important role in the profitability or otherwise of a fund. It is, therefore, important to pay attention to the asset allocation that is proposed in the prospectus. Asset allocation also helps an investor access if the risk of a fund suits or fits an investor’s risk appetite or tolerance.

Where to find mutual fund prospectus

Fund prospectuses are readily available from the fund managers, if otherwise, you can freely request for them from the fund manager, especially during the IPO months for new issues. Prospectuses for Nigerian mutual funds can also be found on the website of Quantitative Financial Analytics Company, Ltd, www.mutualfundnigeria.com.

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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Funds Management

RSA Transfer: What to look for in a fund manager

If you are looking at transfering your RSA from one fund manager to another, here are a few things you might consider first.

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RSA Transfer: What to look for in a fund manager

The National Pension Commission just opened the transfer window for RSA holders to freely transfer from their current PFA to another one. According to PenCom and the code that governs pension accounts in Nigeria, transfer between PFAs is an event that happens once a year, and as such should be taken seriously, after all, the success of a fund has been known to be positively related to the fund manager’s skills.

READ: Nigeria’s pension assets rise to N10.8 trillion in May 2020

Why Fire Your Fund Manager: Before you make that transfer, have you asked yourself, why would I fire my current fund manager? One of the reasons, if not the major reason why investors fire their fund manager is because of poor performance. A fund manager that makes negative or near zero returns while his peers or the broad market index makes returns in double-digit will no doubt be on the chopping board during transfer times. However, before you fire that seemingly non-performing fund manager, find out how the market as a whole is doing or did. If the market is doing or did badly, then the issue with your fund manager probably derives from systemic risks that even the best fund managers may not be able to diversify away.

READ: Nigeria’s Micro Pension industry: A gold mine waiting to be tapped

Before Your Transfer:  It may be necessary to do your homework before you decide to transfer. Look at the portfolio information of the fund you want to transfer into, what assets is the fund manager investing in and what weights does he give to each asset type, compare that with what your current fund manager is investing in. Because of paucity of investible asset types in Nigeria and adherence to regulatory requirements, most pension fund managers in Nigeria invest in similar assets although with different weights. So pay attention to the difference in weights.

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READ: How to transfer your Retirement Savings Account (RSA)

How about Performance: Take a look at the historical performance of the fund you want to transfer into. While past performance does not guarantee future performance, it could give you an indication of the difference between your current fund manager and the prospective one. Ask the fund manager for their performance numbers over the last 5 years and look for out-performance consistency.

How much are you paying for the Services: Take a look at the fees being charged by the fund manager you want to transfer to in comparison with the one you currently have. As required by regulation, Nigerian pension fund managers are required to charge a given percentage of fees, do your research and make sure that the fee requirement is being adhered to by your prospective fund manager.

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READ: Mutual Fund Reporting: A call for standardization

Customer Services is of importance: Another thing to think through is the responsiveness of a fund manager to RSA holders. How quickly, truthfully, courteously and professionally does your current fund manager and your prospective fund manager respond to enquiries and questions from RSA holders?

Availability of information/data: Think about availability of information and data. In these days, data and information is money, especially when such is provided in a timely manner. Many pension fund managers have the prices of their pension funds readily available on their website but there are still many of them that you would go through the eye of a needle to get the information. There are 2 pension fund managers that I have sent over 10 emails with request for pension fund prices, and they have adamantly refused to respond and the information is not even on their website. For such fund managers, it becomes difficult to know their performance, at least independently and quickly. There is a fund manager that has the information in a format that is not amenable to analysis. If I were to make a change, I will dump those at a blink of the eye.

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Experience Matters: Take a look at who the fund manager employees.  These days, some fund managers in Nigeria are beginning to publish the names and qualifications/experiences of their fund managers on the fund factsheets, if you can find that information, it will be useful to know that your fund manager is a Chartered Financial Analyst, CFA or the like. Do not be shy, call the fund manager you want to transfer to and they will be happy to give the information, if they know you want to transfer to them, especially if you have large balance in your RSA account.

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READ: World’s biggest sovereign wealth fund now owns cryptos

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Fund Managers’ motivation: I know that it may not be that easy to glean information from fund managers, but if you can, find out if the guy overseeing your fund is being paid an incentive fee if he outperforms the index or if he generates a certain return. A fund manager that gets incentivized for his performance tends to be more motivated than one that just gets paid his normal salary irrespective of his investment performance. Therefore, go with those that get performance-based incentive fees.

While the above are only but a few things to ruminate about while you decide on if and where to transfer your RSA account, it is hoped that it will help make the transfer decision a bit easy.

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Funds Management

How to transfer your Retirement Savings Account (RSA)

PenCom has made available information that may help you if interested in transferring from one Pension Fund Administrator to another.

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In anticipation of the formal launch of the Retirement Savings Account (RSA) transfer system, the National Pension Commission (PenCom) has published steps in which RSAs can be transferred from one Pension Fund Administrator (PFA) to another.

This is contained in a verified tweet by the commission, as seen by Nairametrics.

Recall that Nairametrics had earlier reported that PenCom had earlier fixed November 16, 2020 (tomorrow) as the date for the official launch of the RSA transfer system.

What you should know

The RSA transfer system involves five different steps which are succinctly explained below;

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  • Data recapture with the current PFA: You must ensure that your personal details have been recaptured and updated on the ECRS by your PFA (I.e. the PFA that currently manages your RSA).

Note: This applies if you opened your RSA before July 01, 2019 and have not been recaptured.

  • Submission of RSA Transfer Request to Receiving PFA: You should approach the PFA that you intend to move your RSA to, (the Receiving PFA) and submit the transfer request by providing the following; Surname, RSA pin, E-mail and current phone number.
  • Validation of Identity: You will be required to provide your fingerprint to the receiving PFA for the authentication of your identity on the National Identity Management Commission’s (NIMC) database. Thereafter, the receiving PFA will issue a printed confirmation slip, which should be signed by you as proof that your transfer has been submitted.
  • Transfer of RSA and funds to receiving PFA: Your current PFA will transfer all the funds in your RSA to your new PFA at the end of the applicable transfer quarter. The process is closely monitored by PenCom
  • Notification to RSA Holder: You will be notified by PenCom and the receiving PFA when your RSA has been transferred.

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Funds Management

Nigeria’s Micro Pension industry: A gold mine waiting to be tapped

The Nigerian government expanded the Pension Reform Act (PRA) of 2014 to include provisions for Micro pensions.

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Micro Pension Plan

According to a report from Price Waterhouse Cooper (PWC), Nigeria has about 59.6 million workers in the informal sector. A projection from the same report says that if those 59.6 million workers set aside N100 weekly into a pension fund in 2016, by the end of 2017, Nigeria’s Micro Pension industry would be worth N61.1 billion if such contributions were invested at a real return of 4.5% per year. Extrapolate that five-year-old projection to today, and you will be amazed at the worth of Nigeria’s Micro Pension industry. In recognition of the potentials hidden within the Nigerian micro pension industry, the Nigerian government expanded the Pension Reform Act (PRA) of 2014 to include provisions for Micro pensions.

The National Pension Commission then followed that up with the design and publication of “frequently asked questions on Micro Pension fund”, a document that seeks to answer potential questions that people may have regarding micro pension scheme. The beauty of that document is that it is in English, Igbo, Yoruba and Hausa, so that those that are not literate in English language still have the opportunity to read, understand and take advantage of the benefits of micro pension funds.

Success Stories Elsewhere: Micro pension schemes have been known to be successful in places like India, and Kenya, but to what extent has it succeeded in Nigeria? There are indications that the scheme has not been as successful as hoped for, in Nigeria, either because of lack of interest by those for whom the scheme was created or due to lack of awareness and enlightenment campaigns.

Nigerians have always relied on their children for their comfort at retirement but that is fast changing with so many of such children unemployed many years after leaving or graduating from schools. It is therefore imperative that parents get into plan “B”, by enlisting into micro pension plans so that if their children fail to provide for them at retirement, they have something to fall back on.

Fund Managers Have A Role to Play: With so much potential in the micro pension industry, fund managers stand to gain by way of the fees they charge, it is therefore of importance that they get into being more active in creating awareness for this laudable scheme. A visit to the various fund managers’ websites indicates that some of them have information about micro pensions on their website. It does not appear, however, that many of them are active in the scheme as lots of them do not have the pricing information of micro pension funds as part of their daily price releases. This copious absence may be an indication of lack of activity.

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Micro Pension Fund Performance: Only a few of the pension fund managers seem to have active participants of micro pension scheme and Quantitative Financial Analytics conducted a performance analysis of those few.  The few are AIICO, ARM, Premium, AXA, PAL and NLPC.  It is quite pathetic that out of about 20 pension fund managers, only 5 are active with Micro pension scheme. Most of the data we collected went back to July 2019 and it is on that basis that the performance analysis was conducted. Of the few active micro pension funds, PAL micro pension fund has the highest return of 5.46%, followed by ARM Micro pension with 5.15%.  AIICO micro pensions took third place with a return of 2.95%.

Source: Quantitative Financial Analytics

Conclusion: Though the absence of pricing information on the fund managers’ web site may not necessarily indicate inactivity, fund managers are encouraged to include that information among the information provided for the other pension funds as all investors deserve to be equally served. In addition, the presence of such information can act to increase the awareness of prospective pension fund contributors and can as well act as marketing tools for the fund managers. Micro pension scheme is still new in Nigeria and we will continue to monitor and report on progress.

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