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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.

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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.

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.

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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.

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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.

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.

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.

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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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Cryptocurrency

Electroneum, a Cryptocurrency, to launch electricity Top-Ups in Nigeria

Electroneum will be launching an in-app electricity top-up feature across four African countries to support digital payment projects for electricity 

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Electroneum, the Cryptocurrency Launching Electricity Top-Ups in Nigeria

Electroneum, the British based blockchain, will be launching an in-app electricity top-up feature across four African countries to support digital payment projects for electricity in Nigeria, Senegal, Mali, and The Gambia.

What this means for Nigerians: The electricity payment platform will allow Electroneum app users to recharge their electricity meters directly from the app installed on their mobile phone by paying in Electroneum tokens.

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What is Electroneum; Electroneum is a blockchain-based payment system created specifically for use on mobile hardware, like smartphones. It is believed by many to be the first Anti-Money-Laundering (AML) compliant and ‘you are your customer’ cryptocurrency. Electroneum’s crypto is mined from your smartphone with ease.

How can I buy Electroneum? Electroneum can be bought from several cryptocurrency exchanges like Liquid, and Huobi. Each cryptocurrency exchange offers diverse ways of paying for Electroneum so be sure to check what payment options are offered to you.

(READ MORE: Bitcoin halving: Here is what experts think comes next)

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However, while  Electroneum has been expanding around the globe with its different payment projects, some of its users do not find these exciting, partly due to the depreciating returns on Electroneum in recent months.

Electroneum, the Cryptocurrency Launching Electricity Top-Ups in Nigeria

According to data obtained from Coinmarketcap, Electroneum ranks 64th as the most valuable cryptocurrency in the world, with a market capitalization of about $95 million dollars, trading up by 5%, with price at $0.0093 at the time this report was drafted.

Their collaboration with non-governmental organizations in these countries is a potential way of boosting the wider use of cryptocurrencies. Electroneum told  Cointelegraph in a note that:

“By working with NGOs (Non-Governmental Organizations) on the ground in developing nations, we are achieving true adoption of a cryptocurrency. We are enabling people and allowing them to join the global digital economy for the very first time.”

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The report also added the fact it would help minimize trade barriers and help freelancers earn a living.

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“More importantly, we want to ensure that the vast number of highly skilled unbanked people of the world have an opportunity to join the global freelance revolution.” 

 

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Company Results

STOCKS: Poor operating performance downgrades Guinness Nigeria to Sell

In its recently released 9M 2020 results, Guinness reported a 5.3% y/y decline in Revenue to N96.0bn from N101.4bn in 9M 2019. On q/q basis, revenue declined 33.2% to N27.7bn in Q3 2020 (Jan – Mar 2020) from N41.4bn in Q2 2020.

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Guinness Revenue, Quick Take: Lower revenue & higher leverage underpins weak operating performance 

In its recently released 9M 2020 results, Guinness Nigeria Plc (Guinness) reported a 5.3% y/y decline in Revenue to N96.0bn from N101.4bn in 9M 2019. On q/q basis, revenue declined 33.2% to N27.7bn in Q3 2020 (Jan – Mar 2020) from N41.4bn in Q2 2020. Pressured by higher excise as well as the closure of on-trade channels in the final week of the quarter, the company’s performance in Q3 2020 (historically one of the best quarters for Guinness) was weak with Q3 2020 Revenue and Net Income declining 17.6% and 97.2% respectively when compared with Q3 2019.

 

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We cut our Revenue forecast for the rest of the year as on-trade channels remained shut for the first 5 weeks of Q4 2020 (Apr-Jun 2020) while ceremonial activities remain banned in many states in the country. Furthermore, while we expect lower barley prices would provide some support to Gross Profit, we expect Opex and Finance cost to remain significant pressure points in Q4. We forecast a loss in the final quarter of the year which would pressure FY 2020e Net Income lower.

We cut our target price for Guinness Nigeria to N15.08/s from N32.12/s previously which implies a 21.5% downside to Wednesday’s closing price of N19.20/s. Thus, we downgrade our recommendation to a SELL from HOLD. We have revised down our profit lines steeply and lower pricing multiples in our relative valuation models given the company’s poor operating performance relative to peers. We arrive at our target price using a combination of the single-stage FCFF model and Relative valuation in the ratio 60:40 with the greater weighting on the FCFF methodology.

Confluence of headwinds pressure Revenue

In its recently released 9M 2020 results, Guinness reported a 5.3% y/y decline in Revenue to N96.0bn from N101.4bn in 9M 2019. On q/q basis, revenue declined 33.2% to N27.7bn in Q3 2020 (Jan – Mar 2020) from N41.4bn in Q2 2020. Revenue performance was unusually weak in Q3 2020 given it is historically one of the best quarters for Guinness. To give perspective, on a y/y basis, Q3 2020 Revenue declined 17.6% y/y.

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The decline in revenue was driven by a confluence of several factors. First, we note that Guinness remains the most affected brewer from the change in excise duty calculation. The company’s portfolio consists of both beer (Excise: Q3 2019–N3,000/hl Q3 2020 – N3,500/h) and spirits (Excise: Q3 2019 – N15,000/hl Q3 2020 – N17,500/hl) making it more exposed to the excise changes. In addition, on-trade channels were shut for the final week of the quarter due to lockdown measures to control coronavirus spread, thus, affecting volume growth. These headwinds combined to mute the impact of price increases earlier implemented by the company.

Lower volume and input cost underpin COGS decline

The company recorded a 1.9ppts expansion in gross margin to 38.3% in Q3 2020 due to a faster decline in Cost of Sales relative to Revenue. Cost of Sales declined 8.1% y/y to N59.3bn in 9M 2020. We were particularly impressed by the faster decline in Q3 2020, as Cost of Sales declined 46.5% q/q (vs. Q2 2020) and 29.4%y/y (vs. Q3 2019). While we note that a decline in volume sold contributed to the dip in Cost of Sales, lower Barley prices (down 3.9% y/y in Q3 2020) also contributed to the decline. Nevertheless, Gross Profit was relatively flat in 9M 2020, down 0.5% y/y to N36.7bn. In addition, Gross Profit was considerably weaker in Q3 2020, down 6.7% q/q due to lower revenue.

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Operating performance deteriorates on Opex & Depreciation increase Operating Expenses (adjusted for depreciation) increased by 4.6% y/y to N23.8bn in 9M 2020 from N22.7bn in 9M 2019. The increase was driven by pressure across Marketing & Distribution Expenses (adjusted for depreciation) and Administrative Expenses (adjusted for depreciation) with both increasing by 3.6% y/y and 7.1% y/y respectively to N16.7bn and N7.1bn in 9M 2020. Consequently, EBITDA was down 8.6% y/y to N13.0bn in 9M 2020 from N14.1bn in 9M 2019. The 9.3% increase in Depreciation & Amortisation cost placed further pressure on operating performance as EBIT dipped 28.8% y/y to N5.2bn in 9M 2020. Q3 2020 operating performance was particularly weak, with EBIT down 38.4% y/y.

Finance cost spikes due to jump in FX losses

Guinness reported a 197.5% spike in Net Finance cost on the back of higher Finance cost (+97.1% y/y) and lower Finance Income (-49.8% y/y) in 9M 2020. The jump in Finance cost was primarily driven by 506.7% spike in FX losses to N1.4bn. We also saw an Increase in Interest on Loans & Borrowings (+26.2% to N1.5bn) and Interest on Overdrafts (+129.0% to N0.5bn) as total Loans & Borrowings increased by 74.0% to N20.7bn as at 9M 2020 from N11.9bn in 9M 2019. The spike in Net Finance cost pressured Pre-Tax profits lower by 67.9% y/y to N2.0bn in 9M 2020 from N6.3bn in 9M 2019. Net profits were also down 68.0% y/y to N1.4bn in 9M 2020 from N4.3bn in 9M 2019. Q3 2020 Net Income declined significantly, down 97.2% y/y to N0.05bn in Q3 2020 from N1.7bn in Q3 2019. Earnings per Share for 9M 2020 was N0.62/s (9M 2019 – N1.94/s).

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Outlook & Forecasts

Pressure on “on-trade” channels threatens Revenue We lower our Revenue forecast for Guinness given expectations of an unusually poor Q4. We forecast revenue of N27.8bn (2.6% lower than our previous forecast) for Q4 2020 (Apr – Jun 2020) which brings our FY 2020e (Jul 2019 – Jun 2020) to N123.8bn. We lower our Revenue forecast due to on-trade channels remaining shut for the first 5 weeks of the quarter while ceremonial gatherings remained banned. Furthermore, the final phase of the new excise regime will be implemented for spirits in June (the last month of the financial year) which would see it move to N20,000/hl from N17,500/hl previously. However, the impact would be minimal considering it would only impact one month in the whole year. The full impact will be felt in FY 2021.

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Favourable commodity price to support Cost of Sales

International commodity prices have remained low relative to last year although signs of recovery are beginning to show. Thus, with Barley prices expected to remain low in Q4 2020, we lower our modeled cost margin by 3.0ppts to 62.0% for FY2020e. Consequently, our new Cost of Sales forecast of N76.8bn implies a decline of 8.7% from FY 2019. We forecast a Gross Profit of N47.1bn. We highlight possible devaluation as a risk to our forecasts over the medium to long term. With Guinness’ financial year ending in June, we do not expect the devaluation risks to crystallise so soon.

Growth in Depreciation & Opex to dampen performance

We forecast sustained pressure on Operating Expenses which we expect to impact on the company’s operating performance for the rest of the financial year. We forecast operating expenses will grow 7.4% to N31.0bn thus placing pressure on EBITDA which we forecast will be down 11.9% y/y to N16.1bn (Prior forecast – N16.6bn). Pressure on operating performance will be further aggravated by high fixed depreciation costs, thus, dragging EBIT lower by 38.6% y/y.

Finance cost pressures to weigh further on Net Income

With Guinness Nigeria booking unexpected FX losses in Q3 2020, we expect Finance cost to remain a key pressure point for the rest of the financial year with the company carrying some dollar-denominated debt and payables. We raise our forecast for finance cost to N4.4bn and consequently, Net Finance cost to N3.9bn. The resulting impact of this is a dip in Pre-Tax profit which we revise lower to N1.6bn for FY 2020e. We also revise our Net Income forecast to N1.1bn for FY 2020e from N2.7bn. Our new Net Income forecast implies a 79.6% y/y decline from FY 2019.

Valuation: Downward revisions to estimate informs downgrade

We cut our target price for Guinness Nigeria lower to N15.08/s from N32.12/s previously. Our new target price represents a 21.5% downside from Wednesday’s closing price of N19.20/s, thus we downgrade the stock to a SELL. The steep cut in our target price is due to downward revisions on our profit lines and lower pricing multiples in our relative valuation models given sub-optimal performance relative to EM peers. Our valuation methodology uses a combination of the single-stage FCFF model and relative valuation in the ratio 60:40 with the greater weighting on the FCFF methodology.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Markets

Pension Fund Managers dump Nigerian Treasury Bills

Pension fund managers redeemed treasury bills worth N512 million Naira in the two months combined but did not invest any additional kobo into treasury bills within the same period.

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Treasury Bill Investment: Ghana Vs Nigeria, Further rate decline expected as N405 billion worth of treasury bills mature , CBN’s N225.45 billion T-bills auction records oversubscription, as rate fall below 5% , Nigeria’s 364-day treasury bills falls to 3.84% per annum

Analysis of the recently released summary of Pension Fund Asset data for the first two months of 2020 by the Pension Commission of Nigeria has shown that pension fund managers are no longer in love with Treasury Bills like they used to be in the past.

Time was when fund managers allocated much of their assets to treasury bills, but that seems to be waning as yields on treasury bills head towards subzero.

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According to the analysis, pension fund managers redeemed treasury bills worth N512 million in the two months combined but did not invest any additional kobo into treasury bills within the same period.

Prior to this event, the pension fund had invested a combined sum of N1.88 trillion into treasury bills, representing 18.4% of total pension fund assets.

With that development, pension fund managers allocation to treasury bills now stands at 13%. This is about the first time, in over 5 years that pension fund managers are shying away from treasury bills.

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The love seems to have shifted to bank placements which attracted additional investment if N420 million from pension fund managers. FGN Bonds continue their camaraderie with pension fund managers as they pumped additional N352 million into FGN bonds in January and February, combined. This seeming reallocation to bank placements is indicative of pension fund managers’ desire to hold on to their cash, while waiting and hoping that yields will trend up anytime soon.

Yield Analysis: Fund managers who are out to seek ways to generate positive alpha or returns for their investors are running away because of the low treasury bill yields. The last Treasury Bill option that was conducted on May 13th, 2020, had stop rates of 2.5%, 2.85% and 3.84% for 91-day, 182-day and 364-day treasury bills respectively. Those rates were not enticing enough for the fund managers.

Strong Market Demand: This does not mean that Nigerian Treasury Bills are no longer in demand because, according to the NTB Auction Results sheet of May 13th, 2020, all the three tenors of treasury bills were oversubscribed.

While the 91-day Treasury Bill had N4,384,80,000 on offer, it attracted a total subscription of N22,334,588,000, the 182-day tenor which had N12,920,900,000 on offer saw N41,194,993,000 being subscribed for, while investors bid N102,030,671,000 for the 364-day tenor which had N16,536,720,000 on offer.

Pension Fund Asset Allocation: All said and done, FGN bonds continue to be the asset type with the highest allocation from pension managers. Out of the N10.5 trillion total pension fund asset value as at February, 29th 2020, N5.6 trillion sits with FGN Bonds, while bank placements come second with an allocation of N1.48 trillion leaving Treasury Bills in the third position with an asset allocation of N1.37 trillion.

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