The Nigerian Stock Exchange (NSE) in conjunction with the Fund Managers Association of Nigeria (FMAN), the Central Securities Clearing Systems (CSCS) and the Association of Stockholding, Nigeria (ASHON) will be launching the Mutual Funds trading platform today, February 22, 2019, at the stock exchange house in Lagos. This is not only a welcome development, it is indeed a step in the right direction. The aim of the platform, among others, is “to improve and enhance access of listed mutual funds to investors” and to “enhance visibility for the listed funds and promote financial inclusion while stimulating retail investor participation in our market”. According to the Nigerian Stock Exchange, “the platform will facilitate electronic transactions with seamless connection among The Exchange, CSCS, Brokers and the Fund Managers”. Wow! That sounds cool.
The Nigerian mutual fund industry has come a long way since the launch of the first mutual fund in 1991 but a sizable proportion of the investing public in Nigeria do not either understand how mutual funds work or are not interested in mutual funds. Nigeria has the lowest mutual fund asset to GDP ratio in Africa, if not globally as I reported in an earlier article.
There, therefore, seems to be apathy among investors towards mutual funds. One of the reasons for the apathy is the lack of transparency that has come to characterise Nigerian mutual funds as well as lack of investor education and awareness. For this platform to achieve the desired goals, there is need to deal with those ills plaguing the mutual fund industry and it is hoped that the creation and launching of a mutual fund trading platform will at least help create the need awareness.
Daily Net Asset Value (NAV) Quotation
The introduction of a trading platform for mutual funds in Nigeria will not only enhance the visibility of mutual funds as hoped by the NSE, it will also increase their liquidity, but it is a tall order given what it takes to achieve those goals. Trading on the exchange and indeed any market entails the availability of prices, and for mutual funds, such prices are called Net Asset Value, NAV. Unlike stocks, mutual fund prices do not change in real time as the trading takes place but rather, the NAV is arrived at by calculating the value of the constituent assets in a mutual fund, usually at the close of business. Unfortunately, only a few fund managers have the daily NAV of their funds available each day. The calculation of mutual fund net asset value involves not just the summation of the valuations of the positions being held by a mutual fund, it also involves booking or figuring out some accruals like dividend/interest receivables, management fee payable, incentive fee payable etc. some or all of those are supposed to be done on a T+0 basis. The question then is, are fund managers ready and equipped to carry out fund valuations on a T+0 basis or even T+1 basis, at worst? To have a functional trading platform, the NSE and other stakeholders should mandate and enforce the mandate for fund prices to be available each day after a stated cut off time, usually 6.00 pm. The authorities will have to also decide if the daily quotations of mutual funds on the basis of which trades would take place will be T+0, or T+1 net asset values. This should be communicated to investors in no uncertain terms.
Mutual Funds charge fees, either before entry (front load) or at the point of exit (backload or no load). In addition, they charge management fees, incentive fees etc. The relationship between the combination of these fees and the total net asset value of a mutual fund is the expense ratio of the fund. The expense ratio is a decision variable that prospective and existing investors use in deciding on what funds to invest in or whether to remain in a particular fund or not. Unfortunately, this very important variable is not readily available among Nigerian mutual funds and a well-functioning trading platform will not be active in the absence of such data. It is, therefore, imperative that the Nigerian Stock Exchange and the Security and Exchange Commission and all that have a hand in the implementation of the platform, should mandate the fund managers to provide their funds’ expense ratio on a continuous basis as a condition for participation on the platform.
At Least 10 Largest Holdings
Since investments in mutual funds are like investment in a basket of securities, it will do the investors a great good if they know what is in the basket before they buy. Currently, most mutual funds in Nigeria do not disclose what securities they hold, to make the proposed mutual fund trading platform effective and vibrant, the authorities should ensure that the funds on the platform have information relating to at least the largest 10 security positions they are holding. That will not only help investors know what they are investing in but also help in deciding on whether to invest (buy) or not.
Trade and Settlement Dates
Given that mutual fund prices do not change in real time like equities and that the NAV should usually be available at the end of the day like 6pm, the authorities should make it clear to investors what the trade and settlement days for mutual fund transactions should be.
While the launching of a mutual fund trading platform is a laudable event, it will be good to ensure that the regulatory environment and enabling architecture are right and in place to make the process seamless.