There is no doubt that the Nigerian mutual fund industry has come of age. Until 1991, there was no mention of mutual funds in the country. But in December 1991, what may well be described as Nigeria’s first mutual fund —Paramount Equity Fund — was established.
Some comparison for your consideration
The total net asset value of the Nigerian mutual fund industry then was N17.5 million. As at today, analysts at Quantitative Financial Analytics estimate that the total net asset value of mutual funds in Nigeria is about N688 billion. If that is not an achievement, I am not sure what is.
But the industry a duopoly
What is a duopoly? – In spite of the strides and achievements in the industry, one may not be far from the truth by characterising it as a duopoly. According to elementary economics, a duopoly is an industry or business structure where two companies share all or nearly all of the market share of goods and services in the industry.
Measuring market share in the industry – The market share of fund management companies in the mutual fund industry is best measured by the sizes of the Asset Under Management, AUM, just like the market share of fund administration companies is measured by the Asset Under Administration, AUA.
The industry is dominated by two companies – Against that backdrop, the Nigerian mutual fund industry is indeed a duopoly. This is because only two fund management companies — Stanbic IBTC Asset Management Company and First Bank of Nigeria (FBN) Asset Management Company — account for 65% of the Asset Under Management of Nigerian mutual fund industry.
The dominance by those two fund management companies is not surprising and unfounded. Out of about the 90 mutual funds that exist in the Nigerian market, Stanbic IBTC Asset Management Company manages 13 of them while FBN Asset Management Company manages 6 funds. The only fund manager with as many funds is Vetiva Fund Managers with 6 funds under its management.
The next fund management company that comes close to managing as many funds is Asset and Resources Management (ARM) Limited which manages 4 funds.
Herfindahl-Hirschman Index (HHI) says Not Quite So
Even though monopoly and duopoly have been known to stymie competition as much as perfectly competitively structured industry will be, and even though only two fund management companies dominate the Nigeria mutual fund industry, none of that indicate that the industry is overly concentrated.
Using a tried and tested mechanism used by the US Department of Justice to measure concentration, Quantitative Financial Analysts applied Herfindahl-Hirschman Index (HHI) to find out if the dominance of the mutual fund industry predicts over concentration. According to Quantitative Financial Analytics, the Herfindahl-Hirschman Index (HHI) for Nigerian mutual fund industry is 2,474, which proves that the industry is moderately concentrated.
About Herfindahl-Hirschman index (HHI)
The Herfindahl-Hirschman Index is an index that measures the market concentration of an industry. A highly concentrated industry is one where a few players in the industry hold a disproportionately large portion of the market share. A low degree of concentration indicates that the industry is close to being a perfect competition while the opposite is an indication of a monopoly.
Ordinarily, Herfindahl-Hirschman Index (HHI) index is used to measure the potential impact of mergers and acquisitions. But it could also be used as a measure of how much influence consumers may have in an industry.
How is the Herfindahl-Hirschman Index (HHI) Calculated?
The Herfindahl-Hirschman Index is calculated by taking the percentage market share of each company in an industry, squaring the number obtained, and then adding all the squares together.
Herfindahl-Hirschman Index Scale and Interpretation
The Herfindahl-Hirschman Index ranges from 1 (lowest concentration) to 10,000 (highest concentration). Since the 10,000 comes from a theoretical scenario where there is only one company in an industry with 100% of the market share, the sum of the sum could be multiplied by 10,000.
According to the US Department of Justice, an HHI index of less than 1,500 indicates an industry with low market concentration, an index of between 1,500 and 2,500 indicates moderate concentration, while any measure from 2,500 to 10,000 indicates a highly concentrated industry.
Based on the calculation by Quantitative Financial Analytics that resulted in an HHI index of 2,474 for Nigerian mutual fund industry, one can say that even though two fund managers dominate the industry, it is only moderately concentrated.