A Mutual Fund is a Trust or Company that pools money from many investors and invests in a specified class of securities such as stocks, bonds, real estate or a balanced mix of asset classes. The Mutual Fund is managed by a professional management company who formulates and implements investment management services to the Mutual Fund on behalf of the investors.
The Advantages of Buying Mutual Funds
- Diversification: Buying one unit of a Mutual Fund allows investors the opportunity to diversify their scarce investment capital into all the assets held by the Mutual Fund. By so doing, all their eggs are not in one basket.
- Professional Fund Manager: The Mutual Fund investors outsource the day to day operations and management of the fund to professional money managers. This frees up the investors’ time and allow best practice to come to bear on the Mutual Fund Assets
- Cost Effective: Mutual Funds offer a low cost way of investing in the overall market ad economy. Owning a unit of an Index Fund, for instance, means the investor has a piece of all stocks listed in that stock exchange. The same example, buying a Real Estate Trust (REIT) allows the investor “own” a share of many properties.
How do Mutual Funds Work?
A Mutual Fund is created by a fund manager. The Fund manager specifies what kind of investment strategy the Mutual fund will pursue (e.g. buying and holding fixed income securities for dividends or Active stock trading.) The Fund manager then offers the Mutual Fund to investors to subscribe to by buying units of the Mutual Fund. The fund investors buy directly from managers. The Mutual Fund can either be set up as a closed end or an open end fund.
A closed end Mutual Fund will issue a determined number of shares of the fund at inception and will not issue any more shares going forward. Future price movements of the Mutual Fund become based on demand and supply of the shares of the Mutual Fund. An open ended Mutual Fund, on the other hand, will create and destroy shares as new investors buy new shares or sell the Mutual Fund shares respectively.
The Mutual Fund then takes these investors’ pools of funds and invests in securities as matching the stated investment objective. The fund manager builds a portfolio of assets using funds from the shares of the fund bought by the investors.
Based on the type of Mutual Fund, the investors can either get cash dividends or see the value of their shares rise. An Equity Growth Fund like the ARM Aggressive Growth Fund, for instance, will invest in shares of promising companies who have very rapid growth and reinvest their profits or cash back to fund internal growth. These type of fund will satisfy an investor seeking a Capital Appreciation objective
On the other hand, a Money market fund like the Afriinvest Plutus Fund will invest in short-term, fixed income securities. These type of funds will generate a lot of cash dividend and will satisfy an investor seeking dividend or Capital Preservation Objective.
What Types Of Mutual Funds Are There?
Mutual Funds are created and characterised according to their investment objective. Mutual Funds can be classified according to how the assets are managed; for instance – Passive versus Active Funds. Passive EFT Index funds such as the Lotus Halal Index Fund index funds are not actively traded. The Mutual Fund Managers buy the index of the stock exchange and simply rebalance their positions as desired. This is a way for the investor to gain exposure to a particular market, sector, or even nation.
Actively managed funds on the other hand like the Legacy Equity Fund will see the Mutual Fund Managers actively buying and selling shares to maximise returns on behalf of the fund investors
Mutual Funds can also be classified by the asset allocation thus;
Money Markey Funds like the Abacus Money Market Fund which invests in short term fixed income instruments
Bond Funds like the Stanbic IBTC Bind Fund which invests in long-dated fixed income instruments
Real Estate funds like the UPDC Real Estate Investment Trust which invests in property with potential for above-average growth in rentals and valuation.
Some income funds also invest in securities that pay dividends regularly. These are mostly a mixture of dividend stock, bonds, and Treasury Bills.
Mutual Funds can also have a hybrid or mixed portfolios investing in different classes of assets. for instance, a fund can have both fixed Income assets like Bonds and Variable assets like Shares. Examples of these are balanced funds like the AIICO Balanced Fund.
Target date funds also called Lifecycle funds hold a mix of stocks, bonds, and other investments in separate funds differentiated by maturity dates. Over time, the asset mix gradually shifts from variable income to fixed income in line with approaching retirement of the Fund Investors. An example of this is the Cordros Milestone Fund.
How Do Investors Make Money in Mutual Funds?
The Mutual fund Manager invests the assets of the fund in s fiduciary manner for the investors to the Mutual fund. Increases in the Assets held by the Mutual Fund will increase the price of the fund leading to Capital Gain. Some Mutual funds also pay a dividend or distribution to the fund investors. So when you invest in a Mutual Funds, you receive the same rise in asset prices and returns as if you invested in the assets directly but proportional to your holdings in the Mutual Fund.
What costs do investors pay?
The fund Managers will charge the fund a management fee for providing investment management and administration services. When a unit of the Mutual Trust is bought that offer price includes the cost of the actual asset itself but also a share of the investment fees paid to the fund managers.
How to Buy And Sell Mutual Funds
Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for the mutual fund is the fund’s per share net asset value plus any fees charged at the time of purchase, such as sales loads.
How are Mutual Funds Valued?
Every close of the trading day, each mutual fund is valued. This value is expressed as the Net Asset Value and is derived by dividing the total value of all the securities in the portfolio, less any liabilities, by the number of fund shares outstanding.
Things to do before investing in any mutual fund
- Read the prospectus, that will tell you the “constitution of the fund including the asset management goals and objectives
- Ask about fees you will pay, fees are a drag on your profitability
- Ask how the fund will manage profits? Dividend payout?
- How quickly can you get your funds if you decide to leave the fund
Do past performance matter? Past performance of any investment cannot be used as a predictor of future values, at best they can give the investor a glimpse into the operations the company e.g. how they treat cash earned.
Even small differences in fees can mean large differences in returns over time. For example, if you invested $10,000 in a fund with a 10% annual return, and annual operating expenses of 1.5%, after 20 years you would have roughly $49,725. If you invested in a fund with the same performance and expenses of 0.5%.
Editor’s Note: It should be noted that this is not an offer to buy or sell securities. Mutual Funds can be risky even as investors could lose invested capital. The Mutual Funds that were mentioned are for illustrative purposes not a recommendation of any sort.
Analysis: Total Nigeria needs a financial overhaul
Total Nigeria’s Q1’20 results are a testament that some might have it worse than others as it recorded a revenue drop of 9.3% to N70.2 billion
The Oil Industry has had a particularly tough year, owing primarily to the novel pandemic. The International Energy Agency (IEA) predicts that the global oil demand is expected to further decline this year as Covid-19 spreads around the world, constraining travel as well as other economic activities.
Organizations like Total depending on international trade will be forced to scale down operations until restrictions ease off. However, Total Nigeria’s Q1’20 results are a testament that some might have it worse than others.
The period recorded a revenue drop of 9.3% to N70.2 billion in the first quarter of this year compared to Q1 2019. Total earns its revenue from three main sectors namely: Networks, General Trade, and Aviation. Revenue from Aviation fell by 39.5%. The decline in Networks is attributed to the reduced demand as a result of the enforced lockdown and restriction on travel across the nation.
Yet, it is clear that the company had its own challenges pre-COVID-19. In the quarter, it attained a loss after tax of N163 million which was 65.6% better than the loss after tax of the comparative quarter; it is overwhelmed by a myriad of distinct issues.
First off, its revenue has experienced a steady fall over the years; reasons for this is tied largely to its lack of importation of petroleum products.
It is also burdened by inefficiencies in its operations evident in its high operational and direct expenses, as well as its high debt over the past years. The company has carried on huge loans and borrowings in its books: N40.6 billion in 2019 and only a marginal reduction of N2.2 billion in the current year.
Even higher are its expenses after an 8.38% reduction in the just-released results, it arrived at N69.7 billion for Q1 2020. Amongst its high operational expenses is the high and increasing technical fees it pays to its parent company. From N251 million in the first quarter of last year, it incurred around N700m in the year under review. It also has cash flow issues with about N22b in negative cash and cash equivalents. In its 2019 report, it revealed that the year had been tough with its cost of doing business rising exponentially as evident in its interest expense, 395% higher than the previous year as a result of repayment for products and a high level of borrowing.
The company, in its last full year annual report, noted that to make significant savings to both operational and capital expenditure costs, a series of initiatives relating to cost efficiency, process optimization, and significant reduction of working capital requirement and finance costs, were put in place and are in motion for this year.
As Dr. Fatih Birol, IEA’s Executive Director put it “The coronavirus crisis is affecting a wide range of energy markets – including coal, gas, and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand transport fuels.”
However, Total’s position goes beyond the impact of the pandemic. Its rebound rests on its ability to carry on with cost control and lower debt commitments, together with the speed of the containment of the virus. That said, the company might need to raise capital soon while also coming up with formidable strategies to strengthen its business model.
Merger, Tax incentive boosts BUA Cement FY 2019 result
BUA Cement Plc recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
One of the industries set to experience the downsides of the Covid-19 pandemic is the construction industry. Given the slowdown in construction activities as a result of the lockdowns and constrained economic activities, the reasons are not farfetched.
Prior to the outbreak of the pandemic, Globe Newswire had predicted an accelerated growth pace of the global construction industry from 2.6% in 2019 to 3.1% in 2020. This growth has now been revised to 0.5%. What is even more daunting is that the revised growth rate is based on the assumption that the outbreak will be contained across all major markets by the end of the second quarter of 2020.
It is only after that (including freedom of movement in H2 2020) that events could facilitate reverting to the normal course of activities to foster businesses in the industry like BUA Cement or those that depend on it to restart activities.
Nigeria’s third-largest cement company, BUA Cement Plc, however, still has its 2019 victories in order. Involved in the manufacturing and sales of cement, BUA Cement has 3 major subsidiaries and plants in Northern and Southern Nigeria.
With a market capitalisation of N1.18 trillion ($3.3 billion), BUA is the third most capitalised company on the NSE. Its recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
The company’s profits also increased by 69.1% from N39.17 billion in 2018 to N66.24 billion in 2019. Core operating performance was strong, and this was supported by strong cement sales in the domestic market, impairment writes back, and other income.
The main reason for the company’s increased earnings is from the cost synergy and increased revenue as a result of the merger that took place between CCNN Plc and Obu Cement Company Limited.
There was also a striking jump in its income statement on its tax for the year. For FY 2019, it incurred a tax expense of N5.6 billion, in comparison to the N24.9 billion tax credit it received in FY 2018.
This was as a result of a reversal of previous tax provision made on Obu Line 1; it received approvals for an extension of the company’s pioneer status on Obu line-1 and Kalambaina line-2 in February 2020, to leave effective tax rate at just over 8% in 2019. The pioneer status will help the company save funds that will otherwise have been spent on higher taxes.
(READ MORE:Dangote Cement to access more debt funding)
BUA reported an impressive FY’19 result. Its performance shows the growing strength of the company and its increasing market share. On the back of the strong performance, management declared an N1.75 dividend per share that translates to a dividend yield of 5.5% on current prices.
Cash flow position was also robust with a strong closing cash balance – from N2.8 billion in 2018 to N15.6 billion as at year ended 2019. The company’s growth, as well as the impact of its merger, present a great buy opportunity of the highly capitalized, low-cost stock. As of today when the market closed (21st May) its share price stood at N35.60 from a 52-week range of N27.6 and N41.
What we see is a great growth stock further heightened by the population expansion and increased urbanization. However, we expect the impact of the Covid-19 pandemic to be felt from the Q1 results of the company.
The industry could slow down for the year as the level of commercial construction also slows down. Yet the best part of holding stocks like this is that even with stalled operations for a period, a resurgence will always emerge.
Analysis: Airtel Nigeria is winning where it matters
Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.
Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.
Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.
Performance Overview: Airtel Africa
Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.
Full Report here.
Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”
Behind The Numbers – Nigeria
Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.
Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.
On cash flows…
The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.
“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”
To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.
Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.
It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.