There is no doubt that Nigerians are in love with money market mutual funds considering the size of money market funds in relation to the entire mutual funds in Nigeria. It’s either Nigerians are predominantly risk averse or are always hungry for yield. The interplay between these two factors has made money market fund the mainstay of the Nigerian mutual fund industry.
There will mostly not be much left in mutual fund assets if money market funds are to be liquidated. It is the important position occupied by money market funds in the Nigerian mutual fund space that has prompted me to take a cursory look at the pains and gains of money market funds.
What are money market funds?
Money market funds are mutual funds or pooled investments that invest in short term fixed income securities like Treasury Bills, Commercial Papers, and similar instruments that mature within a year. In return, they pay interests, often times computed on a daily basis.
One of the characteristics of money markets mutual funds is that they are low-risk investments and therefore suitable for those that are risk-averse, conservative and retired or retiring soon. Another advantageous characteristic of money market funds is that they are quite liquid. And because they are near cash instruments, they can easily be turned into cash without little or no loss of value. Money market funds thrive more in an environment of rising interests or when the yield curve trends upwards.
Risks in Money Market Fund Investments
Many people are of the view that money market funds are not risky. That is a myth. Every investment has an element of risk. However, the good news is that money market funds occupy the lower end of the risk continuum compared to other types of investments. Though money market funds are low-risk investments, there is no guarantee that you cannot lose your money if the fund manager goes under. According to the US Securities and Exchange Commission, “while investor losses in money market funds have been rare, they are possible”.
Money Market Funds are Uninsured.
Money market funds are not bank deposits. Hence, they are not insured by the National Deposit Insurance Corporation. The implication of this, therefore, is that unlike bank depositors who stand to be compensated, up-to-the legally stipulated limit, if their bank goes bankrupt, there is no such compensation for investors in money market funds.
Reading some of the comments people make on some social media platforms like Nairaland, it does look like people tend to equate money market funds to fixed deposit accounts with the banks. While they share some characteristics, especially that of liquidity, they do not enjoy the same protection from the deposit insurance agency.
Unlike fixed deposit accounts with banks, where the depositor knows what rate of interest the deposit will earn over an agreed period, money market funds attract variable interests. The interests that money market funds attract depend on the dynamic nature of the yield curve and the activities of the economy as a whole. In a falling interest rate environment, money market funds tend to generate lower yield while the reverse is the case in a rising interest environment.
Money market funds’ yields may not always keep pace with inflation, especially in a situation or period with rising inflation. If this happens, money market fund investors may suffer losses in real terms but not necessarily in nominal terms. This happens when the inflation-adjusted return of a money market fund becomes negative because its yield lags inflation.
Fund Management Fees
Fund managers charge management fees and sometimes, performance fees on their Money market funds. In addition, they may charge such fees as early redemption fee, audit fee, legal fee, and so on. It is, therefore, advisable to be aware of the expense ratio of the money market fund you intend to invest in.
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Most importantly, read and understand the prospectus of the money market fund to know what risks you may be exposed to, what instruments the fund intends to hold as that may give you an idea of what to expect by way of yield or interest income.
United Capital Plc lists N10 billion fixed rate bonds
United Capital Plc has listed its N10bn, 5 Year 12.5% Senior Unsecured Fixed Rate Series I Bonds.
Today, September 22, 2020, the Nigerian Stock Exchange (NSE) announced the listing of United Capital Plc’s N10 billion, 5 year senior unsecured fixed-rate series bonds due 2025, with a 12.5% interest.
In a statement made available on the NSE website, and signed by Godstime Iwenekhai, Head, Listings Regulation, the medium-term bond will be issued as part of the N30 billion Debt Issuance Programme.
The subscription for the offer will last for twelve (12) days, as the offer will open on the 4th of May, 2020, and close on the 15th of May, 2020.
— The Nigerian Stock Exchange (@nsenigeria) September 22, 2020
Summary of the offer
- Issuer: United Capital Plc
- Offer date: 28th of May, 2020
- Maturity date: 28th of May, 2025.
- Units of sale: 10,000,000
- Price: N1000 per units offered
- Coupon rate: 12.5%
Redemption: Semi-annually, and payable in arrears on 28th November and 28th May of each year, up to and including the Maturity Date.
Note: Senior unsecured bonds are a non-convertible corporate bond, that is not subordinated to any other unsecured indebtedness of the related issuer. Hence, it guarantees bondholders a quick payout in cases of default. While a fixed rate bond is a long-term bond, with an already specified coupon rate (Interest).
United Capital Plc, is a leading African financial and investment banking group, providing bespoke value-added service to its client. The firm was incorporated in Nigeria on March 14, 2004.
Nigerian Treasury Bill falls to 3.05% per annum
The DMO sold N2 billion on the 91-day paper and N8.385 billion on the 182-day.
The latest data from the Treasury bill auctions concluded today revealed that Nigeria’s 364-day tenor dropped to 3.05%. On the other hand, Stop rates printed lower for the 91-day tenor at 1.09% and 182-day tenor, which went for 1.5%.
At the Treasury bill auction, the Debt Management Office sold N2 billion on the 91-day paper, N8.385 billion on the 182-day, and N148.361 billion on the 364-day bills.
Ladi Bello, a treasury dealer at Nigeria’s Tier 1 bank in a phone chat interview with Nairametrics, spoke on the just-concluded auction.
“At the Primary Market Auction conducted by the DMO yesterday, N159bn was rolled-over across the standard maturities on offer with demand skewed towards the new 1-Yr paper.
“Stop rates on the short and mid-tenured maturities closed marginally lower than the preceding auction at 1.09% (↓1bps) and 1.50% (↓5bps) respectively, while the 1-Year paper remained unchanged at 3.05%,” Bello said.
Quick facts: The massive disparity between the subscriptions and the offers recorded suggests investors are willing to earn a negative real return, compared to the higher risk in other assets such as stocks and real estate.
Temitope Busari CFA, a leading investment professional in a note to Nairametrics also spoke on the low-interest rates the Federal Government of Nigeria was borrowing with. She said;
“Yesterday’s Treasury bills stop rates were not far off from expectation and yields will likely continue southwards in the near to medium term.
“Additionally, we might see increased pressure on the short-end of the curve due to the dearth of instruments in the market versus excess liquidity.
“Technically, it’s more beneficial for the Government to borrow at the current levels to enhance our chances of recovery post-pandemic recession. Anecdotally speaking, the current interest rate regime is deemed punitive for savers, considering inflation is currently at 13.22%.”
Basically, the CBN sells T-bills on a bi-weekly basis to investors and it is one of the safest investments available. Interests are paid upfront, with the principal paid in full upon maturity.
Understanding Treasury Bills: Basically, when the government goes to the financial market to raise money, it can do it by issuing two types of debt instruments – treasury bills and government bonds.
Treasury bills are issued when the government needs money for a short period, while bonds are issued when it needs debt for more than, say five years. The issuance of treasury bills is also used as a mechanism to control the circulation of funds in the economy.
Treasury bills have a face value of a certain amount, which is what they are actually worth. However, they are sold for less. For example, a bill may be worth N10,000, but you would buy it for N9,600. Every bill has a specified maturity date, which is when you receive the money back.
The government then pays you the full price of the bill (in this case N10,000), giving you the opportunity to earn N400 from your investment. The amount that you earn is considered as the interest, or your payment for lending your money to the government.
The difference between the value of the bill and the amount you pay for it is called the discount rate and is set as a percentage.
Nigeria’s total public debt stock increased by N2.381 trillion in 3 months
The Debt Management Office revealed that Nigeria’s debt stock increased by N2.381 trillion.
Nigeria’s Total Public Debt Stock stood at N31.009 trillion as of June 30, 2020. The disclosure was contained in a press release by the Debt Management Office (DMO), on September 9, 2020.
The data shows that the Total Public Debt Stock which comprises the Debt Stock of the Federal Government, the 36 State Governments, and the Federal Capital Territory, increased by N2.381 trillion within 3 months when compared with the N28.628 trillion recorded on March 31, 2020.
The N2.381 trillion increase was accounted for by the $3.36 billion Budget Support Loan from the International Monetary Fund (IMF), New Domestic Borrowing to finance the Revised 2020 Appropriation Act including the issuance of the N162.557 billion Sukuk bond, and Promissory Notes issued to settle Claims of Exporters.
Backstory: It will be recalled that the 2020 Appropriation Act had to be revised due to the adverse impact of COVID-19 on the Government’s revenues, and the increased expenditure needs on health and economic stimulus amongst others.
What to expect
According to the Debt Management Office, the Public Debt Stock is expected to grow, as the balance of the New Domestic Borrowing is raised, and expected disbursement is made by the World Bank, African Development Bank, and the Islamic Development Bank, which were arranged to finance the 2020 Budget.
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Additional Promissory Notes are also expected to be issued before the year ends. This and New Borrowings by State Governments are expected to increase the Public Debt Stock.