Columnists

How to build a portfolio fit for 22nd Century

In a world of investment complexity, you need simplicity, frugality and impact. it’s simply too expensive and time-consuming to research all stocks and opportunities.

Published

5 months ago

March 4, 2020

Kalu Aja

22nd Century portfolio, Weekly update of the Global Market ending 13th March 2020, Nigeria’s Banking stocks hit by asteroids, Index down 0.39%

The world is truly a global village. Today, it is routine for a bank founded in Lagos, Nigeria, to raise capital in London by issuing Eurobonds and using those $ investment to buy ATMs with software designed in California, built in China and transported on a ship owned by the California Pension fund, licensed in Libera and captained by a Philippine crew.

If you walk to your fridge in Kano and open it, chances are you will find products from Coca Cola of America; if you go to your sitting room, the TV was assembled by Samsung of South Korea with content streaming via DSTV of South Africa. Your Apple iPhone was made in Vietnam, your generator by Honda of Japan, and your wallet has a Mastercard from the US. You are a global consumer of brands and services. You may buy your cocoa drink from Nestle Nigeria Plc; that cocoa is probably grown in Oyo by Nigerian farmers, but it is sold by a company majorly owned by a Swiss firm.

What about your investing?

Do you invest locally or globally? Why is it even important to invest globally? Let talk about two topics: Risk, and Asset Allocation.

Risk

Risk is volatility, i.e. a numerical expression of uncertainty. Risk in investing means you are not sure of investment outcomes including safety of invested capital. When you invest in the shares of a single company, you can lose 100% of that investment. What if you invest in two companies? Well, simplistic math says the probability of you losing all your capital falls to 50%. A portfolio of a basket of securities has lower volatility, i.e., less risk than a single holding. So, in investing, the maxim holds, don’t put all your shares in one basket.

What about asset allocation?

Asset allocation aims to build you a basket that matches your Age, Risk Profile and Investment Objectives. If you are a younger investor, best practices in asset allocations will propose a portfolio to you designed to be overweight in equities than bonds. If you have an aversion to risk, asset allocation will propose a portfolio selection based on fixed income securities.

The global investor can reduce his investment risk by expanding the available pool of investments to include globally issued securities, and this is done via buying Exchange Traded Funds (EFT), a class of investment securities that offers the diversification effects of Mutual Funds but allow trades to be made during trading hours, unlike Mutual Funds that trade at the end of day using Net Asset Values (NAV). The ETF chosen are all index ETF, meaning they track the performance of that identified index; being passively managed means less management fee.

How do we build the portfolio fit for the 22^nd century for a global consumer and investor? In a world of investment complexity, you need simplicity, frugality and impact. it’s simply too expensive and time-consuming to research all stocks and opportunities. With ETFs, it’s now possible to invest in a targeted manner to take advantage of a specific demographic, sector or opportunity.

There are just two types of investment options, Fixed income like Bonds, where the returns are known in advance, and Variable income like Equity where the investment returns cannot be determined in advance. Below are my recommended ETFs for the global investor. Please note all yields are quoted in USD for uniformity.

Global X MSCI Nigeria ETF tracks the return on the Nigerian Stock Exchange’s most liquid 30 stocks. Expense ratio of 0.88% 5-year return of -16.40%.

VETIVA S & P Nigeria Sovereign Bond ETF, tracks the performance of local currency-denominated sovereign bonds in Nigeria. It has dividend yield of 5.78%.

Vanguard Total Stock Market ETF VTI tracks over 3,500 US stocks, the index aims to represent the entire US Equity market with an expense ratio of 0.03% 5-year return of 8.72%, with dividend yield of 2.35%.

Vanguard Total International Stock (VXUS) mirrors the investment return of stocks issued by companies located outside the United States. Total expense ratio is 0.09% with a 5-year return of 2.55%.

Vanguard Total World Stock ETF (VT) tracks well established and still-developing markets, both US and foreign stocks. It has an expense ratio of 0.09%, and 5-year return of 5.85%.

Vanguard Total Bond Market ETF (BND) tracks a wide spectrum of public investment grade securities in the US, with an expense Ratio of 0.04% and YTD return of 3.89%

Vanguard Total World Bond ETF (BNDW) Broad, diversified exposure to the global investment-grade bond market. Expense ratio of 0.06%, YTD return of 3.25%.

Next thing to do is simply select from our table and build a portfolio fit for investment purpose.

E.g., Ade, a 25-year-old seeking to invest for his retirement 30 years from today, can build a portfolio of 80% Variable Income and 20 % fixed Income.

This portfolio makes Ade a shareholder in every large company in the world; he participates in equity dividends as well as coupons from the US and Nigerian governments. His average cost, if he invested $100, is about .027%.

Do note there are many asset allocation models and investment options also available to Ade. He can select ETFs that pay a dividend, that invest in SME, or even in a specific sector like biotech.

Related Topics:asset allocation Eurobonds Global X MSCI Nigeria ETF Vanguard Total World Stock ETF

Kalu Aja

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Columnists

Activity level rebound in June as locals sustain dominance

Foreign outflows grew to N31.1bn (US$81.8m) compared with N16.8bn (US$44.2m) in May.

Published

16 hours ago

August 4, 2020

CSL Stockbrokers

Based on the recently released NSE Domestic & Foreign Portfolio Investment Report for June, total value traded grew 8.2% m/m to N128.9bn (US$339.2m) in June 2020 with foreign transactions up 59.9% m/m to N56.3bn (US$148.2m) recovering from a 29-month low while domestic transactions dipped 13.6% m/m to N72.5bn (US$190.8m). Although the value of transactions executed by domestic investors declined, they maintained dominance of the local bourse as their share of total transactions in June was 56.3% (YTD; 60.5%) while foreign investors’ share of total transactions was 43.7% (YTD; 39.5%).

On the domestic front, transactions were dominated by institutional investors who traded N40.2bn (US$105.8m) while retail investors executed transactions worth N32.3bn (US$85.0m). Notably, foreign outflows grew to N31.1bn (US$81.8m) compared with N16.8bn (US$44.2m) in May. Hence, foreign outflows outpaced inflows, resulting in a net outflow of N5.8bn (US$15.3m) in June vs net inflow of N1.62bn (US$4.3m) in May. This may signify the possibility that foreign investors may have been able to move some of their funds out of the market. However, we note that FX illiquidity remains a major problem for FPIs.

In line with the rebound in activity level, the local bourse sustained the positive performance from May as the benchmark All Share Index (ASI) was up 0.9% in June. Although the month of June was largely volatile and bearish, we note that major market players were once again bolstered with some excess liquidity as OMO & T-bills maturities worth over N642.2bn hit the system while only N315.6bn worth were rolled over. We also note that bond auctions
absorbed N100.0bn of those maturities. Nevertheless, we believe some of the excess liquidity particularly for PFAs, corporates and HNIs flowed into the market as risk appetite increased.

READ: Equities: CBN’s heterodox policies is driving domestic investors’ to the stock market.

Going forward, we expect FPIs to retain their apathy towards Nigerian equities, however inability to get FX may continue to force reinvestments as we have been observing in recent months. That said, we expect locals will continue to drive the market as we begin to see a flurry of OMO and T-bills maturities in the final months of the year which we expect to boost liquidity.

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.

Columnists

Manufacturing: Activity levels pick up albeit readings still below water

For the second consecutive month, the non-manufacturing PMI showed broad-based improvement.

Published

2 days ago

August 3, 2020

CSL Stockbrokers

Manufacturing: Activity levels pick up albeit readings still below water

According to the Purchasing Managers Index (PMI) data released by the Central Bank of Nigeria (CBN) for the month of July, activity levels improved, through readings still remained below 50 index points. Specifically, manufacturing PMI improved to 44.9 in July from 41.1 in June, the third consecutive month of negative (below 50) reading in the sector. However, the continued relaxation of the lockdown measures which enabled service-based
organisations to improve their scale of operations sustained the faster recovery in the non manufacturing PMI for the second consecutive month, as it improved further to 43.3 in July from 35.7 in June.

Although, the readings in the manufacturing sector improved in July (Save for Supplier delivery time (-4.5) which declined, the remaining four indices used in gauging the manufacturing sector strengthened in July; Production level (+8.1), New orders (+6.7), Raw materials/WIP Inventory (+2.2) and Employment level +1.2). We believe the sluggish pace of recovery in the sector when compared with the non-manufacturing sector is reflective of supply chain disruptions given the continued ban on international airline operations, FX liquidity constraints, weak production runs and subdued demand from customers. The data revealed that, of the 14 surveyed subsectors in the manufacturing sector, only transportation equipment subsector reported growth while 12 subsectors contracted.

READ: CBN, Bankers committee back N3.5 trillion stimulus package for Nigeria

For the second consecutive month, the non-manufacturing PMI showed broad-based improvement across the four key metrics; Business Activity (34.3 to 46.1), Level of new orders (32.5 to 43.4), Inventory level (38.5 to 42.7) and Employment level (37.4 to 41.1) used in gauging activity level. We believe the continued relaxation of the lockdown measures in the month under review enabled most service-based organisations to improve their scale of operations.

Columnists

VAT collection edges higher but indicates weaker economy

VAT collection for Q2 2020 climbed higher by 0.8% q/q and 4.9% y/y to N327.2bn.

Published

1 week ago

July 28, 2020

CSL Stockbrokers

Yesterday, the Nigerian Bureau of Statistics (NBS) published data on Value Added Tax Collection (VAT) collection for the first half of 2020. According to the data, VAT collection increased by a modest 8.5% y/y to N651.8bn in H1 2020 from N601.0bn in H1 2019.

Suprisingly, VAT collection for Q2 2020 climbed higher by 0.8% q/q and 4.9% y/y to N327.2bn. The biggest contributing sectors to VAT collection, Professional services (up 40.9% y/y) and Other manufacturing (up 2.7% y/y) remained resilient during H1 2020. In addition, VAT collections on Breweries, Bottles and Beverages increased 12.0% y/y in H1 2020 although on a q/q basis, we observed a deep contraction of 27.3% in Q2 2020.

Further analysis of the data provided some indication on how weak economic activities were in H1 2020 given the disruptions brought by the global pandemic particularly in Q2 2020 when there was full lockdown in Lagos, Ogun and FCT in April. We recall the VAT rate which was increased by 50% from 5.0% to 7.5% kicked off in February 2020 and must have provided a significant buffer for VAT collections in H1 2020. If we adjust for the increase in the VAT rate, we think economic activities must have slowed heavily given that the impact of a 50% increase in rate translated to a relatively meagre 8.5% y/y increase in absolute collections.

The numbers confirm our view that the steep rise in prices of goods and services nationwide occasioned by high inflation and a steep currency depreciation in the face of stagnant wages and a pandemic has tightened the squeeze on consumer spending and as such raising taxes in this setting would only do little to improve government revenues. Thus, the Federal government needs to do more from a policy perspective to improve business operating environment, as well as consumer conditions, post the pandemic. In our opinion, this would have a multiplier effect on companies’ revenue as well as consumer demand which would not only boost VAT collections but also other taxes such as Company Income Tax.