The Naira has been undergoing some erosions in value in what economist call devaluation since September 1986, but the pace of such devaluation seems to be gaining traction.
It will be recalled that the Naira was higher in value than the US dollar until around September 1986, when the International Monetary Fund (IMF) deceived, confused and literally compelled the then government to devalue the currency as one of the conditionalities for an IMF loan.
Since then, the Naira has never looked north, it has been heading south, and no one knows if and when that journey to the south will end.
Given that the end is not and may not be near for the Naira, investors may be better off looking for ways to shield their portfolios from the effects of such devaluations. One way of doing this is to invest in funds that are denominated in currencies other than the Naira, the so-called Euro funds or Dollar funds.
The advantage of those investments is that they gain when the market does well and they also gain when the local currency loses value. Whether those are actually invested in foreign currency denominated assets is a question to be answered another day.
Here are some of those that have leveraged and gained from the seeming constant devaluation of the Naira;
Legacy USD Bond Fund: Based on data from the Security and Exchange Commission, (SEC), the Legacy USD Bond fund has returned 17.62% since the beginning of 2020. This is coming from a gain of N54 per unit on an ending price of N360.5 as at May 29th 2020. The fund had closed the year 2019 with a price of N306.5 per unit.
Vantage Dollar Fund: Vantage Dollar fund is another fund that can provide a hedge against Naira devaluation. The fund which ended 2019 with a closing price of N401.02 rose to N455.5 as at May 29th 2020, to record a gain of N54.48 or 13.59%, according to the Security and Exchange Commission’s NAV reports.
United Capital Euro Bond Fund: United Capital Euro Bond Fund, though not as high a performer like the preceding two, can as well be used to manage currency risk. As is rightly and often said in investment literatures, past performance does not guarantee future performance. The United Capital Euro Bond Fund returned 23.83% in 2019 but it has only been able to return 8.97% so far in 2020. It does not look like it is providing an appropriate hedge against currency devaluation so far this year.
Stanbic IBTC Dollar Fund: Like the United Capital Euro Bond Fund, Stanbic IBTC Dollar fund has not been that spectacular in providing a hedge against currency devaluation, at least in 2020. The fund has so far recorded a return of 8.49%, having ended the month of May 2020 with a price of N458.73, which, when compared with its 2019 closing price of N422.83 leaves the investor with a gain of N35.9 per unit.
Conclusion: Unfortunately, the global market has been anything but stellar. The volatility in oil market and the lack of commitment from the Nigerian government to diversify the Nigerian economy out of oil, have combined to continue to weaken the Naira. The weakness is even being exacerbated by the increase in the debt burden from domestic and foreign borrowings. In such a situation, Nigerian investors will be wiser for it, if they can find ways to manage and hedge against currency risk by allocating a portion of their assets to foreign currency denominated investments, either directly through direct investments or indirectly through Euro Dollar fund investments.