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Shielding your portfolio from currency devaluation

Invest in funds that are denominated in currencies other than the Naira.

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currency devaluation, Eurobond, parallel market, bond market

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.

READ MORE: Eurobonds in Nigeria: What they are and how to invest in them

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.

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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.

READ MORE: United Capital Plc releases Nigeria’s 2020 Outlook Report

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.

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Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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Book of States 2020: Vast resources, low industrial development

State governments have been heavily reliant on FAAC distribution to meet recurrent expenditure, thus making no room for capital spending. 

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Oil Price Crash: Governors to meet on budgetary and economic issues, Insecurity: Governors to meet on Wednesday over rising insecurity

The Nigerian Investment Promotion Commission (NIPC) in a recent report titled “Book of States 2020” highlighted the investment prospects of the 36 states of the federation including the Federal Capital Territory (FCT) to steer attention to the subnational investment opportunities in Nigeria. We note that the report is an outcome of a partnership between the commission and the Nigeria Governors’ Forum (NGF) to showcase the key investment opportunities for each state.

The report focused on the key areas of physical capital (airports, railway stations and seaports), resources (natural and minerals) and demography (population and labour force) of each state including their Internally Generated Revenues (IGRs), budget spending and household consumption.

While we acknowledge the decrepit infrastructure as a major hindrance to the growth of businesses and economic prosperity of many states, we note the little emphasis placed by the states on financing capital projects to attract private sector investments. Over the years, state governments have been heavily reliant on FAAC distribution to meet recurrent expenditure, thus making no room for capital spending.

The truth is that as long as state governments do not make desperate efforts to develop their internal revenue-generating capacity, the states in the country would continue to operate an inefficient rent collection system where they rely solely on FAAC allocation to meet basic needs such as paying workers’ salaries.

In our view, we believe the efforts to revive the ailing status of many states depend on the effectiveness and soundness of policies made to propel investments. Currently, Nigeria has enormous potentials to improve tourism given its ample amount of resources to attract both local and international tourists. Many countries in the continent such as South Africa, Kenya and Morocco have made great fortunes from tourism.

Over 50% of the states have recorded no foreign direct investments over time due to little or no requisite infrastructure needed to attract capital inflows amid untapped resources in these affected regions. Also, we believe the Federal Government needs to relax its control on some of the state-owned resources to enable the states better exploit these resources.


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.

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How EFCC’s proposed lifestyle audit will affect your finances

While enforcing lifestyle audit, the relevant agencies must take note of the fact that social media influencing has become a serious business in Nigeria.

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Access, GTBank, two others pay PWC & EY N1.5 billion as Audit fees in H1 2020 

On Wednesday, the 24th of March 2021, Lauretta Onochie, a presidential aide, took to Twitter, to announce the legality of lifestyle audit in Nigeria, with a view to tackling corruption. She also mentioned that those who flaunt lifestyles they cannot afford can now be investigated by any of the antigraft agencies such as the Economic and Financial Crimes Commission (EFCC) and Independent Corrupt Practices Commission (ICPC) to give information about their source of wealth.

Some Nigerians have already expressed delight in the government’s action, hailing it as a great move, while others have heavily criticized it, adding that such lifestyle audit should be for those in public offices and those holding political positions in Nigeria.

READ: $1.3 billion Malabu oil field sale was lawful – Former Shell Executive

The implication of lifestyle auditing

Lifestyle audit basically involves an inquiry into the lifestyle of individuals for the purposes of revealing unreported cases of unjust self-enrichment and suspicious affluence that may suggest that such individual perpetrates fraud or is involved in corrupt activities. In carrying out such an audit, there is a comparison of the living standards of the said individual with his known source of income.

There is also an inquiry into the consumer index of such an individual, which includes the income of his or her spouse, the monthly expenses of the family, the declared assets of the family and related personal expenditure of such individual. It is considered a major tool in fighting corruption.

Whether such audit is conducted in the public sector, i.e. on those in public offices or employees of government, or whether it is carried out in the private sector, the major goal of a lifestyle audit is to consider whether or not an individual is living beyond his or her legal means, and whether there is a possibility that such lifestyle is funded by corruption or fraud.

If during the course of the audit, the individual is unable to prove the source of funds or income, such funds may be taxed as undisclosed income, and if it is discovered during such investigations that the individual is involved in fraud or any criminal related activity, such individual may be prosecuted.

READ: FBI ranks Nigeria 16th in its 2020 International Crime Victim Countries

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Is Nigeria the first to legalise lifestyle audit?

Countries like Kenya and South Africa have been carrying out lifestyle audits. Kenya for instance has embraced lifestyle audit as a means to reduce corruption in both the private and public sectors. Government institutions in Kenya audit their staff by comparing the lifestyle of such staff with their income, in order to reveal any inconsistencies.

In the private sector, lifestyle audits are also carried out on employees who declare their wealth, allowing for an investigation into the existence of any questionable source of income or revenue.

The Ethics and Anti-Corruption Commission of Kenya in 2008 took a financial controller who was earning Sh306, 000 a month to Court. But the EACC said he owned seven houses or plots, four vehicles, six bank accounts (one in London) and had Sh4 million in cash in his house. What the EACC wanted was for the court to agree he had “unexplained assets” and that the assets should be seized. The lower court rejected the EACC’s case on a variety of grounds based on the Constitution. However, the Court of Appeal held that the Financial Controller had not shown how he had acquired some of the assets.

READ: 6 types of pension plans: Deciding which is right for you

In 2018, the Kenyan Government intensified the war on graft by announcing that all public servants will undergo a compulsory lifestyle audit to account for their sources of wealth. In an article published by the Katiba Institute, Kenya, on 27 June 2018, it was reported that various corruption scandals have been exposed and over 40 persons have been arrested as a result of corruption scandals resulting from lifestyle audit in Kenya.

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In South Africa, the government has carried out lifestyle audit for the public sector in order to curb corruption and fraud. However, lifestyle audit in South Africa is not limited to the public sector as the South African Revenue Service (SARS) since 2007 has been carrying out lifestyle audit on private individuals and using it for several criminal investigations. The SARS encourages members of the public to report people living a lifestyle beyond their known means of income. The SARS would usually ask the individual to fill a questionnaire to aid them in their inquiry.

Business Insider South Africa has stated in an article published recently, that SARS has been using lifestyle audits on private individuals since 2007 and they have used it to conduct thousands of criminal investigations.

READ: Corruption erodes the constituency for aid programmes and humanitarian relief – IMF

Possible challenges Nigeria may face

While enforcing lifestyle audit in Nigeria, the relevant agencies may need to take note of the fact that social media influencing has become a serious business in Nigeria today. What usually happens is that these influencers present a lifestyle to the public which they may not be able to afford or which cannot be said to be at par with their income.

The reason for such presentation is to get more followers on social media and attract brands and businesses that would usually enter into an agreement with them to influence the public to patronize the products of such brands in return for a fee. The question now arises, what becomes the fate of such influencers in the face of the legalizing of lifestyle audit in Nigeria? What effect would it have on their businesses since they are not considered illegal?

In an interview with Elsie Godwin, a YouTube content creator, Lekan Bamidele, the Managing Partner of Lekan Bamidele & Co stated that there is a huge possibility that lifestyle audit may lead to an invasion of the privacy of the audited individuals which is an infringement of their fundamental human rights as guaranteed by the Constitution of the Federal Republic of Nigeria 1999 (as amended). This is because, in carrying out such audits, the private properties of such individuals such as their phones, bank statements etc. may be looked into even without their consent.

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He also added that lifestyle audit may result in abuse by the authorities, as the Nigerian Police having no right to conduct lifestyle audit on Nigerians may want to usurp the powers of the relevant agencies; and that lifestyle audit should generally be restricted to public officials.

However, based on the provisions of the Nigerian constitution the right to privacy is not absolute and an invasion of privacy would not be considered as an infringement where it is for the purpose of public morality, public order, etc. The actions of the agencies carrying out such audit may be considered as falling under this exception and would not be illegal.

Moreover, since Nigeria still battles with issues such as police brutality and sometimes, unwarranted profiling which led to the recent #EndSars protest, lifestyle auditing may give unscrupulous officials the leverage to treat citizens with indignity and may also lead to the abuse of the entire auditing process. It, therefore, opens a lot of Nigerians to the risk of harassment and unnecessary profiling.

Additionally, it is a notorious fact that one of the major problems facing Nigeria is corruption. Corruption is a phenomenon that has eaten deep into the systems and permeated every level of governance in the country and even the agencies of government. It may, therefore, pose a major threat to the smooth running and enforcement of lifestyle audit in Nigeria.

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Conclusively, the relevant body or agencies should take these and more into consideration, and a formal structure should be put in place, and legislation enacted, in order to effectively carry out lifestyle audit in Nigeria. Also, there should be no overlapping of duties in the enforcement. That is, only agencies that are vested with such powers should exercise them. This would ensure that Nigerians are not faced with a situation where just any person would claim the right to investigate the source of their income.

 

Written by Nwankwo Tochukwu

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