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Funds Management

Mutual Fund Reporting: A call for standardization

Nigerian Mutual Funds do not make their financial reports public.

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Mutual Funds, Mutual Fund gone bad: Nigerian investor discloses his 10 years investment that nosedived , Nigeria’s mutual fund asset value reaches N1 Trillion

One of the banes of mutual funds in Nigeria is the lack of proper reporting. In some cases, the reports are either not available at all, or lacking in timeliness. Most importantly, when available, the reports lack uniformity.  This lack of uniformity makes it difficult for investors to compare among mutual funds.

Why Mutual fund reports are important: The importance of timely and standardized mutual fund reporting to investors cannot be overemphasized. Mutual fund reports are a means by which fund managers provide periodic information to their investors. Such reports act as a vehicle by which financial and other relevant information is provided or communicated to shareholders. The reports allow investors the ability to make better-informed investment decisions. It allows investors to compare among funds prior to and/or during investing.

What should be disclosed; Because there are many information relating to mutual funds, not all of them call for disclosure but the most important ones should be disclosed with respect to each fund in a way that makes it easy for investors to find and understand. Here are the important things that should be disclosed in a standardized form:

READ MORE: Nigeria’s mutual funds generate over N529billion in new investments in 2019

Fund Fees: One important consideration for a mutual fund investor is the expenses that he or she has to bear by investing in a mutual fund. Mutual funds typically disclose information about their fees in their prospectus; however, it is important that those fees also be disclosed in the monthly reports and fact sheets to remind and keep investors abreast of the fees. Some funds do this, as at the moment, but many do not either issue fact sheets or do not disclose fees in them.

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Portfolio Position Holdings: Mutual funds invest in other securities and investors should be made to know what their funds are invested in. Unfortunately, most mutual funds in Nigeria do not disclose this information. At best, they show the industry or sector classifications of what they invest in. Though it may not be easy to disclose all the holdings, especially with a large fund, but fund managers should be able and required to disclose any investment that is more than a given percentage of the fund’s net asset value, like 10%. At the barest minimum, fund managers should be required to disclose the largest 10 investments in the fund.

READ ALSO: Understanding Mutual Fund Fees: Incentive or Performance Fee

Disclosure of position holdings helps investors to know the extent to which they are exposed to concentration risk, the extent of diversification in a fund, and the extent of correlation between funds, for investors investing in multiple funds. In other words, disclosing position holdings will enable investors to know the extent to which their funds overlap and also form the basis of making informed asset allocation decisions. A disclosure of position holdings will help investors know when a fund manager engages in style drift, an indication of when a fund manager deviates from the investment objectives of a fund. When fund managers disclose position holdings, it places investors in a better position to evaluate the fund’s risk profile and investment strategy.

Fund Performance: Even though past performance does not guarantee future performance, fund managers should disclose fund performance in a consistent and similar manner in their reports. Such reports should show month to date, quarter to date as well as year to date returns. It should even show inception to date returns, and if possible, shown as a cluster of monthly returns. This will help investors know whether a fund manager is consistent in his/her performance or if the fund performs well in up markets or in down markets or in both.

Structure of Reports: It is not only the information that requires disclosure that should be standardized, the structure of the reports should be as well. A situation where one fund shows the performance of the fund on the first page and another fund hides it as a fine print, does not make comparison easy.  Therefore, funds should locate similar information on the same spot across fund reports so that investors can easily find them in one report based on their experience with another report.

Conclusion: Mutual funds in Nigeria have come a long way and they have come to stay. It is time for the regulators of mutual funds to come up with guidelines on reporting standards and frequencies in order to make understanding and using of such reports easy for investors. By so doing, there will be a level playing field for all funds. As it stands, the regulation of mutual funds in Nigeria seem to be lacking in certain areas. Such standardization, while increasing investors’ understanding will also help in getting more prospective investors interested in the mutual fund industry, and invariably lead to the growth of the industry.

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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Funds Management

SEC publishes new Crowd Funding Regulations limiting investment to 10% of income

SEC Nigeria recently published new rules intended to regulate crowdfunding.

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How to build a profitable Mutual Fund Portfolio

The Securities and Exchange Commission, SEC, has issued updated guidelines and rules governing the operation of Crowd Funding activities in Nigeria.

This follows an exposure draft issued in May 2020 as reported by Nairametrics.

Key Highlights of the new SEC regulations

  • SEC introduced Crowd Funding Intermediaries who will facilitate crowdfunding transactions such as offer for sale of securities or instruments through its portal.
  • This means anyone seeking to raise money through a crowdfunding service will have to go through a Crowd Funding Intermediary (CFI).
  • Thus, a fundraiser (the initiator of the fund) will need to go through a CFI web portal to raise capital
  • The new rules also limit the amount retail investors can invest in a crowdfunding transaction to just 10% of their net annual income in a year.
  • This means individuals cannot invest more than 10% of their net salaries in crowdfunding activities. But this excludes High Networth Individuals who do not have limits.

Information contained in the regulation highlights 

In summary, this is SEC Nigeria’s attempt to provide a framework around who can participate in crowdfunding issuances, drive increased transparency around Crowdfunding issues AND create more accountability to investors.

Specifically, the new rules specify the following four (4) participants in a crowdfunding issuance.

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  • Fundraiser, Crowd-Funding Intermediary, Investors, and Custodians.
  • There is also a provision for applications for a self-regulatory trade association to facilitate Crowdfunding supervision.

Definitions of the participants per the new rule

  • Fundraiser: refers to the originator, maker, or obligor of the investment instrument to be issued pursuant to these Rules.
  • Crowdfunding Intermediary (CFI): An entity organized and registered as a corporation to facilitate transactions involving the offer or sale of securities or investment instruments through a Crowdfunding Portal (CFP);
  • Investors: As defined by the act; relates to end takers of the instruments and products from the crowdfunding issue. The SEC attempts to differentiate between High-net-worth individuals, Retail Investors, and Qualified Institutional Investors.
  • Custodians are the banks who will hold the funds contributed on behalf of the parties.

Requirements

The four categories of participants specified in the rule are required to register with the SEC for purposes of taking part in Crowd Funding activities. Whereby the SEC will approve or reject registration requests depending on the eligibility criteria as outlined in the new rules on Crowdfunding.

The eligibility criteria vary by participant type. As an example,

  • Fundraisers must be entities incorporated in Nigeria and have been in operation for at least two years. Or have technical partners who meet the 2-year operating track record requirement.
  • Crowdfunding Intermediaries have a lot more onerous set of requirements for registration. This is because these intermediaries are the core participants saddled with creating and operating crowdfunding portals (i.e., Platforms/marketplace for the crowdfunding issue).
  • Notably, both the Crowdfunding intermediaries and the actual Crowdfunding platforms need to be registered.
  • Custodians: As the name implies will facilitate the aggregation of funds deposited and only release to the Fundraiser subject to the criteria of each issuance being met.

Workflow highlights for each Crowd Funding issuance

  • The workflow highlights for each crowdfunding issue include
  • Fundraisers need to engage a Crowdfunding Intermediary (CFIs) to facilitate the pooling of funds from investors via the approved Crowdfunding Portals (CFPs).
  • These CFIs will ensure that there are sufficient disclosures by Fundraisers to Investors about the purpose and use of funds.

Notably the new rules prohibit misleading information to investors.

  • The amounts being raised will be safe kept at a Custodian for the duration of the fund-raising window and released to the Fundraiser subject to meeting criteria.
  • Crowdfunding Intermediaries and the Portals are required to provide a plethora of information to both SEC and Investors. The portals also help ensure compliance with approved guidelines (e.g. not exceeding target amounts approved for each issuance)

In conclusion,

  • The new rule on Crowdfunding is a welcome development. Specifically, the introduction of technology portals to enhance disclosures about funds should bring more transparency into the sector and facilitate investor due diligence.
  • Furthermore, the introduction of eligibility criteria for the various participants should serve to increase accountability whereby Fundraisers will need to provide increased levels of assurance with regards to the use of funds whilst Crowdfunding intermediaries will be keen to facilitate investor due diligence as they seek to protect their reputation and prevent censure from the SEC.
  • One observation however is that the new SEC rule is not explicit about the issue of recovering investor funds in the event of registered entities failing. This may explain why the SEC is keen to differentiate between classes of investors (i.e. High-net-worth, Institutional investor, and Retail investor) and then further require that retail investors, who are arguably the most vulnerable to financial shocks, do not invest more than 10% of their annual income in these schemes.

Download New SEC Nigeria Guidelines for Crowdfunding

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Funds Management

Understanding how Mutual Funds and ETFs work in Nigeria

This article sets to answer all your questions about Mutual Funds and Exchange Traded Funds.

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Nine Mutual funds that joined the league of mutual funds in 2019, Nigeria’s best performing mutual funds in 2019, SEC clarifies new rules for mutual funds, sets new deadline for compliance 

Mutual Funds (MF) and Exchange Traded Funds (ETFs) are amongst the fastest growing asset classes in Nigeria. Broadly they are both classified as Collectives Schemes and are similar in many aspects yet are also different in operations.

Mutual Funds (MF) have been in existence for a long time. Mutual Funds are pools of funds created with the intent to pooling funds from various investors and buying assets. MF allows those investors to own the wide range of assets that the MF own, thus achieving diversification with a lower cost.

Dutch merchant, Adriaan van Ketwich is credited with the first investment trust in 1774 under the name “unity creates strength”. The first mutual fund to include bonds and shares was the Wellington Fund which was set up in 1929.

Nigeria’s oldest mutual fund, the Chapel Hill Denham Paramount Equity Fund has been in operation since 1991. The Security and Exchange Commission published the Nigerian Net Asset Valuation (NAV) Summary Report which found that there are 106 mutual funds in Nigeria with a total asset value of $3,714,013,444.

Exchange Traded Funds (ETFs) are a more recent asset class in Nigeria. (ETFs) are securities that track the performance of an index or basket of assets. There are about 12 listed ETFs on the Nigerian Stock Exchange

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What are Mutual Funds and ETFs?

Think of mutual funds as a savings pot where you and your friends save excess cash and subsequently invest that entire savings in a specific way, maybe to buy a cow for Christmas. Imagine if your group of friends decided to allow everyone in your town to join your investing club and contribute to buying cows. The funds then become so larger that you employ an asset manager to oversee the administration of the cows, and you simply create a company that will also offer cows, goats, and lambs. Thus, contributors can join your club and receive goat, lamb, and cow meat without having to buy actual cows or goats.

This is exactly how mutual funds work. A company like Stanbic IBTC creates an investment fund just like those friends, but instead of cows, they invest in bonds, money markets, equity, and other financial instruments. By buying shares in just that StanbicIBTC fund, you own a part of whatever the fund owns. This is s cheaper way for you to participate in the broad market, without having to buy every single investment.

Are Mutual Funds similar to ETFs?

In similarities, both offer investors a low-cost way to diversify holdings by selecting specific sectors, geographical regions, or risk profiles. For example, both MF and ETFs allow investors to buy country-specific investments e.g., the Vertiva Griffin 30 EFT and the Global X MSCI Nigeria ETF that invests in only Nigerian equity.

How do they differ?

In terms of differences, MF cannot be traded during the trading, an investor must wait for the close of business to calculate the Net Asset Value of the mutual fund and then place an order to buy or sell. ETFs on the other hand allow trading during the day.

Why buy collective schemes, why not invest directly?

The collective investment schemes have been embraced by Nigerians because of their greater promise of yield and diversification. These funds have offered retail investors the ability to earn a higher return on mostly money market investment, much higher than placing funds in banks. This preference for collective schemes has also been highlighted by the fall in yields offered by the risk-free Federal Government binds.

About 69% percent of the total assets of mutual funds are invested in money market funds. 9% in Eurobond funds, 7% in bond funds. In simple terms, by investing with others in a fund, the individual investor can access investment management which increases his chances to gain superior returns.

The future for ETFs and Mutual Funds

These asset classes will continue to grow in AuM as investors become more sophisticated and price-conscious. ETFs, especially Index ETFs offer sales commissions at a fraction of the brokerage cost. Also, FinTech’s automation of the asset allocation process has allowed more fund options to match individual choices.

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Funds Management

PFAs investment in FGN securities rises by 3.7% in November 2020

RSA registration marginally increased by 0.17% to 9,188,475 as at November 2020.

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NLPC, Investment One and OAK PFAs generate highest ROI in three RSA funds for 11 months, Sacked workers cash in N2.56 billion in 25% early pension withdrawal

The Pension Fund Administrators (PFAs) have increased their investments in Federal Government of Nigeria securities by 3.7% to N8.14 trillion in November 2020.

This is according to recent data from the National Pension Commission (PenCom), which revealed that the amount invested by PFAs on FGN securities including; Bonds, Treasury Bills, etc., increased from N7.85 trillion as of October 2020 to N8.14 trillion by the end of November 2020.

Key highlights

The breakdown of the amount invested on various FGN securities within the period under review are:

  • FGN Bonds got the lion’s share of N7.38 trillion as of November 2020, accounting for 90.7% of the total amount invested in FGN securities for the aforementioned month. This indicates a growth of 4.3% Month-on-Month.
  • Investment in Sukuk bond increased to N100.07 billion in November 2020, up by +6.9% Month-on-Month.
  • Investment in Treasury Bills declined to N642.03 billion, down by -1.7% Month-on-Month.
  • Investment in Agency bonds also declined to N6.03 billion, down by 50.9% Month-on-Month.
  • Investment in green bonds declined to N11.8 billion, down by 10.6% Month-on-Month.
  • Investment in state government securities stood at N150.59 billion, down by 2.5% Month-on-Month.

Read Also: Pension Fund Assets hits N9.3 trillion as investment in FGN securities drops

Upshots: The increased investment in FGN securities by PFAs within the aforementioned period might be attributable to an earlier order by CBN which prohibited PFAs from OMO Auctions. The order redirected the investment focus of most PFAs, with many opting for other low-risk FGN securities, possibly explaining why the increase occurred.

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What you should know: Nairametrics had earlier reported that CBN had restricted OMO auctions to banks and foreign investors.

  • The Net asset value of all PFAs in the country as of November 2020 stood at N12.3 trillion, marginally up by +1.98% Month-on-Month.
  • Total RSA registration for the aforementioned period also increased by 0.17% to 9,188,475.

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