In one of my recent pieces, I elucidated on the importance of and need for standardized reporting on mutual funds. Just recently, the Security and Exchange Commission (SEC), as the apex organization that regulates operations of mutual funds in Nigeria, issued “new rules on collective investment schemes”. This new rule bothers more on the calculation and reporting of expense ratios for mutual funds. This is indeed a step in the right direction, as mutual fund investors should be made to know, in no equivocal terms, how much fees they are paying for the mutual funds they invest in. The importance of that is that it helps the mutual fund investors with the opportunity to compare fund fees, while investing and even before investing so as to make informed choices
Though the new rule has been lauded as a step in the right direction, it does not seem to go far enough. Mutual fund, as an investment vehicle, is still new and young in Nigeria and it is begging for understanding among investors, especially, retail investors. As a result, the industry needs to be properly regulated and with proper enforcement so as to instill confidence among investors.
Historical Performance: Though knowing how much a fund costs is important, such information becomes almost useless when used in isolation of some other parameters. In most cases, fund fees are used together with fund performance to find out if what is being paid for is worth it. For example, if you have two funds, in the same category, one having 0.5% expense ratio and the other 0.75% expense ratio, intuitively, the fund with the lower expense ratio becomes the choice. What if I tell you that the 0.5% fund has historically made 10% return over the past 10 years while the 0.75% fund has made 25% return over same period, your fund of choice will probably change, even though past performance does not guarantee future performance. Therefore, in addition to asking fund managers to report expense ratios, the SEC should ask them to also report historical performance, among others.
Risk Return Profile: Again, what if I tell you that the 0.5% that has the history of 10% return has a low risk or is a fund with a risk-return ratio of 5% while the 0.75% fund with a history of returning 25% gain is a high-risk fund with risk-return ratio of 50%. Meaning that in a bad market, there is 50% chance of losing all your money while the other fund offers 5% chance of losing your entire investment. Depending on your risk tolerance, your choice of fund may change with that additional information. Therefore, the SEC should advocate for fund managers to report the risk-return profile of their funds. Currently, Stanbic IBTC Asset Management Ltd seems to be the only fund manager that reports the risk profile of their funds, on a scale of 1 through 5.
Sill or Luck: Again, what if I had told you that the fund with 0.5% expense ratio made 5% return 3 years ago, 8% return,2 years ago and 7% return, last year but the fund with 0.75% expense ratio made 45% gain, 3 years ago, lost 20% 2 years ago and lost 25% last year. Over the three-year period, you will see that the fund with 0.5% expense ratio made 20% gain but the fund with 0.75% expense ratio made 0% gain, even though it made 45% three years back. Again, with that information, you may wish to rethink your thought on which fund to invest in. Investors should, and many do pay attention to consistency of fund performance because it helps them to know if the fund manager outperformed the benchmark as a result of luck or as a result of skill. The fund manager that made 45% 3 years ago and lost all that the next 2 years, most probably hit the 45% jackpot by luck while the fund manager that gained 5%, 8% and 7% respectively over a 3-year period must have done so out of his investment skill. Therefore, the rule should ask fund managers to report their monthly performance over the last 5 or 10 years so that investors can have a feel about the consistency of performance as well as be in a better position to access whether a fund manager depends on luck or skill.
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In Closing: Given the “youthful” nature of the mutual fund industry in Nigeria, one agrees that the role out of the rules may have to be a gradual process, but the earlier the better. More importantly, such rules should be enforced, as research has shown that most of what the fund managers promise in their prospectuses are not delivered as at when due. A good example is daily mutual fund prices, which only a handful of fund managers make available on their websites. Yet there does not seem to be anything being done to enforce the publication of the daily prices.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
Nairametrics | Company Earnings
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