It is often said that he who must find gold, must dig deeper because such is not found on the surface. With the current trends in interest rate, yield has become like gold, and those that must find it, should dig deeper than they have done before. It is no longer news that yield in traditional asset classes is approaching historically low levels. Indeed, yields are so low that yielder hunters are literally stuck. In one of my last pieces, I noted that the low yield had driven pension funds to the point of abandoning treasury bills as an asset class. The picture gets scarier and disheartening when viewed in real terms. With inflation holding steady, the low yields end up translating to negative returns when discounted for inflation.
Now that Treasury bills seem to be out of the question due to sub-zero yields, what can investors turn to? Here are a few things that investors could think of doing;
Invest in Money Market Funds: Money market funds have been the darling asset class for most Nigerians, due to their conservative nature and the fact that money market funds seem to be much easier to understand. The present low yield in the World market is also affecting money market funds but they still remain much higher than what is obtainable from Treasury Bills. Unfortunately, a great majority of fund managers do not have the yield of their money market funds on display when I visited their websites, below is a list of the prevailing money market yields in Nigeria for those that could be gleaned from the various website:
It may pay to shop around for yield as different funds present with different yields, as can be seen from the table above.
Fund Managers to the Rescue: One of the implications, if not the major implication of the ultra-low interest rate is that investors in yield driven asset classes, like money market funds, will either make minimal returns or no returns at all, especially when inflation is factored in. Unfortunately, most of these money market funds pay fees to the fund managers. To help the situation, it is time for fund managers to reduce or waive some of the fixed fees they charge investors like management fees. Investors should, therefore, ask fund managers for a renegotiation of the fee structure in such a way that the burden of low-interest rate is shared between the fund managers and the investors. Fund managers in places like the US are already doing this.
Loss Carryforward Provisions: Another way that investors can manage this situation is for them to ask fund managers to insert loss carry-forward provisions into the mutual fund agreement or prospectus. A loss carryforward provision is one which states that the fund manager does not get paid any incentive fee unless and until the fund attains its last known highest asset value. By having loss carryforward provisions, investors are afforded the time to recoup on losses before being charged further incentive fees.
Look for High Dividend Yield Stocks: Though stock investment remains riskier than money market funds and fixed income fund investments, in a low yield environment, it may pay to look for and invest in high dividend stocks that have a history of regular and consistent dividend payments.
Warning: Nothing in this article should be taken as investment advice and the author should not be held liable for using it as such.
SEC publishes new Crowd Funding Regulations limiting investment to 10% of income
SEC Nigeria recently published new rules intended to regulate crowdfunding.
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.
- 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.
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)
- 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
Understanding how Mutual Funds and ETFs work in Nigeria
This article sets to answer all your questions about Mutual Funds and Exchange Traded Funds.
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
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.
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.
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.
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.
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.
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.