There was a time was when it was almost a norm for the total net asset value of mutual funds in Nigeria to increase week after week but that trend seems to be quickly becoming history if the current trend continues.
Though fund asset value is expected to flow and ebb in accordance with events in the broader market, the Nigerian mutual fund industry had, in the past, been trending in the ascendancy irrespective of the vagaries of the market. Nigerian Mutual fund total net asset value hit its peak around the third week of February 2021 and ever since, it has been trending southward as indicated by the trend line below.
Source: Quantitative Financial Analytics
On a year to date basis, Nigerian mutual fund asset value has fallen by 12.37% from N1.572 trillion as at December 31, 2020, to N1.377 trillion as of September 3rd, 2021. Within the same period, Quantitative Financial Analytics estimated it to have made gains of N16.9 billion or 1.24%. So where is the decrease in Net Asset Value coming from, you may ask?
The decrease is a result of withdrawals that have consistently exceeded subscriptions for the major part of 2021. On a year to date basis, Quantitative Financial Analytics estimated that the industry suffered a total outflow of N616.7 billion but attracted a total inflow of N405.3 billion, resulting in a net outflow of N211.3 billion. Unfortunately, much of the decrease comes from money market mutual funds which used to be the flagship of the industry.
It is easy to blame all failures on Covid 19 but truthfully, one of the reasons for the massive outflow is the impact of Covid 19 on the financial wellbeing of Nigerians. Covid-19 caused many people to save less or withdraw from their savings and money market accounts to keep mind and soul together. This is more so for people who lost their jobs due to the pandemic and those whose business activities got stymied or jeopardized by the pandemic.
Economic hardship in Nigeria
Another reason for the downward trend in the net asset value of mutual funds in Nigeria is the current and ongoing economic hardship being experienced by the generality of the public, even before the advent of Covid. As the condition continues unabated, many have resorted to their savings and money market accounts to try to weather the storm.
Low interest rates
Interest rates have been on the low side the world over for the last two years or so, to the extent that some countries like Japan operated under a negative interest regime. Even in the US, the interest rate has been low although the FED has, on some occasions, increased the rates by 0.25 basis points.
The low-rate environment has no doubt demotivated yield-hungry and yield-seeking/hunting Nigerian investors, who, in reaction, have pulled out much of what they have in the money market mutual funds to wherever they can get more yield.
Investors all over the world look for outlets to make the greatest amount of return on investment, of course, without taking too much additional risk. Nigerian investors do the former without doing much of the latter.
Many Ponzi Schemes have arisen with promises of mouth-watering rates of return in high double digits. Many have fallen prey to such schemes and have therefore withdrawn their money from mutual funds into such Ponzi Schemes and many have been burnt in the process. This migration from low yielding money market funds to high yielding Ponzi schemes has helped to decimate the net asset value of mutual funds.
When one thinks about the Naira and what is happening to it in relation to currencies like the US Dollar or the British Pound, one can only say, “there was a currency.” The free fall of the Naira is not helping matters with mutual funds as many mutual fund investors have or are resorting to trying to hedge the value of their investment by having their money in US Dollar or British Pound denominated Domiciliary accounts.
This flight from mutual funds to domiciliary accounts is yet another factor leading to the continuous decrease in the total asset value of mutual funds in Nigeria.
Lacklustre stock market
The Nigeria stock market has not been helping matters either. With the economy still mono-cultural with over-dependence on oil coupled with bad governance and insecurity, it will be a tall order to expect a miracle from the stock market. The triple play from instability in the world price of oil, social insecurity and bad governance has led to the stock market performing abysmally since the beginning of the year. As of December 31, 2020, Nigeria’s All Share Index ended the day at 40,270.72 points from 26,842.07 points recorded on December 31, 2019. That was a performance of 50.03%. As of September 17th 2021, the All-Share Index closed at 38,933.61 points, which translates to a negative performance of 3.32%. With that performance, the equity-oriented and mixed mutual funds’ performance are affected, which in turn translates into the dwindling total value of mutual fund assets in Nigeria.
What it all boils down to
The decreasing trend of mutual fund assets in Nigeria is not new and it will continue as long as the factors that exacerbate such downward trend are still in play.