“Cash is king” is a popular saying in the world of high-stakes finance. Liquidity is essential; however, holding idle cash during periods of shifting monetary policy and currency fluctuation is tantamount to a guaranteed loss in value.
A non-diversified portfolio typically sheds up to 20% of its purchasing power within a single fiscal cycle due to high inflation and failure to acquire inflation-hedging instruments.
This risk is acute in emerging markets like Nigeria, where inflation has been up to 18-24% in recent years, causing cash-heavy or low-yield savings to shrink in value by the difference between the inflation rate and the nominal return.
Data from global markets suggest that up to 70% of long-term institutional investment success is derived from asset allocation and the use of fixed-income securities. Roger G. Ibbotson, alongside Paul D. Kaplan of the CFA Institute, concluded that asset allocation explains over 90% of the variability in a portfolio’s performance over time.
For the Nigerian High-Net-Worth Individual (HNI) or Corporate Treasurer, wealth preservation is no longer found in simple savings but in the precision of a fixed-income portfolio.
The Fixed Income Spectrum
A resilient portfolio is built on an understanding of the fundamental building blocks of the Nigerian and global debt markets. It is a spectrum of risk, return, and liquidity.
In the local market, Naira-denominated securities such as Nigerian Treasury Bills, Federal Government of Nigeria (FGN) Bonds, and Commercial Papers offer varying degrees of yield and maturity.
Treasury Bills provide short-term liquidity with sovereign backing, while FGN bonds allow investors to lock in yields that serve as the efficient frontier for local returns. However, a truly diversified portfolio surpasses borders.
Foreign currency securities, specifically FGN Eurobonds, are no longer a luxury but a necessity. Holding dollar-denominated assets issued by the sovereign enables investors to create a hedge against local currency volatility, ensuring that their global purchasing power is intact regardless of domestic happenings.
The Modern Portfolio Theory
Transitioning from an investor to a portfolio strategist begins with the application of Modern Portfolio Theory (MPT). This theory suggests that the risk of a portfolio is not the sum of its parts, but how those parts move in relation to one another. It involves:
- Multi-Currency Management: Balancing NGN and USD assets for high local yields and global stability.
- Duration Matching: This is concerned with aligning the maturity of investments with future financial obligations. If an organization has a major tax liability in 18 months, its portfolio should be structured to ensure that high-quality instruments mature when the cash is needed.
- Asset-Liability Matching: This involves matching long-term educational or estate goals with bonds with a similar tenure or long-dated sovereign debt that guarantees a specific future value at a designated point in time.
Cash Flow and Returns
Every portfolio that is not consciously diversified is making an implicit bet. For instance, if your Corporate Treasury is entirely in short-term commercial paper, you are making an implicit bet that interest rates will stay high. If rates drop, you face reinvestment risk, which is the danger of reinvesting your capital for a significantly lower return.
Liquidity is crucial for businesses to operate, but the ultimate objective is returns. This is why we encourage a laddering strategy that staggers the maturity date of fixed income holdings.
This allows instruments to mature every 30, 60, and 90 days to ensure that capital is always available for operational needs, while the rest continue to earn higher yields.
We Are the Right Partner for You
The difference between a mediocre return and institutional-grade performance is in access and execution. Coronation Merchant Bank occupies a unique position in the Nigerian financial ecosystem.
Our industry leadership is underscored by our solid international rating by Fitch, reflecting our strong capitalization, robust liquidity profile, and the institutional resilience required to navigate complex market cycles.
We help our clients move from implicit bets to explicit strategies, analyzing interest rate directionality and credit spreads to ensure that every position in your portfolio is a conscious choice based on data.
You will benefit from:
- Proprietary Research: Our analysts identify mispriced securities and macroeconomic trends before they become common knowledge.
- Bespoke Advisory: Every portfolio we manage is custom-built to fit the specific risk profile of our client.
- Seamless Execution: The technical ability to execute large-scale trades with minimal slippage and maximum transparency.
Wealth preservation requires a strong strategy that factors in inflation, currency risk, and an avenue for consistent returns. You deserve the precision of a prosperity partner that understands the nuances of the Nigerian and global financial markets. That is who we are.
Visit www.coronationmb.com to learn more about us today.
