By Coronation Research, March 14, 2022
Last year we showed (Coronation Research, The rise of dollar mutual funds, 1 November) how 1-year T-bill rates rose to 10.70% per annum in May 2021 as investors demanded high yields at auctions. By the end of the year, however, 1- year T-bill rates had collapsed to 5.35% pa, giving an inflation-adjusted return of negative 8.89% pa when compared with annual inflation of 15.63% year-on-year (December). This provided the impetus for investors to take on risk assets such as equities and to buy US Dollar funds.
This year, while inflation has continued to decline, primarily due to base effects, 1-year Treasury Bills yield 5.02% (end-February) with inflation still in double digits at 15.60% (February). This has presented challenges for fund managers seeking to attract money into Money Market and Fixed Income funds. The differentiating factor between funds today is how skillfully their managers position portfolios as interest rates change.
Risk appetite has sent the NGX All-Share Index up 11.05% year-to-date. This rally has been driven by new NGX Exchange listings (e.g. BUA Foods), better-than-expected Q4 earnings, positive earnings expectations and corporate actions, as well as investors taking positions ahead of FY 2021 dividend payments. In our report (See Coronation Research, 2022 Investment Strategy, Optimising Risk and Returns, 22 February), we make a case that equities continue to look attractive with a few stocks, notably among the banks and telcos, generating higher dividend yields than the 1-year T-bill.
Following the recent reclassification by the Securities and Exchange Commission (SEC), there are now 10 categories of publicly listed mutual funds: Money Market Funds, Fixed Income/Bond Funds, Infrastructure Funds, Real Estate Funds, Mixed Funds, Exchange-Traded Funds (ETFs), Equity Funds, Ethical Funds, Sharia Compliant Funds, and US Dollar Funds.
This reclassification was necessary because US Dollar funds used to be listed under Fixed income and Bond funds, as we explained in our report The rise of dollar mutual funds, 1 November).
Having realised a nominal compound annual growth rate (CAGR) of 61.58% between 2016 and 2020, the Nigerian mutual funds’ industry suffered its first decline in five years in 2021. According to the SEC, between 31 December 2020 and 31 December 2021, the total combined Net Asset Value of all the regulated mutual funds declined by a nominal 10.63% from N1.57tn (US$3.78bn) to N1.41trn (US$3.38bn). This decline was primarily driven by an exodus of N187.86bn from Money Market funds and N101.37bn from Fixed Income and Bond funds.
Growth returns to Nigerian mutual funds
However, in this same period, other categories of funds, notably US dollar-denominated funds (+62.24%), Infrastructure funds (+44.32%), Real Estate funds (+18.66%), and Equity funds (+5.14%), grew, showing the increasing appetite on the part of investors for risk assets. (Note that some of the growth was accounted for by the performance of the underlying assets.) So far this year, the total combined Net Asset Value of all the regulated mutual funds is up 4.34%.
What are the prospects for the rest of this year? Our view is that risk assets will remain in vogue as long as risk-free returns continue to fall. So, we expect to see money going into the above-mentioned categories of funds. By contrast, our core view on market interest rates is that these are likely to rise this year (see Coronation Economic Research, Blend of Optimism and Uncertainty, 14 February), and so we expect risk-free returns to improve. We, therefore, expect mainstream Money Market andFixed Income funds to attract money throughout the year.
Coronation Asset Management, 10 Amodu Ojikutu Street, PO Box 74853, Victoria Island Lagos, Nigeria.