Nigerian equity funds underperform SA peers on risk-adjusted basis

by | September 26, 2016 12:30 am


mutual fund is a collective investment scheme (CIS) that enables investors to pool their financial resources together for the purpose of investing in securities (stock, bond, etc) in which they would otherwise have been unable to invest.

The operation of mutual funds in Nigeria is regulated by the Nigerian Securities and Exchange Commission (SEC), under the provisions of the Section 153 of the Investment and Securities Act No. 29 of 2007 (the ISA).

The ISA defines a collective investment scheme as:

“a scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which:

Two or more investors contribute money or other assets to and hold a participatory interest;

The investors share the risk and benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed, but not a collective investment scheme authorised by any other Act”.

The ISA specifies several types of mutual funds that may be operated in Nigeria. These include Unit Trusts, Venture Capital Funds, Open-ended Investment Companies, Real Estate Investment Schemes, and Specialised Funds.

In addition to the benefits highlighted by the ISA definition above, viz. sharing of risk and returns by investors, mutual funds also enable investors to transfer the responsibility of managing their investments to professional people, who have acquired the training and skills to grow the wealth of the investors. In addition, mutual funds provide liquidity for the investors since investors are able to enter into, and exit from, participation in the funds with comparative ease. It also allows investors with small amount of money to invest in securities of big companies or other entities.

Mutual Funds in Nigeria

In Nigeria, many financial institutions have established their own collective investment schemes (Mutual Funds).  Presently, there are 65 mutual funds in Nigeria that are duly registered by the SEC.

These mutual funds comprise equity-based funds, money market funds, bond funds, fixed income funds, real estate funds, mixed funds, ethical funds, and exchange-traded funds.  Almost all the mutual funds promise to increase the wealth of investors through superior investment skills, deep market knowledge, among other distinguishing characteristics, but the key question remain, “to what extent has the mutual funds kept their promise of increasing investors’ wealth?”Business day research reveals a mixed result for the Nigerian equity-based mutual funds (the Funds). Businessday examined six of the Funds whose benchmark is the NigeriaStock Exchange All Share Index (NSE ASI) from the information on their websites. The result is revealing: 4 of these posted a positive year-to-date (YTD) returns, indicating an increase in wealth for their respective investors. However, two of these funds tend to have eroded the wealth of their investors by posting negative returns.

Similar results can also be seen regarding the performance of the funds relative to their benchmark, the NSE ASI – the funds that posted positive returns also outperformed their benchmark, while the ones that posted negative returns underperformed their benchmark. On the average, the mutual funds examined have outperformed their benchmark by about 1.4 percentage points, both on absolute and risk-adjusted bases.

Performance of South African equity-based funds lags their Nigerian Counterparts’

Compared to their South-African peers, Nigerian mutual funds could be said to have done well. Businessday research shows that of the five South-Africa-based (SA) funds examined, three posted marginal positive returns, below one percentage point, while two posted negative returns.

Only two of the SA funds outperformed their various benchmarks, while three of the funds underperformed their benchmarks by significant margins. On the average, the SA funds underperformed their benchmarks by c.2.54 percentage points.

Nigeria’s equity funds performance to date

Our analyses show that of all the equity-based funds in Nigeria, the best performing fund year-to-date is the frontier fund, which realised 5% returns for investors, and outperformed its benchmark by about six percentage points. Following Frontier Fund is the Stanbic IBTC Nigerian Equity Fund, which posted a year-to-date returns of 4% for investors, followed closely by the Legacy Equity Fund and the ARM Aggressive Growth Fund, which increased the wealth of its investors by 3% and 2.5% respectively. The Funds that have eroded the wealth of their investors include the Paramount Equity Fund that depleted the fortunes of its investors by 7%, and United Capital Equity Fund that eroded its investors’ wealth by 3%.

Equity-based mutual funds returns: are investors better off?

Investors are worse off! The reason for our opinion above stems from the fact that if the investors staked their funds in the Nigeria Treasury Bills they would have realised a yield of at least 9%. Given that the average risk-adjusted return on the equity-based mutual funds in Nigeria is c.1.4%, this implies that the average investor in the Funds would have lost c.7.6% in returns forgone.  In conclusion, much as we agree that mutual funds investments present Nigerian investors with the opportunity to leverage the advantages of scale offered in pooled financial resources,  there is evidence that these funds have not really lived up to the interest of the investors. We therefore recommend that the mutual funds managers should review their investment strategies to ensure that investors are adequately compensated for the risk they undertake by investing in their funds rather than on the less risky Nigerian Government securities.