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Market | Mutual Funds

A Comparative Analysis of Mutual Funds in Nigeria

Mar 26, 2019   •   by   •   Source: Proshare   •   eye-icon 10849 views

Tuesday,March 26, 2019 2:00PM / First Ally / Header Image Credit: Moneycontrol

 

The first mutual fund (investment fund)was set up in 1774 in Netherlands by a Dutch merchant known as Adriaan VanKetwich. Van Ketwich’s fund ran for about 49 years, but his innovation createda hallmark for personal investing globally and emergency of other mutual fundsin Europe and its surroundings. Globally today we have over 100,000 mutualfunds with a majority concentrated in the United States.

Mutual Funds emerged in Nigeria in theearly 1990s following the rapid growth in the financial sector after theimplementation of the deregulation policy. Over the years, there has been asignificant increase in the number of mutual funds as investors interestincreases. Mutual funds have become a vehicle used byboth advisors and institutions to access investible funds and diversifyportfolios.

 

Figure 1: Evolution & MutualFund in Nigeria 


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Source: SEC, FAAM Research

 

As at December 2018, the sector’s totalasset under management (AUM) was in excess of N600 Billion, with money marketfunds accounting for 67%. In comparison, this figure is 55%, 29%, 13% and 2%for Ghana, South Africa, United States and the United Kingdom respectively. Inthese markets, equity based funds dominate the sector. However, in Nigeriaequity based funds are only 3% of Nigeria’s mutual funds. This figure rises to17%, 19%, 46% and 59% for Ghana, South Africa, United States and the UnitedKingdom respectively. 

 

Figure 2: Mutual Fund Composition

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Source: ICI, Morningstar, SEC, FAAM Research


Economic Indicators

In a comparison of the mutual funds tothe population and AUM contributions to GDP, Nigeria’s asset managementindustry ranked lower than other economies. In a group consisting of Ghana,South Africa, United Kingdom and the United States, Nigeria ranked better thanGhana alone on AUM contribution to GDP. While in term of access to mutualfunds, Nigeria ranked the lowest.

 

Table 1: Economic Indicators

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Money Market Fund

A money market fund is an open-endedmutual fund that invests in short-term debt securities characterized by shortmaturities and minimal risk. They’re one of the lowest-volatility types ofinvestment. The funds balance income generation with capital preservation byadopting a conservative investment strategy. 

In Nigeria, average returns on Money Market Funds are very competitive incomparison to the average interest on savings account and inflation rate.Looking at other countries within our coverage, average returns on Money MarketFunds exceeded the average interest savings accounts and inflation rate exceptin the United Kingdom where average return on Money Market Fund outperformed theaverage interest on saving accounts but was below inflation rate. 

 

Figure 3: ComparingMMF Return, Savings Rate & Rate of Inflation

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Source: Deposit, NBS, NSE, ICI, FAAM Research


There is a positive correlation betweenyield on a 364-day T-bill yield and growth in the industry’s AUM. The data alsoshow a negative relationship between the returns on Nigeria All Share Index(NSE ASI) and 364-T-bill yield. 

 

Table 2:Correlation Analysis


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Source: FAAM Research

 

Summary

  1. The Nigerian Market isunderserved with just above 80 mutual funds for a population in excess of190Million
  2. The AUM to GDP is lowgiven the size of the Nigerian economy and its population
  3. Compared to the returnson equities, yield on Nigeria Treasury drives growth in the industry’sAUM 
  4. Average yields on MoneyMarket funds has outperformed average interest rate on the savings accounts andhave exceed inflation rate in Nigeria.

 

 

Conclusion

The money market fund continues to evolve and grow. It is as anefficient vehicle for investors who may be interested in fixed depositplacement or hybrid current/savings account but seek to achieve higher returnson their investment. 

Money market funds in Nigeria have notbeen fully exploited by short and medium term investors as there is room formore funds in relation to the population. In particular, low income earnersthat have limited or no access to other money market instruments except savingsaccounts will benefit from the advent of more money market funds. 

In line with this, there is a need forthe government and financial/investment houses to sensitize the public of theneed of alternative investments such as mutual funds, the benefits. Thiswill create awareness in the market and go a long way in creating strongrelationship between the investors and investees. 

 

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