Why You Should Use A Fund Manager in A Declining Fixed Income Yield Environment - FBNQuest

Tuesday, August 04, 2020 / 04:30 PM / FBNQuest /Header Image Credit: The Balance

Hunting for Yield

The outbreak of COVID-19 and its impact on the global economy hasmade the investment environment unpredictable. By tweaking the approach tomonetary policy amid a decline in foreign investor interest in Nigeria, thecentral bank of Nigeria set yields on government securities significantly lowerover the last four (4) months. In the meantime, the inflation rate has risenfor 10 consecutive months to 12.56% in June. This means that the returns onvirtually all instruments in the local fixed income market are below theinflation rate. Fixed income investors are therefore seeking alternativeinstruments that can offer superior yield. Cultivating a relationship with alocal fund manager could offer several advantages to investors in this season.

Unearthing Opportunities

One service that a portfolio manager can offer clients is the expertiseto spot opportunities. For example, portfolio managers do not only monitorlocal currency investments, but they often explore foreign currency investmentopportunities. The attractive yields offered in the Nigerian Eurobond market isan example of an opportunity that many investors are unaware of. However, somesecurities in the Eurobond market are currently delivering higher yields thanlocal currency instruments with similar tenors and risk profiles.

Diversification is Good Advice

While the Eurobond market may offer more attractive returns,investors should embrace a culture of diversifying their portfolio in thisseason. The search for higher yields could tempt some investors to stake theirbets in higher yielding securities but at the cost of the higher risks related tothe volatility of returns or the liquidity of the instrument that they mayconsider. It is the fund manager's job to review the client's investment objectivesin the context of the economic circumstances of the client. This points to onevalue of signing up to a discretionary portfolio management agreement with afund manager. However, there are other benefits to ceding the management ofyour portfolio to a professional.

The Investing Emotional Roller Coaster

If you have done it for a while, you will soon realise thatinvesting in financial markets can be an emotional roller coaster. Markets canbe intoxicating when they are rising like they did between January 2006 andMarch 3, 2008, when an economic boom and elevated foreign investor interest inNigeria saw the NSE All Share Index rise 176%.

However, markets can also be devastating when they are falling as wesaw in the subsequent four (4) years when the NSE All Share Index declined by 69%from its historic peak. This steady decline eroded the wealth of individualsand institutions with some still struggling today under the pressure of sharepurchase loans.

The volatility and potential losses from ill-advised investments isjust one reason why everyone, regardless of age or economic circumstances,should consider employing the services of a fund manager. Furthermore, keepingup with events that can impact the value of your portfolio can be a challengingand time-consuming endeavor.

Get Help Monitoring your Portfolio

Using a discretionary portfolio manager relieves you of thepressure associated with constantly monitoring financial markets that are oftencomplex. Financial markets these days are very fast-moving and comprise severalelements such as stocks, bonds, exchange rates and commodity prices. The lastfour (4) months since the spread of the COVID-19 virus across the world hasshown that these elements can fluctuate dramatically, sometimes on the smallestpiece of news.

Subscribing to a discretionary portfolio management service takesaway the headache of continuously monitoring your portfolio. The fund managertakes the decision on what to buy and sell. If you enter a discretionaryinvestment management relationship, what you will be delegating is theexecution of an agreed overall investment strategy to a firm with theinvestment skills and experience to help you succeed.

Outsource the Discipline of Portfolio Rebalancing

Achieving success at investing by achieving risk adjusted returnsrequires discipline. Portfolio rebalancing is one of the keys to successfulinvesting over time.

It is the process of adjusting your holdings by buying and sellingcertain stocks, funds, or other securities to maintain your established assetallocation. This process is important because it keeps your tolerance for riskat the most comfortable level. For example, if you defined your assetallocation is sixty percent stocks and forty percent bonds. If stock prices goup for a few months, your allocation to them might rise to seventy percent.That means you have to sell some stocks to get back to your desired level. It'simportant to maintain your asset allocation because it keeps your tolerance forrisk at the most comfortable level. Considering what we know about typicalhuman nature, it is useful to cede this responsibility to a fund manager.

Access to Structured Products

Finally, taking advantage of the discretionary portfolio managementservice also provides access to structured products. These are investmentproducts in the form of notes issued by entities that could be related orunrelated to the fund manager but secured by underlying assets. While they areoften more risky than traditional fixed income instruments, they often offerhigher yields and indirect access income yielding assets in the local or inforeign markets. For example, they could offer indirect exposure to bondsissued by Africa governments and corporations. These products may not be foreveryone, but they may be an acceptable addition to a diversified portfolio.

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