Hedging against Inflation in a yield rising environment


Wednesday, August 24, 2016 3:00pm / Cordros Asset Management

The current economic climate in Nigeria has made lots of investors wary about investments with most people turning a deaf ear to investment opportunities. With purchasing power depleting, a volatile equity market and inflation rising rapidly, investors and would-be investors have remained risk averse. The less savvy investors opine that they might be better off keeping the little they have than lose their meager and scarce resource by investing in an unfamiliar terrain.

For the sophisticated investors, the major concern has been how can I have a positive real return on my investment (i.e. ensuring my investment keep pace or outpace inflation rate)?. In a bid to encourage savings and attract foreign portfolio investors, the Monetary Policy Committee (MPC) hiked the Monetary Policy Rate (MPR) from 12% to 14% in its last meeting in July. The hike has caused a repricing of fixed income assets with yields on risk free assets trading above 15%.

While the average man understands perfectly how high inflation rate impacts their purchasing power, most are in the dark on how they can benefit from the rising yield environment. In reality, there are several avenues but we would like to focus on Money Market Funds as one of the veritable investment options in this current economic climate in Nigeria. Although fast gaining popularity, mutual funds ("Collective Investment Scheme") still appears to be an unfamiliar concept in Nigeria. Information from Worldbank on Datamarket's website reveals that mutual Fund as a percentage of GDP in 2014 was 91% in USA, 47% in UK, 4% in South Africa and only 0.2% in Nigeria. This obviously shows that the Nigerian financial market is still relatively underdeveloped.

Over the years, the retail segment of the investment industry has been neglected with most fund managers focusing on only investors with deep pockets (i.e. institutions and the High Networth Individuals). Collective Investment Schemes are very simple investment vehicles that allows retail investor invest in instruments which ordinarily might have been hitherto elusive. Investopedia defines mutual fund ("Collective Investment Scheme") as an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Collective Investment Schemes are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investor. A Collective Investment Scheme's portfolio is structured and maintained to match the investment objective stated in its prospectus.

In explaining the Collective Investment Scheme concept, let us use a simplistic example. Let us assume there is a group of twenty (20) people all wanting to buy fruits. Assuming they all had N100 each to buy fruits individually. We know that ordinarily, each person might only be able to buy a single unit of a particular fruit while in some cases they cannot even afford a particular fruit with their N100. However, if they pool their funds together, they will have N2,000 and can buy a basket of various fruits. At the end of the day, each individual can have several fruits with just N100. In the above example, we saw economies of scale as transportation cost to the market will be borne by all the group members as opposed to a single individual. This definitely will increase the return they will all get at the end of the day as they will have more than their N100 can afford. We also saw diversification in the above example as each individual will have different types of fruits with just N100.

The above example shows some of the benefits of investing in Collective Investment Schemes funds and how the retail sector can have some of their investment needs met. In a bid to deepen the investment landscape and provide investment opportunities for the underserved, retail sector, High Networth Individuals and Institutions, Cordros Asset Management Limited recently floated N1 billion Cordros Money Market Fund and the initial public offer ('IPO') closes on Wednesday September 7th, 2016.

The Cordros Money Market Fund is an open ended fund authorized and registered in Nigeria as a Unit Trust Scheme under Section 160 of the Investment and Securities Act. The fund's investment objective is to provide capital preservation and regular income to unit holders by investing in high-quality money market instruments recognized by the Securities & Exchange Commission ('SEC'). Investors of the fund will be provided with the following features and benefits:

Diversification: The fund will be investing in a basket of securities and not just a single instrument. The Cordros Money Market Fund will invest in Commercial Papers, Treasury Bills and Fixed deposit with Banks. Although all these instruments are correlated, they often offer varying return and yield profile. This will mitigate the overall risk in the portfolio and also enhance the portfolio's return.

Ease of entry and exit: The Cordros Money Market Fund will only invest in highly liquid money market instruments. The fund will have a weighted maturity of 90 days for the investments in the fund. There is free entry and exit to the fund. Anyone can invest on any working day and redemption in the fund does not exceed Five (5) working days.

Access to professional fund managers: The Cordros Money Market Fund will be managed by Cordros Asset Management Ltd a fund/portfolio management company licensed by the Securities & Exchange Commission as a fund manager.

Competitive return with minimum investment: The beauty of a Collective Investment Scheme is that the fund manager has bargaining power by pooling funds from several investors. In view of this, every investor enjoys a return that ordinarily would have been difficult for them to achieve if they invested themselves.

Affordability: The underserved sector of the market also have investment needs and savings account obviously does not do justice. The Cordros Money Market Fund is an attractive option because with as little as N10,000 everyone can invest in the fund. The fund is an attractive option for students, workers, artisans, infants, institutions etc. The list is definitely endless.

Quarterly dividend payment: Every unit holder in the fund will be entitled to receive interest payment every three months on their investment. The investor can decide to re-invest the interest as additional units if they so desire.

Safety of Investment: The Cordros Money Market Fund is relatively safe and secured. It has an indicative rating of A(f) from Augusto & Co. Also, the underlying assets are relatively secure as the funds will be investing a significant portion in risk free instruments. In terms of safety, the fund's assets will be held in custody with a licensed Custodian for safekeeping and the fund's activities will be monitored by a Trustee to the Fund and the Securities & Exchange Commission.

In addition to the above, the Cordros Money Market Fund offers investor’s opportunities to hedge against inflation as some of the instruments the fund will be investing in currently offers a positive real return. Since the fund is structured to pay interest on a quarterly basis, by reinvesting the cumulative interest  regularly, the fund can also provide a technical hedge through compounding interest. The power of compound Interest shows how one can really put money to work and watch it grow. When you earn interest on investment or savings, that interest then earns interest on itself and this amount is compounded periodically.

Kindly click here to download the offer prospectus, which provides more details on the fund, its operations and professional parties.

To invest in the fund, download the Application Form and submit same with your KYC documents and fund before September 7, 2016.

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