A Comparative Analysis of Mutual Funds in Nigeria

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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 Van Ketwich. Van Ketwich’s fund ran for about 49 years, but his innovation created a hallmark for personal investing globally and emergency of other mutual funds in Europe and its surroundings. Globally today we have over 100,000 mutual funds with a majority concentrated in the United States.

Mutual Funds emerged in Nigeria in the early 1990s following the rapid growth in the financial sector after the implementation of the deregulation policy. Over the years, there has been a significant increase in the number of mutual funds as investors interest increases. Mutual funds have become a vehicle used by both advisors and institutions to access investible funds and diversify portfolios.

 

Figure 1: Evolution & Mutual Fund in Nigeria 


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Source: SEC, FAAM Research

 

As at December 2018, the sector’s total asset under management (AUM) was in excess of N600 Billion, with money market funds accounting for 67%. In comparison, this figure is 55%, 29%, 13% and 2% for Ghana, South Africa, United States and the United Kingdom respectively. In these markets, equity based funds dominate the sector. However, in Nigeria equity based funds are only 3% of Nigeria’s mutual funds. This figure rises to 17%, 19%, 46% and 59% for Ghana, South Africa, United States and the United Kingdom 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 to the population and AUM contributions to GDP, Nigeria’s asset management industry ranked lower than other economies. In a group consisting of Ghana, South Africa, United Kingdom and the United States, Nigeria ranked better than Ghana alone on AUM contribution to GDP. While in term of access to mutual funds, Nigeria ranked the lowest.

 

Table 1: Economic Indicators

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Money Market Fund

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

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

 

Figure 3: Comparing MMF Return, Savings Rate & Rate of Inflation

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


There is a positive correlation between yield on a 364-day T-bill yield and growth in the industry’s AUM. The data also show 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 is underserved with just above 80 mutual funds for a population in excess of190 Million
  2. The AUM to GDP is low given the size of the Nigerian economy and its population
  3. Compared to the returns on equities, yield on Nigeria Treasury drives growth in the industry’s AUM 
  4. Average yields on Money Market funds has outperformed average interest rate on the savings accounts and have exceed inflation rate in Nigeria.

 

 

Conclusion

The money market fund continues to evolve and grow. It is as an efficient vehicle for investors who may be interested in fixed deposit placement or hybrid current/savings account but seek to achieve higher returns on their investment. 

Money market funds in Nigeria have not been fully exploited by short and medium term investors as there is room for more funds in relation to the population. In particular, low income earners that have limited or no access to other money market instruments except savings accounts will benefit from the advent of more money market funds. 

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

 

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