Collective investment schemes – mutual funds and unit trusts alike – have quickly become very popular among investors in Ghana. In part three of our serialized guide to financial portfolio investing in 2019 TOMA IMIRHE examines the prospects for investors who rely on such pooled investment schemes this year to invest in the money, equities and real estate markets.
Over the past decade or so, collective investment schemes in Ghana have evolved from being unknown and esoteric into becoming among the most popular forms of portfolio investment in the country’s financial markets, especially among relatively small retail investors. Through mutual funds and unit trust schemes, such investors can now invest in money market instruments beyond the government treasury bills and fixed deposits they were hitherto restricted to by their lack of large investible funds. Such pooled funds investment schemes have also given them access to diversified equity portfolios that include blue chip stocks such as Standard Chartered Bank, Total Petroleum and Unilever, which hitherto were possessed mainly by large institutional investors and by high networth individuals who could fund large volume transactions. Even real estate investments are no longer beyond the reach of retail investors.
But it is instructive that large institutional investors and high networth investors also embrace collective investment schemes too, even though they do not need them to get access to the most sought after equities and the highest yielding fixed income securities. There are several reasons for this. One is that the income accruable to investors in licensed collective investment schemes is tax free – neither the investors nor the schemes themselves pay taxes on dividends, interest income or capital gains accruing from price appreciation.
Another is that pooled investment schemes offer diversified portfolios and therefore diversification of investment risk. The third reason is related to the second – diversified portfolios not only diversify risk, but they tend to ensure relatively high returns too, when managed professionally.
There are two types of collective investment schemes and both are on offer in Ghana, allowed for under the Securities Law that allowed for their formal introduction and regulation by the Securities and Exchange Commission, SEC in the middle of the previous decade. These are mutual funds and unit trust schemes. Mutual Funds are set up as independent companies, with accompanying independent managements and boards and the investors in the fund are the company’s shareholders. Each one’s investment portfolio is managed by a licensed fund manager or investment advisor and its investment assets are held by a licensed, custodian, this being a bank or other type of financial institution. A unit trust is not a separate company but is a scheme established by a trust deed which means it has trustees in addition to fund managers and custodians and the investors are known as unit holders.
Currently there are over 30 mutual funds and some 25 unit trust schemes licensed in Ghana. They are all open-ended which means they can take on new investments and existing investors can exit whenever they like unless a particular scheme has limitations, agreed by the shareholders or unit holders as the case may be.
Some of these are equity funds which invest entirely in equities. Others are fixed income funds which invest entirely in government treasury instruments, corporate debt and fixed deposits. Some again invest in a mixture of equities and fixed income instruments and so are called balanced funds.
While these make up most pooled investment funds in Ghana, there are a few other types available. For instance, Republic Bank runs a real estate investment fund and one of the funds run by Databank is an ethical fund, which means it does not invest in companies involved in weapons and ammunition, alcohol or cigarettes.
Investors who are risk adverse are best off with fixed income funds. Although SEC has recently prohibited fund managers from guaranteeing their clients specific expected returns, the investors themselves can have an idea about what to expect by simply benchmarking the past performances of a fixed income fund against one of the main types of investment instrument in its portfolio and then forecasting current performance by applying the past performance premium (or discount as the case may be) to the current yield on the instrument used. Thus, for example if a fixed income fund has on average been delivering annual returns of, say, 5 percent above the 91 day treasury bill rate, then it should be expected that with the current 91 day bill rate currently at just below 14 percent, an investor in that fund should be expecting annual returns of about 19 percent this year. While the expectations would inevitably be a bit different from the eventual out turn – due to changes in both the investment portfolio’s composition and in interest rates during the year – the investor would still have a general idea as to what returns to expect.
With equity funds the opposite is the case which is why they are best suited for investors with a large appetite for risk in order to possibly – but not certainly -reap much higher returns on investment than a fixed income fund can provide. Stock markets can deliver huge returns, when share prices rise sharply during the course of the year, but can also wipe away a large proportion of the investors monies when prices fall; a no one can accurately predict what will happen because so many uncertain factors come into play. However, over the medium term, stock markets tend to outperform fixed income investments, which means investors with a medium to long term investment horizon can confidently invest in a professionally managed equity fund and expect to do well over three to five years even if the first year only generates losses.
The combination of all these considerations is why many investors go for balanced funds, which effectively provide diversification of risk and returns from both fixed income and equity funds.
Last year though, the poor performance of the Ghana Stock Exchange in general resulted in fixed income funds doing the best, and equity funds doing the worst. Indeed many equity funds mirrored the GSE composite index leaving their investors in the red by year’s end. An exception though was Databank’s E-Pack, the oldest equity fund in Ghana and this was because it invests in nine stockmarkets across Africa, thus offering a very diversified equity portfolio. While some markets were falling, such as the GSE, others were rising.
The fortunes of the GSE this year are uncertain and so are the fortunes of equity funds, nearly all of which invest only on the GSE, being their home market. Equity analysts argue that the falling stock market during the second half of 2018 has left equities undervalued and this should be corrected this year by rising equity prices. However others fear that last year’s price melt down will discourage bids and encourage offers on the bourse which would send prices even lower before the market price correction eventually occurs.
The outlook for fixed income funds is more certain. Interest rates have stopped falling since mid 2018, as the Bank of Ghana has suspended the monetary easing it began in late 2016 in order to make cedi denominated investment yields more competitive against dollar denominated investments and thus stem the cedi’s fall against the dollar. Last year, fixed income funds easily outperformed their equity fund counterparts and indeed, towards the latter part of the year there was a discernible shift by investors from the latter to the former.
This has set the grounds for similar investor sentiments this year; 2019 has started with fixed income funds enjoying a flow of investments from equity funds. However some investors are still holding back from this conventional wisdom in the hope that the GSE will rebound this year, enabling equity funds to deliver returns that fixed income funds are simply incapable of matching.
The ongoing uncertainties with regards to the prospects on the equities market, coupled with the strong showing on the fixed income market have made balanced funds particularly attractive for 2019. Already managers of balanced funds have been revising the compositions of their respective portfolios, shifting their emphasis from equities to fixed income instruments. Instructively, the balanced funds that performed the best last year were those that were the fastest in responding to the transformation of the GSE’s erstwhile bull market into a bear market at the same time as interest rates stopped falling and began rising albeit marginally.
Indeed, the best performing balanced fund for 2018 was the CM Fund, managed by SDC Capital, and this was because it revised the composition of its portfolio faster and earlier than its competitors. It is instructive that by the middle of last year, falling equity prices had dragged the CM Fund’s annualized returns down to just over 12 percent as equities still accounted for about half of the Fund’s investment portfolio at that time. However, by the end of the year, with the portfolio having been recomposed to comprise about 70 percent fixed income instruments and just 30 percent equities, the CM Fund had left its competitors behind posting a full year return of 20.89 percent.
This year therefore, having started off just like last year ended, balanced fund investors are in pole position because they can take advantage of the stabilization of fixed income securities and interest rates on fixed deposits, while still retaining some capacity to take advantage of a surge in equity prices if indeed it does happen as some analysts predict.
But investors who want to earn the highest possible returns this year, need to look beyond the straightforward choice between equity funds, fixed income funds and balanced funds; they need to look at the composition of the fixed income component of the fund they want to be invested in.
In line with the usual principles of risk and reward, the safest investments – government treasury instruments – also have the lowest yields, followed in upward direction of yields by bank fixed deposits and then corporate bonds. CIVs that invest primarily or wholly in treasury instruments to minimize risk, therefore cannot deliver the level of yields produced by those that invest primarily in fixed deposits and corporate bonds. Importantly though, the nearly completed clean up of banks balance sheets has made them safe enough for investors monies.
However, investors would do well to ensure that any CIV they invest in that has corporate bonds in its portfolio only deals with large, reputable corporations that generate enough cash flow to meet their financing obligations; a bond issuing borrower that goes under could have a dire impact on a CIV that has financed it.
This year, fixed income funds can be expected to deliver returns to its shareholders/unitholders of between 14 percent and 25 percent in general, but the higher the return the higher the associated investment risk.
There are no meaningful predictions for pure equity funds. The stock market could erupt upwards; on three occasions in its 17 year history the GSE’s composite index has more than doubled over the space of 12 months, meaning the possibility of equity investors making over 100 percent profits from price gains alone. On the other hand, it could decline even faster than it did last year – in the past share prices have fallen by a (weighted) average of more than 20 percent within a 12 month period, which could leave equity investors losing up a quarter of their capital, instead of making profits.
This is the lure of balanced funds for investors who want to enjoy upside potential but without risking everything. If the equity market remains flat or declines further, a balanced fund manager would simply recompose the portfolio heavily towards fixed income securities. Conversely, if a bull market erupts on the GSE, then the fund manager can recompose the portfolio towards equities to benefit from the resultant equities price surge.
An alternative to using a balanced fund is to put part of one’s money in a fixed income fund and the other part in a separate equity fund. Indeed, several investment management firms operate both, such as Databank (with its M-Fund, a fixed income fund as well as its E-Pack equity Fund) and Republic Bank ( which runs an equity unit trust and a money market unit trust).
But before choosing a CIV to invest in , find out what kind of instruments it invest in and whether that suits your risk appetite and the kind of returns on investment you are seeking. For the latter, also research into the returns it has delivered over time. For a fixed income fund evaluate the performance by comparing its returns against yields on treasury bills, notes and bonds for the period. For an equity fund benchmark its performance against the GSE’s composite index. For a balanced fund compare its returns on investment against the simple average returns from both the GSE index and treasuries. `
SDC Capital’s CM Fund
The best bet for an investor who wants the potential for high returns without risking losing one’s capital is to invest in a balanced fund. Based on past and current performance we can stick out our necks and recommend one of them: the CM Fund offered by SDC Capital.
To be sure, this was not the collective investment scheme that provided the best returns in 2018 and it might not produce the best in 2019 either. Those were produced by entirely fixed income funds last year. But the CM Fund was not far behind, delivering returns of 20.89 percent last year. This year it stands to be even closer to the fixed income funds that will lead, as it has responded to the equity price crash of the second half of last year by increasing its focus on fixed income instruments. Currently the fund managers expect a continuation of last year’s trend – marginally rising fixed income interest rates and sluggish equities performance on the GSE.
But on the other hand, being a balanced fund, if equity prices unexpectedly recover and actually surge, the CM Fund is positioned to take advantage in such a way that fixed income funds cannot. Instructively, the CM Fund was the fastest balanced fund to respond to fundamental changes in market performance last year and that accounts for its exemplary success. Currently, about 70 percent of the fund’s portfolio comprises fixed income securities while the other 30 percent comprises equities. This is the result of the re-composition of the fund from being roughly half in each type of investment instrument during the early part of last year, before the sharp drop in equity prices.
To be sure the CM Fund was the best performing balanced fund in Ghana last year and with the local markets where they stand now, the smartest thing to do is invest in a balanced fund. Put these two assertions together and they amount to investing in the CM Fund which is why we are recommending it.
But there is another reason too: SDC Capital has an exemplary attitude to customer service which has made it more convenient for investors to be in the CM Fund than other collective investment schemes.
Firstly, the fund remains eminently liquid. Even as some other fund managers are introducing compulsory medium term tenors before the expiration of which investors cannot redeem their monies, shareholders in the CM Fund can redeem their investments within three days of serving notice.
Importantly, clients do not need to visit SDC’s office at all to invest or exit. Investments can be made by Mobile Money using short code *737*70#. Alternative, they can transact their CM Fund business using any of SDC’s partner banks – Standard Chartered, Guaranty Trust or GCB Bank. Online transactions can be executed using clients visa cards or mastercards through the MyGhPay.com app. Yet another alternative is by direct debit through Ghana Interbank Payments and Settlements Systems, for either one-off or standing order transactions. Add to all these a dedicated relationship executive for CM Fund shareholders who can be reached on 0249590380.
Mutual funds’ rates
Equity & balanced funds
|Fund||Date||Bid price, GH¢||Offer price, GH¢||Year to date|
|SAS Fortune fund||02/01/19||0.8434||0.8434||0.01%|
|NTHC Horizon fund||31/12/18||0.5060||0.5060||-0.35%|
|FirstBanC Heritage fund||14/01/19||0.5553||0.5553||0.06%|
|Gold Fund Unit Trust||02/10/18||0.4440||0.4440||19.87%|
|Republic Equity Trust||16/01/19||0.7026||0.7026||0.63%|
|Republic F Plan||16/01/19||2.7417||2.7417||0.54%|
|NGIS Anidaso Fund||17/01/19||0.8453||0.8453||0.65%|
|CDH Balanced Fund||03/01/19||0.2472||0.2497||-0.40%|
|SEM All-Africa Equity Fund||31/12/18||0.5579||0.5579||-3.05%|
|Omega Equity Fund||17/01/19||1.5494||1.5494||0.54%|
|EDC Balanced Fund||31/12/18||0.6001||0.6001||8.55%|
Money market funds
|Fund||Date||Bid price, GH¢||Offer price, GH¢||Annualised yield|
|Republic Unit Trust||31/12/18||0.5838||0.5896||15.22%|
|Omega Income Fund||17/01/19||2.8536||2.8536||0.75%|
|SEM Money Plus||31/12/18||0.9769||0.9769||15.01%|
|EDC Fixed Income Fund||31/12/18||3.8106||3.8106||16.85%|
|Fund||Date||Bid price, GH¢||Offer price, GH¢||Year to date|
|Gold Money Market Fund||05/10/18||0.4306||0.4306||14.92%|
|SEM Income Fund||31/12/18||1.0378||1.0378||19.20%|