Fund managers move to close down guaranteed return schemes

Following an announcement this week by Gold Coast Fund Management, the asset management subsidiary of Groupe Nduom, that it is closing down its structured finance product which offers guaranteed returns to investors, several other fund management companies, licensed by the Securities and Exchange Commission have begun moves to follow suit with regards to similarly structured products that they offer.

This is in response to a directive, issued by SEC in June this year, ordering licensed fund management companies to stop guaranteeing investment yields to investors and to indeed return all monies taken from investors under such terms by the end of 2018.

There are 148 fund managers currently licensed by SEC and between them they manage monies on behalf of thousands of investors ranging from retail investors to the bigger institutional investors in Ghana as well as foreign financial portfolio investors.

As of March this year, there were about GHS34 billion in investment under the care of fund managers duly licensed with SEC, up from just GHS1 billion as at 2010.

Industry operators reckon that as much as one tenth of this – over GHS3 billion – could be subject to various levels of guaranteed returns currently, although more conservative estimates put the amount at closer to just 5 percent, or about GHS1.7 billion.

Gold Coast became the first fund manager to announce its intention to fully comply with the directive, following SECs announcement last week that it is dead serious on enforcing the directive.

Fund managers, faced with this realization have spent much of this week drawing up plans, replete with timelines for following suit to avoid sanctions from the capital market regulator.

SEC first issued a directive to fund managers to close their guaranteed returns products back in 2014 and has since then issued reminders but has failed to enforce the directive.

Consequently fund managers have ignored the directive and have continued to offer guaranteed returns on products whose investment structures cannot accurately determine whether those promised returns can actually be achieved.

However following SEC’s widely publicized clamp down on Menzgold, which claims to be a fund manager rather than a deposit taker, the capital market regulator has stepped up its efforts to enforce the latest timelines it has given the fund management industry.

Menzgold, had been offering guaranteed yields of between 7 percent and 10 percent a month on its gold vault investment product, without even disclosing what it invested customer’s contributions.

Instructively, since SEC stopped the company from taking new deposits, it has emerged that its ongoing investments are not generating enough returns to meet its guarantees to customers, seemingly confirming the allegations of regulators that the company is simply running a “pyram” scheme that relies on incoming new deposits to meet maturing obligations to investors rather than investment income generated by the investment portfolio it claims to have established.

SEC’s directive is based on the fact that fund managers cannot accurately guarantee investment returns derived from portfolios over which they do not have complete control as to the yields generated.

“The idea is to offer a product based on the risk reward profile so that the investor can make a decision on what kind of risk they are ready to take because there is a trade off between how much risk you are ready to take and the kind of returns you will earn” explained Daniel Ogbarmey Tetteh, the Director General of SEC last week.

He gave an example: “If you buy shares there is no way an operator should guarantee a (level of) return because one does not know the factors or forces that influence the price movements.”

While returns on fixed income instruments such as fixed deposits, treasury bills and corporate bonds are more predictable, even they are not entirely so, especially when the entire portfolio comprises different investments and the composition is continuously being changed in response to changes in short term interest rates.

At best fund managers would be able to offer a range of yields and even those cannot be guaranteed.

Most fund managers also offer products that do not guarantee returns – such as mutual funds and unit trust schemes – and are now looking to convince investors to switch their funds under management into these so as to avoid having to terminate customers investments with them altogether and refund the invested monies outright.

By Toma Imirhe