Shifting The Savings Appetite of Nigerian Investors

1 Research I Nigeria | Fund Management
Shifting the Appetite of

Nigerian Investors:
From Savings to Mutual Funds
Key Contact
Guy Czartoryski
Head of Research
[email protected]
Contents
Introduction 4
The amazing growth industry 5
Measuring performance in Nigeria 11
Measuring performance – the future 13
Fees and scale 14
Bank, fund managers and tech 16
Disclaimer and disclosures 17

Introduction
A growing industry in need of risk management and performance data
The Nigerian fund management industry currently offers levels of growth probably only exceeded
in the tech sector – in fact, part of the industry is driven by the tech sector. Investors are putting
a growing proportion of their savings with funds – more so than with banks – just as, almost a
generation ago, they began investing with pension funds. The fund management industry continues to
build trust even in this early stage of its development. With this in mind, we believe it needs to address
two challenges.
The first is risk. Nigeria has left behind, in 2020, a 10-year period when yields on Nigerian Treasury
Bills (T-bills) generally exceeded inflation, allowing fund managers to invest clients’ money in risk-
free T-bills with little need for sophisticated risk management. Banks benefited from this as the
primary destination of savings, as did pension funds. However, the fall in T-bill rates over the past year,
combined with a surge in the value of Federal Government of Nigeria (FGN) bonds, demands a new
level of risk management, in our view. Investment risk is rising as yields fall, and fund managers and
investors need to master risk management and learn the benefits of diversifying their investments
across asset classes.
Second, a key factor in the growth of funds globally is a wide choice of products catering to different
risk appetites, and detailed performance data. Nigeria’s fund management industry is not yet mature
in either regard. A brief look at fund performance websites in developed markets (we give some
examples in this report) reveals a vast amount of information for the use of investors and professional
fund distributors, something which continues to build confidence. We think that generating this kind of
information is key to the Nigerian industry’s future
Total Assets Under Management of Nigeria’s mutual funds, and T-bill rates, Jan 2012 to present
1,600,000 25%
1,400,000
20%
1,200,000
1,000,000 15%
800,000
600,000 10%
400,000
5%
200,000
0 0%
Jan-12
Jan-14
Jan-16
Jan-18
Sep-20
Sep-12
Sep-14
Sep-16
Sep-18
May-13
May-15
May-17
May-19
Jan-20
Total Industry AUM, nominal Naira millions 364-day T-bill yield, rhs
Source: Securities and Exchange Commission (SEC), FMDQ, Coronation Research
The amazing growth industry

Mutual funds are rising stars – but risks are rising, too
Nigeria’s fund management industry is undergoing remarkable growth. Total assets under
management (AUM) over the four years 2015 to 2019 more than doubled in inflation-adjusted terms
and were up 305% in nominal terms. The compound annual growth rate (CAGR) in total AUM from
2015 to 2019 was 22% in inflation-adjusted terms and 42% in nominal terms. It would be difficult to find
a Nigerian industry that matches this.
Total Industry AUM, nominal Naira millions Total Industry AUM, in 2012 prices, Naira millions
1,200,000 500,000
1,000,000
400,000
800,000
300,000
600,000
200,000
400,000
100,000
200,000
0 0
2012
2014
2016
2018
2019
2013
2015
2017
2012
2014
2016
2018
2019
2013
2015
2017
Source: Securities and Exchange Commission (SEC) of Nigeria, National Bureau of Statistics (NBS), Coronation Research
What is the nature of this growth? As the charts, above, show, there was a reversal during the
recession year of 2016, but the upward trend resumed soon afterwards. Growth was strong in 2019 and
has continued into 2020, with total AUM up 27% in the first half of this year, in nominal terms.
It is helpful, in our view, to look at the fund management industry as the junior partner to the pension
fund industry, whose own total AUM are almost 10 times as large (N1.1 trillion for Mutual funds: N10.2
trillion for pension funds), though not growing anything like as quickly in recent years.
Total Pension Fund assets, nominal Naira billions Total Pension Fund assets, in 2007 prices, Naira billions
12,000 3,500
3,000
10,000
2,500
8,000
2,000
6,000
1,500
4,000
1,000
2,000 500
0 0
2008
2009
2010
2008
2009
2017
2010
2016
2018
2019
2012
2014
2016
2018
2019
2013
2015
2017
2014
2011
2012
2011
2015
2007
2013
Source: National Pension Commission (PenCom), NBS Coronation Research

Money Market funds and Fixed Income funds
Once we understand that the fast-growing fund management industry is much smaller than the
pension fund industry then it becomes possible to understand its recent dynamics. Contributions to
pension funds are mandatory. Closely-regulated pension fund administrators (PFA) have built up trust
with their clients over the past decade. This in turn builds trust in the concept of fund management
itself, giving savers the confidence to make voluntary savings with Mutual funds. By sheer bulk, the
biggest contributors to the fund management industry’s growth have been Money Market Funds,
which accounted for 61% of total AUM by June 2020.
Money Market funds, nominal Naira millions Money Market AUM, in 2012 prices, Naira millions
800,000 400,000
700,000
600,000 300,000
500,000
400,000 200,000
300,000
200,000 100,000
100,000
0 0
2012
2014
2016
2018
2019
2013
2015
2017
2012
2014
2016
2018
2019
2013
2015
2017
Source: SEC, NBS, Coronation Research
Money Market funds grew, from 2015 to 2019, at a CAGR of 28% in inflation-adjusted terms and 49%
in nominal terms, faster than the fund management industry as a whole. This represents, in part, a
rotation of savings from banks to Mutual funds, something which declining bank deposit rates in H1
2020 only helped. Money Market funds grew by 11% in nominal terms during the first half of this year.
Even then, however, the growth rate in Money Market funds was easily outstripped by growth in Fixed
Income funds which now account for 17% of total AUM.
Fixed Income funds, nominal Naira millions Fixed Income funds, in 2012 prices, Naira millions
160,000 70,000
140,000 60,000
120,000
50,000
100,000
40,000
80,000
30,000
60,000
40,000 20,000
20,000 10,000
0 0
2012
2014
2016
2018
2019
2013
2015
2017
2012
2014
2016
2018
2019
2013
2015
2017

Recent explosion in Fixed Income funds is driven by interest rate moves
Fixed Income funds grew, from 2015 to 2019, at a CAGR of 82% in inflation-adjusted terms and 111%
in nominal terms. Growth has picked up rapidly in the past two years, with growth at 60% during H1
2020, in nominal terms. Why is this happening? In part, the rise is due to interest rate movements.
Fixed Income funds invest in fixed-income securities of more than one year in duration, such as
Federal Government of Nigeria (FGN) bonds. When interest rates come down, the values of bonds rise.
And with a sharp move down in interest rates between September 2019 and now, performance has
been strong. A five-year FGN bond appreciated by 15.8% during the first eight months of 2020 and a
10-year FGN bond appreciated by 18.9%.
Naira yield curve

14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
5Y
1Y
2Y
10Y
20Y
7Y
6M
4Y
3M
6Y
8Y
9Y
15Y
25Y
3Y
12Y
30Y
01-Jan-20 07-Sep-20
Source: Bloomberg, Coronation Research
Interest rate movements have changed the shape of the Naira yield curve, which plots the yields
available on different FGN maturities. Investors have progressively ‘gone out along the curve’,
increasing their exposure to long-dated bonds. This is risky (if short-term yields increase sharply then
the mark-to-market values of bonds fall) but it has proven profitable so far this year as short-term
interest rates has fallen - represented here by the rates available on Nigerian Treasury Bills, T-bills.
Treasury bill yields, 1 October 2019 to present

16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
3-Dec-19
3-Feb-20
6-May-20
5-Mar-20
7-Aug-20
2-Nov-19
3-Jan-20
7-Sep-20
2-Oct-19
7-Jul-20
5-Apr-20
6-Jun-20
Source: FMDQ, Coronation Research

The emergence of mark-to-market risk
Another way of looking at the performance of Fixed Income funds is to look at Bloomberg’s Naira
Fixed Income Index, which measures the value of a basket of Naira-denominated bills and bonds. This
rose by 26% between 1 January and 7 August 2020.
Such exceptional performance calls into question whether some investors are over-exposed to
duration risk. Imagine what a reversal in this index would mean in terms of bond prices. For example,
a FGN Naira bond maturing in mid-2026, with a 14.50% coupon, recently (7 September) yielded close to
7.1% and was priced at N134. If there were an instantaneous increase in short-term rates to 14.50% this
would lead to a mark-to-market loss of 29%.
However, it is important to understand that not all financial institutions need to mark their bonds
to market. Part of the bond portfolios of pension funds and part of the bond portfolios of banks are
recorded as being held to maturity and are amortised over the life of the instrument. Therefore,
different investors treat bond price corrections in different ways, with the fortunate effect that not all
investors head for the door (i.e. try to sell) when bond prices fall.
The Bloomberg Naira Fixed Income Index

430
410
390
370
350
330
310
290
270
15-Mar-20
29-May-20
4-May-20
25-Jan-20
9-Apr-20
23-Jun-20
19-Feb-20
18-Jul-20
12-Aug-20
6-Sep-20
31-Dec-19
Source: Bloomberg, Coronation Research
Such a scenario is not our base case outlook for interest rates (we think that low rates will be around
for several months to come), but it illustrates the risks that may be developing in the fixed income
market if short-term interest rates return to levels close to, or above, inflation (which was 13.22%, year-
on-year, in August’ for ’12.82%, year-on-year, in July’ ). This is true of Fixed Income funds as it is of the
fixed income market as a whole.
As we have already seen, only part of the growth of Fixed Income funds can be attributed to price
performance. More than half the growth in Fixed Income funds this year is attributable to new
subscriptions. In effect, investors has been attracted to subscribe by capital gains in Fixed Income
securities, and while it is possible that this trend may continue for a while, it seems unlikely that
Nigerian interest rates and its yield curve can keep on going down indefinitely. (Even though this
appears to be happening in several developed nations, Nigeria has much higher inflation than these
countries.)
The unsurprising rise in US dollar bond funds
Needless to say, some investors see value in diversification, especially currency diversification. US dollar
bonds funds, though not a large part of the industry’s overall AUM (10.4%) have been growing quickly
of late. The CAGR in US dollar bond funds (expressed in their Naira equivalent values) from 2015 to 2019
was 39% in inflation-adjusted terms and 61% in nominal terms.
US dollar bond funds in nominal Naira millions US dollar bond funds in 2012 prices, Naira millions
50,000 25,000
40,000 20,000
30,000 15,000
20,000 10,000
10,000 5,000
0 0
2012
2014
2016
2018
2019
2013
2015
2017
2019
2012
2014
2016
2018
2013
2015
2017
Take another look at equity funds?
Equity Funds have not grown at all during the period under review: quite the reverse. The CAGR
in Equity Funds from 2015 to 2019 was negative 32% in inflation-adjusted terms and negative 21% in
nominal terms, following the poor fortunes of the Nigerian Stock Exchange All-Share Index (NSE-ASI).
On the other hand, it may be reasonable to buy at the bottom, if not equity funds that replicate the
index then perhaps funds that expose investors to the best-performing companies, some which we
feature in Navigating the Capital Market: The Investors’ Dilemma, July 2020.
Equity funds, nominal Naira millions Equity funds, in 2012 prices, Naira millions
50,000 50,000
45,000 45,000
40,000 40,000
35,000 35,000
30,000 30,000
25,000 25,000
20,000 20,000
15,000 15,000
10,000 10,000
5,000 5,000
0 0
2012
2014
2016
2018
2019
2019
2013
2015
2012
2014
2016
2018
2013
2015
2017
2017

Distribution of Mutual funds by type
Of the total AUM of the fund management industry, which stood at N1.3 trillion (US$3.4bn) at 30 June
2020, the distribution by type is: Money Market funds, 61.4%; Fixed Income funds, 16.6%; US dollar bonds
funds, 10.4%; Infrastructure fund (one fund), 4.4%; Real Estate funds, 3.2%; Mixed funds (i.e. money
market plus fixed income plus equity), 1.9%; Exchange Trade funds, 1.0%; Equity funds, 0.8%; Ethical
funds, 0.3%.
Distribution of mutual funds by type, 30 June 2020

70%
60%
50%
40%
30%
20%
10%
0%
ETF*
Money Market
Infrastructure
Equity
US Dollar Bond
Ethical
Real Estate
Fixed Income
Mixed
Source: SEC, Coronation Research *Exchange Traded Funds
Conclusions
The growth of the fund management industry presents several opportunities and threats. The
opportunity is to participate in an extraordinary phase of growth as investors increase the proportion
of their savings which they hold in Mutual funds. On other hand, market risks are rising and investors
may not be wholly aware of the degree of mark-to-market risk that Fixed Income funds would be
exposed to if T-bill rates were to rise.
There is a strong case for diversification. Indeed, some investors have already diversified and we
can see this in the recent rise of US dollar bond funds, though we need to bear in mind that not
all investors necessarily have access to US dollars. Another route to diversification is the Nigerian
equity market, though many investors have reasonable doubts as to the equity market’s long-term
performance. However, and as we argue in Coronation Research, Navigating the Capital Market:
The Investors’ Dilemma, July 2020, there are pockets of value in the equity market which are worth
exploiting, and there are number of listed companies whose long-term internal returns on equity (RoE)
suggest positive long-term total returns.
In any event, the rise of Mutual funds calls for a new level of risk management across the sector. A
rapidly-growing industry requires a high level of risk management if it is to maintain the confidence of
investors. In addition, we will also argue that increasing the quality of performance data is vital to the
future of the industry.
Measuring Performance in Nigeria

Measuring performance in Nigeria

The limited information for Nigerian Mutual funds
Just as PenCom’s regulatory regime built up trust in the pension industry, so too has the Securities
and Exchange Commission (SEC) built up trust in the Mutual funds business. SEC reporting rules are
focused on ensuring that funds act in their fund holders’ interests and that data is reported regularly
and accurately. This reporting facilitates a certain amount of comparative information, though this is
not its primary purpose.
Here we present, for selected Fixed Income funds (the selection is based on whether the SEC publishes
sufficient years’ information for this study), their three-year compound annual growth (CAGR) in unit
prices, in nominal terms, for the period from 2016 to 2019.
Unit price performance (nominal) for select Fixed Income funds, 2016-19
20.0%
16.0%
12.0%
8.0%
4.0%
0.0%
Absolute Fund (Sub
Zenith Income Fund
Lotus Capital Fixed

Conservative Fund
Investment Fund
PACAM Fixed Income

Coral Income Fund
Stanbic IBTC
Guaranteed
Income Fund
Stanbic IBTC
Stanbic IBTC
(Sub Fund)
Fund)
Fund
Source: SEC, Coronation Research
However, this is not full performance data, in our view. It falls some way short of giving investors a full
account of the performance track record of these Fixed Income funds, for several reasons:
the data is for unit price rather than total return. Dividends could have given fund holders returns in
addition to the appreciation of unit prices;
there is not much of a time series. There is four-year (2015 to 2019, inclusive) unit price data for some of
the funds in the chart, but only three-year data for others;
there are not many funds to choose from. We have a list of 21 Fixed Income funds, with most of them
reporting unit prices from 2017 onwards (therefore the majority were left out of this chart).
In other words, we do not think investor have much to go on, as yet. A valuable service would be
provided by giving a complete picture of total returns, which, as the industry grows in future, will
encompass many more funds than now and build up a longer times series than we have now.
Data held by the Fund Managers Association of Nigerian (FMAN – see next page) suggest that this can
be developed. A store of reliable and detailed information would further build up trust in the industry
and allow investors to make sophisticated choices between funds and their different strategies.
Different investors have different time horizons, different aims, and different tolerance of both risk and
volatility, and the industry would improve its ability to meet customers’ requirements.
Measuring performance in Nigeria

SEC reforms
Needless to say, the SEC is aware of the need to make progress in the sector, and it addressed
several areas in guidelines published at the end of last year, which are due to take effect by the end
of September 2020. These ‘Amendments to Rules on Collective Investment Schemes’ form a large
part of the document ‘New rules and amendments to the rules and regulations of the Commission’
(December 2019).
The new guidelines cover, among other topics: investment in securities issued by related parties;
guidelines on conflicts of interest; disclosure of related-party transactions; filing of registration
statements; opening and closing of offers (for subscription); fees attached to offers; guidelines on
advertisements; maximum management fees; definition of different types of fund (money market,
fixed income, balanced, equity, real estate, ethical, faith-based, etc); calculation of bid prices.
It seems to us that the SEC is concerned with clarifying and strengthening many of the ground rules of
the fund management industry. As the industry is in a period of rapid growth (and is probably growing
faster than anyone could have predicted last year), it seems natural that the regulator insists on getting
the fundamental operating rules clear (as well as regulating the maximum fees payable by investors).
The clauses on calculation of bid prices, however, likely point to the future development of an improved
performance measurement system.
Fund Managers Association of Nigeria
The Fund Managers Association of Nigeria (FMAN) plays a vital role in providing performance data to
investors, with its daily price list the best regular source of information. The daily price list currently
gives data on 93 funds of various types (e.g. Money Market, Fixed Income, Balanced and Equity)
managed by 27 firms. The daily price list goes back to the beginning of 2016.
FMAN’s daily price list gives a bid and an offer price for most of the funds listed (although in some
cases only the NAV per unit is given) and for each fund gives either the current yield (for money market
funds) or the year-to-date total return.
Global Investment Performance Standards
The subject of fund comparison brings us to Global Investment Performance Standards (GIPS). GIPS are
the creation of the CFA Institute (Chartered Financial Analyst) which began publishing global standards
for calculating and recognizing investment performance in 1999, with derogations for local variations in
reporting standards eliminated in 2005. GIPS caught on as fund managers realised that their adoption
would, in time, enable them to market their funds globally, leading to the kind of detailed – and
instantaneously available – international fund comparisons which we feature below. The CFA Institute
states that 1,700 organisations claims compliance with GIPS, and that they have been adopted in 46
countries.
GIPS focus on the use of controls at each stage of the investment performance assessment, starting
with data input, and encourages periodic compliance checks, as well as suggesting independent
third-party verification. The institute requires a minimum of five years of GIPS-compliant annual
performance or, if the underlying fund is younger than five years, GIPS-compliant performance since
inception. Given the increasing number of Nigerian investment professionals who are CFA charter-
holders, it seems to us that GIPS are likely to play an important role in developing performance
tracking. Already two fund management firms in Nigeria are GIPS-compliant.
Measuring performance
The vast amount of information on funds in developed markets
To judge from recent data, the fund management industry in Nigeria is on its way to developing
significant scale. However, to succeed, in our view, it needs to bring the quality of its performance
information up to international standards. For examples of the benefits that international standards
bring, one need only look at a handful of websites dealing with funds in developed markets.
In the UK, for example, there is a vast amount of information about funds and their relative
performance, including total returns. In this study we look at just two websites, the MorningStar and
the Financial Times Fund Comparison websites, both of which offer free access. MorningStar’s UK
website has data on over 60,000 funds, and the Fund Comparison service from the Financial Times
facilitates straightforward and useful graphic comparisons between up to five different funds at a time.
These functions are just two of many services available on these and other websites: here we give an
example of how they can be used. Our point is that visibility generates investor confidence, and this is
contributing to steady growth in the global industry.
Growth in selected* UK funds, 2010-19, £ millions Distribution of selected* UK managed funds, 2019
1,400,000
Al l Others , 12%
1,200,000
1,000,000 ISA**, 10%

Equi ty,
800,000
46%
600,000
400,000
Mi xed
200,000 As s et,
0 14%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Fi xed Income, 17%
Total Funds Equity Fixed Income

Source: The Investment Association (of the UK), Coronation Research *Members of the Investment Association and other
funds recorded by the Investment Association, **Individuals Savings Accounts
For example, say an investor wishes to purchase shares (or units) in a global equity fund and
understands that both BlackRock and Investec are reputable fund managers. The investor can now
select Morningstar.co.uk and look up approximately 2,000 funds managed by BlackRock and, perhaps,
select the BlackRock Global Equity Fund A. The site gives key statistics, including its Net Asset Value
(NAV), its bid and offer prices, its size, its charges, and three measures of its performance: absolute,
relative to benchmark and relative to category. The same exercise can be performed to obtain data on
the Investec World Axis Global Equity Fund Class A.
On the Financial Times Fund Comparison website, markets.ft.com, these two funds can be located
(using either their names or their ISIN codes, which the BlackRock site supplies) and all their essential
data is presented, with a chart giving the ‘Total returns on £1,000’ for both funds over different time
periods. Here were learn that the five-year compound annual return in pounds sterling for the
BlackRock Global Equity Fund A has been 7.31%, while for the Investec World Axis Global Equity Fund
Class A it has been 3.21% (as of 1 September 2020).
This kind of information builds up traction with investors, and with professional fund distributors. It is
invaluable to the sustained growth of the industry. In Nigeria, this kind of information is not available
yet, but the rapid growth in funds, and the appetite for investing, suggest that such information will be
demanded – and ultimately supplied – in future.
Fees and Scale

Fees and scale

The question of fees
Typical management fees for public funds (collective investment schemes) are between 1.5% to 2.0%
per annum, with 1.5% often seen as the minimum for a Fixed Income Fund and 1.5% for a Balanced
Fund. 1.0% is often considered the minimum for a Money Market fund. The SEC sets a maximum 3.0%
management fee.
Although Nigerian management fees are high by developed market standards, they have not stopped
the Nigerian fund management industry from growing. Funds are quite justified in charging at
least some fees. There are marketing costs, administrative costs (of which part is associated with
compliance) and fund management costs (i.e. paying the fund manager and for research). It is
only possible to lower fees significantly when funds reach a large scale, and this is unlikely to have
happened an industry which is in the early stage of its development.
Nigerian Treasury Bill (T-bill) yields from 2010 to present

25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Sep-10
Sep-12
Sep-14
Sep-16
Sep-18
Sep-20
May-19
Jan-10
May-13
May-15
May-17
May-11
Jan-12
Jan-14
Jan-16
Jan-18
Jan-20
Source: FMDQ, Coronation Research
What is the likely trend in fees? The prudent response, we believe, is not to pre-empt the market’s
reaction to fee schedules. After all, and as mentioned above, Money Market funds grew by 11% in
nominal terms in the first half of 2020, even though fees were consuming an increasing part of the
investment return from T-bills. So, the market was probably not reacting so much to declining T-bill
yields as to the declining rates on bank deposits.
To elaborate on this point, it is clear that when money market earned yields in double digits, fees of
between 1.5% to 2.0% per annum were not much of a disincentive to invest. After all, during the period
between 2010 and September 2020, Nigerian Treasury Bills (T-bills) yielded 2.57 percentage points
above inflation, on average, and in nominal terms yielded 13.91%, on average.
As T-bill rates have tightened since the beginning of Q4 2019, consistently falling during the first eight
months of 2020, these management fees have become a rising portion of the overall return. When a
T-bill yields close to 3.0% a management become much more visible than they were in the past. The
positive aspect of this decline in rates is that bank deposits become progressively less attractive than
Mutual funds, a factor which we discuss below.
Fees and scale

The regulator and fees
It is as well to remember that fund management fees can become subject to regulatory review,
though such reviews are more typical of developed markets than rapidly-growing markets such as
Nigeria. Nevertheless, we recall the experience of MiFID II (Markets in Financial Instruments Directive
II) which came into force in the European Union at the beginning of 2018. This legislation, which had
far-reaching implications for investment banking and asset management not only in Europe but across
the world, began with an enquiry into the costs and management fees of European and UK fund
managers. It led to a profound rationalization of the industry and changes in its structure. The lesson is
never to underestimate the regulator.
Performance and scale
The origin of several problems suffered by many funds in a small-but-rapidly-growing fund

management industry is scale. Funds run the risk of client concentration. If a fund has a small number
of clients and one of them decides to redeem, this can easily upset the return of the fund overall. For
example, a redemption usually triggers a sell-down in securities, which involves costs, or even the
breaking of a deposit with a bank which itself triggers penalties on interest earned to date. These costs
are borne by the fund overall.
And redemptions are not the only source of problems for a small-scale fund. Getting too many
subscriptions can also adversely affect performance. For example, in an environment of declining
interest rates, a large subscription to a Money Market Fund will require the purchase of new securities,
diluting the overall yield of the fund. So, and in the interests of maintaining performance, a fund
manager might wish for neither large redemptions nor, in certain circumstances, large subscriptions.
Building up a numerous, diverse and stable client base is every fund manager’s wish.
Conclusions
It is difficult to manage funds in Nigeria, in large measure because of their small scale and the potential
disruption that small scale can bring. At the same time, the current level of fee schedules has not
stopped the industry from growing and approaching the scale it requires for efficient operation. So
we doubt that any problems would be solved by stringent regulation of fees: better to let the market
determine these.
Banks, Fund Managers and Tech

Banks, Fund Managers and Tech

Banks are no longer the default destination for savings
The four-year growth rates for Mutual funds (collective investment schemes), detailed at the beginning
of this report, show that savers are switching away from banks to Mutual funds as the default
destination of their savings. We believe this to be the start of a multi-year trend which is transforming
the way in which Nigerians save.
Two regulatory developments are accelerating this process. Since July 2019 commercial banks have
been required to lend a certain proportion of their deposits to customers. This loan-to-deposit ratio
(LDR) was initially set at 60% and later increased to 65%. Meanwhile the cash reserve requirement
for commercial banks has been set at 27.5%, meaning that this percentage of customer deposits must
be lodged with the CBN. Not surprisingly, those banks with adequate customer liquidity have little
incentive to gather deposits.
Average rates on Time Deposits and Savings Deposits Average rates on Demand Deposits
8.0% 0.8%
7.0% 0.7%
0.6%
6.0%
0.5%
5.0%
0.4%
4.0% 0.3%
3.0% 0.2%
4-Mar-20
25-Mar-20
6-May-20
4-Mar-20
15-Apr-20
27-May-20
17-Jun-20
25-Mar-20
6-May-20
15-Apr-20
27-May-20
17-Jun-20
1-Jan-20
12-Feb-20
8-Jul-20
22-Jan-20
29-Jul-20
1-Jan-20
12-Feb-20
8-Jul-20
22-Jan-20
29-Jul-20
Time Deposits Savings Deposits Demand Deposits
Source: Central Bank of Nigeria (CBN), Coronation Research. Average of 27 commercial banks’ rates (where available) as reported to and by the CBN
At the same time, the structure of Nigerian interest rates has changed. New issues of open market
operation (OMO) bills from the CBN have been closed to most institutional investors since October
2019, diverting funds into the Treasury bill (T-bill) and Federal Government of Nigeria (FGN) bond
markets. The result has been a rapid decline in market interest rates. And banks, as the charts show,
have cut their own deposit rates, incentivizing savers to switch to Money Market funds and Fixed
Income funds. And in late August the CBN cut the minimum rate payable by banks on Saving Deposits
from 3.75% pa (30% of the Monetary Policy Rate) to 1.25%.
The tech challenge
This not to say that traditional fund managers, with their salesforces and investment managers
operating out of mid-town offices, will have the fund management industry to themselves. The tech
sector is an important challenger and has proven itself adept at raising funds.
A generation of young savers uses apps rather than paper forms and is comfortable saving with
companies whose physical offices are modest and whose salespeople they will never meet (they
are non-existent). A typical tech fund manager may not have sophisticated in-house investment
management skills but this does not matter: the point is to distribute funds via its app, remove
as much administrative process as possible, and to raise assets under management. Investment
management can be shared with other companies, while the business model depends on offering a
wide variety of funds. One such tech company offers: a Naira savings fund; a Naira flexible fund; a US
dollar flexible fund; a fixed income fund; a real estate fund; an agricultural fund and a transportation
fund. Money can be transferred in and out of its funds in hours.
Disclosures & Disclamers

Disclosures & Disclaimers

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Security Name Available Disclosure

Nestle Nigeria
Flour Mills of Nigeria G
Unilever Nigeria G
PZ Cussons Nigeria G
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Ratings and Price target history
Current price, Target

Date Recommendation Date Recommendation Date Recommendation Naira/s price, Naira/s
Zenith 02-Jan-19 Buy 08-May-19 Buy 08-Jan-20 Buy 21.80 27.50
GT Bank 02-Jan-19 Hold 08-May-19 Hold 08-Jan-20 Buy 31.25 37.50
Access 02-Jan-19 Buy 08-May-19 Buy 08-Jan-20 Buy 10.30 11.25
FBNH 02-Jan-19 Buy 08-May-19 Buy 08-Jan-20 Buy 6.50 12.50
UBA 02-Jan-19 Buy 08-May-19 Buy 08-Jan-20 Buy 8.85 11.50
Stanbic IBTC 02-Jan-19 Buy 08-May-19 Buy 08-Jan-20 Buy 42.50 61.35
Fidelity 02-Jan-19 Buy 08-May-19 Buy 08-Jan-20 Hold 2.02 2.50
Sterling 02-Jan-19 Hold 08-May-19 Hold 08-Jan-20 Hold 2.00 1.90
Current Target
Price, price,
Date Recommendation Naira/s Naira/s
Nestle Nig. 17-May-19 Hold 1,300 1,213.89

Flour Mills of
Nig. 17-May-19 Hold 13.50 18.29
Unilever Nig. 17-May-19 Hold 29.45 28.39
PZ Cussons Nig. 17-May-19 Hold 5.90 8.22
Coronation Research Investment Rating Distribution

Buy 66.7%
Sell 0%
Hold 33.3%
Under Review 0%
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1 Research I Nigeria | Fund Management

Shifting the Appetite of

The amazing growth industry 5

Measuring performance in Nigeria 11

Measuring performance – the future 13

Fees and scale 14

Bank, fund managers and tech 16

Disclaimer and disclosures 17

A growing industry in need of risk management and performance data

The amazing growth industry

The amazing growth industry

Source: National Pension Commission (PenCom), NBS Coronation Research

The amazing growth industry

Money Market funds and Fixed Income funds

Source: SEC, NBS, Coronation Research

Source: SEC, NBS, Coronation Research

The amazing growth industry

Recent explosion in Fixed Income funds is driven by interest rate moves

Naira yield curve

Source: Bloomberg, Coronation Research

Treasury bill yields, 1 October 2019 to present

Source: FMDQ, Coronation Research

The amazing growth industry

The emergence of mark-to-market risk

The Bloomberg Naira Fixed Income Index

Source: Bloomberg, Coronation Research

The amazing growth industry

The unsurprising rise in US dollar bond funds

Source: SEC, NBS, Coronation Research

Take another look at equity funds?

Source: SEC, NBS, Coronation Research

The amazing growth industry

Distribution of Mutual funds by type

Distribution of mutual funds by type, 30 June 2020

Source: SEC, Coronation Research *Exchange Traded Funds

Measuring Performance in Nigeria

Measuring performance in Nigeria

Zenith Income Fund

Lotus Capital Fixed

PACAM Fixed Income

Source: SEC, Coronation Research

Measuring performance in Nigeria

Fund Managers Association of Nigeria

Global Investment Performance Standards

1,000,000 ISA**, 10%

Fi xed Income, 17%

Total Funds Equity Fixed Income

Fees and Scale

Fees and scale

Nigerian Treasury Bill (T-bill) yields from 2010 to present

Source: FMDQ, Coronation Research

Fees and scale

Performance and scale

The origin of several problems suffered by many funds in a small-but-rapidly-growing fund

Banks, Fund Managers and Tech

Banks, Fund Managers and Tech

Time Deposits Savings Deposits Demand Deposits

The tech challenge