Investors Snub Equity Mutual Funds Despite Stellar Performance

March 16, 2018
Investors Snub Equity Mutual Funds Despite Stellar Performance

By Quantitative Financial Analytics

The year 2017 will go down the annals of financial history in Nigeria as the year that mutual funds visited investors with all manner of blessedness.

On average, equity-based funds returned 29.03 percent with the likes of ARM Aggressive fund retuning 58.06 percent, Legacy Equity Fund, 53.74 percent, Coral Growth Fund, 52.79 percent and ACAP Canary Growth Fund recording the lowest performance among equity funds with a whopping 16.57 percent.

In the same likeness, ETFs which are predominantly equity based, returned 38.78 percent on average, with Vetiva Banking ETF recording 50.25 percent, New Gold ETF, 47.87 percent and Vetiva Griffin 30 ETF, 45.98 percent.

All the Equity based funds and ETFs made gains of not less than 16 percent in 2017.

Surprisingly, a flow analysis carried out by Quantitative Financial Analytics’ analysts indicate that investors did not take advantage of the equity market performance. Cash flow analysis is a way of measuring investors’ attraction or appetite for mutual funds.

While every category of mutual funds recorded net inflows in 2017, only the equity fund and ethical fund categories recorded net out flow.

In 2017, the total estimated inflow to the industry stood at approximately N249 billion while outflows amounted to N63 billion leaving a net inflow of N186 billion.

As usual, money market funds attracted the greatest inflow in the amount of N221 billion but suffered outflows amounting to N40 billion, resulting in a net inflow of N181 billion.

Bond or fixed income funds attracted inflows of N18 billion while suffering outflows of N11 billion, leaving it with net inflow of N7 billion. The other categories of Real estate funds, ETFs, and Balanced funds, all ended the year with net inflows but the story is different for equity and ethical funds.

In the year under consideration, equity funds received N4 billion of inflows but suffered outflows in the sum of N8 billion, amounting to a net outflow of N4 billion.

As at March 2, 2018, the total asset of mutual funds in Nigeria was N512 billion out of which only 6.5 percent (N33 billion) is in equity funds.

Though the trend does not seem to be reversing so far in 2018, there appears to be some attraction to equity funds.

Within the first two months of 2018, the industry attracted a total of N98 billion inflows with N14 billion outflows. While N89 billion of those went to money market funds which suffered N10 billion of outflows (net-flow N79 billion),  equity funds attracted N2 billion inflows and suffered N0.9 billion in outflows leaving that category of funds with positive net flow.

The reason for the lack of appetite or likeness for equity mutual funds could be because investors are still reeling from the losses made from the market crash of 2009, but for how long, one may ask.

Another reason could be the risk disposition of investors. While money market funds may not be yielding as much in bull markets, they tend to be less risky than equity funds and as such attractive to risk averse investors.

Yet another reason could be lack of data and information. In the Nigerian mutual fund industry, it is easy to get information on money market yields but not so easy to get such information on other categories of mutual funds.

This issue is even exacerbated by some blogs or articles on fund performance being thrown out there. Some of those blog/articles tend to overstate the performance of money market funds while understating that of other categories of funds because such blogs/articles ignore the effects of cash flows on performance calculations.

By lumping cashflows into the fund, they run the risk of interpreting changes in funds’ net asset value as due solely to performance. This erroneous interpretation tends to punish funds that suffer net outflows while rewarding those with net inflows.

It is important however, to note that past performance does not guarantee future performance so much such that the stellar performance of equity funds in 2017 does not indicate that they will perform as well or better in the future, so invest with caution.

Modupe Gbadeyanka

Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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