Risks and Collective Investment Schemes – A case for money market funds

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Asset management companies in Nigeria are increasingly offering money market funds (MMFs) as an asset class to reach the country’s risk-averse retail market. These funds – which are perceived to be low-risk alternatives to other more traditional asset classes account for over 70% of collective investment schemes and 25% of non-pension assets under management. In particular, MMFs offer comparable yields to short-term government securities, with an annualised yield of circa 13.2% as at Q1 2019, higher than the 11.3% on 90-day treasury bills as at the same date.

In managing these funds, asset managers have traditionally conformed to higher credit standards above the benchmarks, with most holding over 65% of net assets in risk-free securities and other highly rated securities (above the benchmark of Bbb), resulting in a superior risk-reward profile when compared with a number of investment vehicles.

Consequently, money market funds operating within these investment constraints typically have investment grade ratings from Agusto & Co., Nigeria’s foremost rating agency. As of 31 March 2019, Agusto & Co had live ratings for 14 of the 18 registered money market funds in Nigeria

Table 1: Fund Risk Rating League Table – Money Market Funds

S/N Fund Fund Size Million Agusto Fund Risk Rating
1 Stanbic IBTC Money Market Fund 253,221 Aa(F)
2 ARM Money Market Fund 52,920 Aa(F)
3 FBN Money Market Fund 137,501 Aa-(F)
4 Abacus Money Market Fund 9,889 A+(F)
5 AXA Mansard Money Market Fund 26,074 A(F)
6 United Capital Money Market Fund 3,581 A(F)
7 Chapel Hill Denham Money Market Fund 1,306 A(F)
8 Meristem Money Market Fund 761 A(F)
9 EDC Money Market Fund (A) 6,052 A-(F)
  EDC Money Market Fund (B) 465 A-(F)
10 Zenith Money Market Fund 6,847 A-(F)
11 Coronation Money Market Fund 5,653 A-(F)
12 Cordros Money Market Fund 5,261 A-(F)
13 Legacy Money Market Fund 1,499 A-(F)
14 GDL Money Market Fund 866 Bbb+(F)
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Source: Agusto & Co and Securities and Exchange Commission (Information as at 29 March 2019)

An Agusto & Co fund risk rating assesses exposure to downside (loss of principal) risk based on a portfolio’s investment strategy and guidelines. In particular, we assess a Fund’s exposure to credit, liquidity, interest rate, currency and pricing risks.

Money market funds are set to continue to dominate the collective investment schemes market in the short to medium term, accounting for a projected 28% of total non-pension AuM by 2021 (2018: 25%), with at least three additional MMFs expected to launch in 2019 alone. Our expectation is supported by the current high-risk environment, which has resulted in many investors being more conservative and seeking risk-averse asset classes away from traditional fixed income and equity instruments.

Money market funds continue to appeal to a broad spectrum of customers ranging from institutional investors to HNIs and the mass affluent. Furthermore, these funds target members of the general public, with many MMFs having a minimum investment range of ₦5,000 – ₦10,000. We expect these funds to continue to drive retail participation in the Nigerian capital market, given the current macroeconomic headwinds that continue to hamper the performance of other traditional investment outlets. We believe that in the long term, Money Market Funds may represent the silver lining in mobilising savings and creating a huge pool of investible funds while also creating a new culture of savings and investments.

Overall, the MMF has lessons to offer to its cousins within the financial sector. While the growth in the pension industry has been stimulated by the institutional framework which compels savings, MMFs have largely grown on the back of voluntary savings, which further reinforces the success of the scheme. This should offer lessons to the insurance industry on value creation as a unique proposition to deepen participation.