There was a time when it was almost normal for the total net asset value of mutual funds in Nigeria to increase week by week, but this trend seems to quickly become a story if the current trend continues.
Although the value of the fund’s assets is expected to fluctuate depending on events in the wider market, the Nigerian mutual fund industry has in the past trended upward regardless of the vagaries of the market. Nigerian mutual fund total net asset value peaked around the third week of February 2021 and since then has been trending south as shown by the trendline below.
Source: Quantitative financial analysis
Since the start of the year, the value of Nigerian mutual fund assets has fallen 12.37%, from 1,572 trillion naira as of December 31, 2020 to 1,377 trillion naira as of September 3, 2021. During the same period, Quantitative Financial Analytics estimated it to have achieved earnings of N16.9 billion or 1.24%. So where does the decline in net asset value come from, you ask?
The drop is the result of withdrawals that have consistently outperformed subscriptions for most of 2021. As of the start of the year, Quantitative Financial Analytics has estimated that the industry has suffered a total outflow of N616.7 billion but has declined. attracted a total influx of 405 naira. 3 billion, resulting in a net outflow of 211.3 billion naira. Sadly, much of the decline came from money market mutual funds that were once the flagship of the industry.
It’s easy to blame all the failures on Covid 19 but frankly one of the reasons for the massive exit is the impact of Covid 19 on the financial well-being of Nigerians. Covid-19 has prompted many people to save less or withdraw from their savings accounts and the money market to keep mind and soul together. This is more true for people who have lost their jobs due to the pandemic and those whose business activities have been hampered or compromised by the pandemic.
Economic difficulties in Nigeria
Another reason for the downward trend in the net asset value of mutual funds in Nigeria is the current and continuing economic hardship facing the general public, even before the advent of Covid. As the situation continues unabated, many have resorted to their savings and money market accounts in an attempt to weather the storm.
Low interest rates
Interest rates have been low all over the world for the past two years or so, so much so that some countries like Japan have been operating under negative interest rates. Even in the United States, the interest rate has been low although the Fed has on some occasions raised rates by 0.25 basis points.
The low interest rate environment has undoubtedly demotivated Nigerian yield-hungry and yield-seeking investors, who in response have withdrawn much of what they have in money market mutual funds where they can get more yield.
All over the world, investors are looking for opportunities to get the maximum return on the investment, of course, without taking too much additional risk. Nigerian investors do the first without doing much of the second.
Many Ponzi schemes have sprung up with promises of enticing double-digit rates of return. Many fell prey to such schemes and therefore withdrew their money from mutual funds in such Ponzi schemes and many were burned in the process. This migration of low-yielding money market funds to high-yielding Ponzi schemes has helped decimate the net asset value of mutual funds.
When you think about the Naira and what is happening to it against currencies like the US dollar or the British pound, you can only say “there was a currency”. The free fall of the Naira does not help matters with mutual funds, as many mutual fund investors try or attempt to hedge the value of their investment by having their money in US dollar denominated home accounts or in pounds sterling.
This flight from mutual funds to domiciliary accounts is yet another factor leading to the continued decline in the total value of mutual fund assets in Nigeria.
Dull stock market
The Nigerian stock market hasn’t helped matters either. With an economy still monocultural with an excessive dependence on oil coupled with poor governance and insecurity, it will be difficult to expect a stock market miracle. The triple play of instability in world oil prices, social insecurity and poor governance has led to the stock market’s catastrophic performance since the start of the year. As of December 31, 2020, Nigeria’s All Share index ended the day at 40,270.72 points, compared to 26,842.07 points recorded on December 31, 2019. This represents a performance of 50.03%. As of September 17, 2021, the All-Share index closed at 38,933.61 points, which translates into a negative performance of 3.32%. With this performance, the performance of equity-focused and blended mutual funds is affected, which in turn results in the decrease in the total value of mutual fund assets in Nigeria.
What it all boils down to
The downward trend in mutual fund assets in Nigeria is not new and will continue as long as the factors that exacerbate this downward trend are still in play.