Oct 11, 2020
The Capital Markets Authority (CMA) recently published guidelines to Collective Investments Schemes, (CIS), on the valuation, performance measurement and reporting by Fund Managers, highlighting that the guidelines would ensure the standardization of the sector as well as ensure the consistency of the information presented across the sector. The guidelines are a commendable move by the CMA as they will ensure the alignment of the market players and ease comparability across various players. However, they present various shortcomings such as: can the regulator determine the asset allocation for managers? And, do these guidelines override the fund managers trust deed? With this in mind, we found it necessary to demystify these guidelines and give our view on what they mean to fund managers and the CIS industry in general. In this week’s topical, we shall delve into the guidelines with a focus on the below;
Section I: Governance of CIS and where the guidelines fit in
Collective Investment Schemes (CIS) are pools of funds that are managed on behalf of investors by fund managers. The amounts invested in the CIS are pooled and utilized by fund managers to buy stocks, bonds or other securities that are in accordance with the funds’ objective, with the aim of generating returns for their investors. In Kenya, Collective Investments Schemes are governed by the Capital Markets Authority (CMA) and are regulated under the Capital Markets Collective Investments Schemes Regulations, 2001. The governance structure of CIS’ is such that there are checks and balances to ensure investors’ capital and returns are protected. According to the regulations, to ensure the proper running of a CIS, it should have a Fund Manager, a Trustee; as well as a Custodian. The Fund Manager administers, manages and ensures that the funds from their investors are invested in accordance with the fund investment objective. A custodian is a company, usually a bank, approved by the Authority to hold in safe custody the funds/ assets of a collective investment scheme. Trustees on the other hand, ensure that the investors’ interests are protected at all times.
According to the CMA, these guidelines will be read together with the Collective Investments Schemes Regulations, 2001 and as such, we believe that these guidelines will provide a comprehensive guidance to fund managers on the effective management of investors’ funds.
Section II: CMA Guidelines to CIS on the Valuation, Performance and Reporting by Fund Managers
The guidelines, which will be effective 1st January 2021, are meant to encourage international best practice in the capital markets through standardization, thereby enhancing the comparability and consistency of the information presented across the sector. The same policies will indicate how performance is calculated, measured and presented, aside from identifying the methodology to be used for valuing each asset type. The guidelines touch on the operation of CIS, performance reporting, advertisement guidelines and returns calculation for the CIS among others.
Fund Managers are required to establish comprehensive and documented investments policy procedures that will govern the valuation of assets held in the CIS. The policy procedure which will be used to value each type of asset, should be consistent across all the funds managed by the Fund Manager. In the establishment of various funds, fund managers shall be guided by the following criteria:
Key to note, the investments limits provided in Part VII / Regulation 78 of the CIS Regulations, 2001, specifically are not fund specific, however they limit the maximum investments exposure as below;
Consequently, the recently released guidelines have to be read together with the existing Regulation 78 and also likely inconsistent with fund specific constitutive documents, and may lead to confusion with regard to investment limits given there are now 3 different places to look.
Fund Managers shall be required to prepare and submit their performance reports to CMA quarterly and the report shall be submitted within 21 days after the end of each quarter. Additionally, the report shall be made available to the fund managers existing and prospective clients. When determining the total AUM, the fund manager will consider the aggregate fair value of the assets and ensure that the assets have not been double counted. According to the guidelines, should a fund manager choose to benchmark the fund’s returns, the report shall be inclusive of the description of the benchmark for instance its name and features. Additionally, the benchmark used shall be of the same type of return, same currency as the fund and the same period for which the returns have been reported. To put it to perspective, for instance, if the fund manager is reporting the performance of the Equity Fund portfolio, the benchmark used may either be the NASI, NSE 20 or NSE 25. In this case, given that Equity Funds primarily invests in the Equities Market, the benchmark used cannot be in the Fixed Income market such as the short term government papers given the variance in the returns and the investments made.
The fund manager’s portfolios will be valued daily and in accordance with the definition of fair value under International Financial Reporting Standards (IFRS 13). IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). In terms of the funds returns, the returns will be calculated using the time weighted rate of return method.
Current Provision: The CIS regulations, 2001, provide that the Net Asset Value (NAV) of the fund shall be calculated by the fund manager at the end of each business day and that the formula to be adopted during the determination of the NAV will be dividing the value of the assets of the fund less its liabilities (including such provisions and allowances for contingencies as the fund manager may think appropriate) by the number of shares issued and fully paid. The regulations also provide that the fund manager’s trust deed shall also include the specific method used for the calculations of the value of the unit trust.
When publishing the returns of the fund in any advertisement platform, fund managers will be required to include at a minimum, the Net Asset Value of the fund, the yield in terms of Year to Date (YTD), Month to date (MTD) as well as Quarter to Date (QTD). Net Asset Value refers to the net value of an asset minus the value of the liabilities. Additionally, for all publications, the fund manager shall present the total returns according to at least one, three and five year annualized returns through the most recent period.
The guidelines stipulate that the fund manager will be required to list all the funds offered inclusive of the summary of the description of the funds in its website or any other platform that is easily accessible to the funds current and future investors.
Section III: Impact and Emerging Issues in the sector
These new guidelines raise substantive issues with the law and present various shortcomings as set out below:
On the upside, these guidelines;
However despite the potential upsides;
Section IV: Recommendations on the Improvement of the Capital Markets
In light of the above shortcomings, we recommend the following;
The robust governance structure put in place by the authority, inclusive of these guidelines, will ensure that Kenya’s Capital Market more so the Collective Investments schemes are managed well and in a legal and regulatory framework thereby ensuring investor protection and a financially stable system. Additionally, the standardization in the CIS will make it easier for investors to evaluate the performance the funds and compare between the different fund managers. However, we believe that CMA needs to offer clarity to the fund managers on what happens to existing contracts that run for a long period than the recommended tenor. Given that the guidelines take effect on 1st January 2021, we believe that this clarity will go a long way in ensuring a stable financial market without destabilizing the returns offered by the funds more so Money Market Funds. The Collective Investments Schemes Regulations, 2001 indicates that provisions done in the Trust deed relating to unit trusts should be consistent with any provision in the regulations as well as in the Capital Markets Act. Therefore, given that the new guidelines should be read together with the Collective Investments Schemes Regulations, 2001, we believe that fund managers will need to align their trust deeds and other incorporation documents with these new guidelines, but keeping in mind that some changes in the trust deeds may require approval of unit holders.
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.