Aug 9, 2020

Unit Trust Funds, “UTFs”, are collective investment schemes that pool money together from many investors and are managed by professional Fund Managers, who invest the pooled funds in a portfolio of securities to achieve objectives of the trust. Following the release of Unit Trust Fund Managers’ results for Q1’2020, we examine the performance of Unit Trust Funds, especially Money Market Funds, which is the most popular Unit Trust Funds investment with a market share of 88.2% in Q1’2020, an increase from 87.0% in FY’2019. In our previous focus on Unit Trust Funds, we looked at the FY’2019 Performance by Unit Trust Fund Managers. In this note, we focus on the Q1’2020 performance by Unit Trust Fund Managers, where we shall analyze the following:

1. Performance of the Unit Trust Funds Industry,
2. Performance of Money Market Funds,
3. Comparing Annualized Unit Trust Funds AUM Growth with Bank Deposits Growth, and,
4. Conclusion

Section I: Performance of the Unit Trust Funds Industry

As defined above, Unit Trust Funds are essentially investment schemes that pool money from investors and are managed by a professional Fund Manager who invests the pooled funds in a portfolio of securities to achieve objectives of the trust. The funds in the unit trust earn returns in the form of dividends, interest income, and/or capital gains depending on the asset class the funds are invested in. The main types of Unit Trust Funds include;

1. Money Market Fund – This fund invests in short-term debt securities with high credit quality such as treasury bills and commercial paper. The fund offers high-income yield, liquidity as well as capital stability. Risk adverse investors are prone to invest in Money Market Funds in times of high stock market volatility;
2. Equity Fund – This fund aims to offer superior returns over the medium to longer-term by maximizing capital gains and dividend income through investing in listed equity securities. To maintain liquidity, the fund reduces its high exposure in the equities market through diversifying its portfolio of shares in various sectors;
3. Balanced Fund – These are funds in which the investments are diversified across the Equities and the fixed income market. The fund offers its investors with long-term growth as well as reasonable levels of income; and,
4. Fixed Income Fund – This fund invests in interest-bearing securities, which include treasury bills, treasury bonds, preference shares, corporate bonds, loan stock, approved securities, notes and liquid assets consistent with the portfolio’s investment objective.

In line with Capital Market Regulations (2002) Part IV (32), Unit Trust Funds Managers released their Q1’2020 results. As per the results, the overall Assets under Management (AUM) of the industry grew at a rate of 0.32% to Kshs 76.3 bn in Q1’2020, from Kshs 76.1 bn as at FY’2019. In the last two-years, Assets under Management of the Unit Trust Funds have grown at a CAGR of 17.0% to Kshs 76.1 bn in FY’2019 from Kshs 55.6 bn recorded in FY’2017.  

This growth can be largely attributable to:

• Affordability to Retail Investors: Unit Trust Funds have become more accessible to retail investors, with a majority of the Collective Investment Schemes’ (CIS) in the market requiring an initial investment ranging between Kshs 100.0 - Kshs 10,000.0,
• Diversification: Unit Trust Funds are also advantageous in terms of offering investors the opportunity of diversifying their portfolios by providing them with access to a wider range of investment securities even with limited capital, which would have not been accessible if they invested on their own, and,
• Liquidity: Compared to other investment options such as equities, unit trusts are liquid, as it is easy to sell and buy units without depending on supply and demand at the time of investment or exit. Furthermore, the advent of digitization and automation within the industry has enhanced liquidity enabling an investor to receive their funds within 3 to 5 working days if they are withdrawing to their bank accounts, and immediate access to funds when withdrawing via M-Pesa.

According to the Capital Markets Authority, there are 24 approved collective investment schemes made up of 92 funds in Kenya as of Q1’2020. Out of the 24 however, only 19 are currently active while 5 are inactive. The table below outlines the performance of Fund Managers of Unit Trust Funds in terms of Assets under Management:

Assets Under Management (AUM) for the Approved and Active Collective Investment Schemes
No.	Fund Managers	FY'2019 AUM (Kshs mns)	Q1’2020 AUM (Kshs mns)	AUM Growth* FY'2019 – Q1’2020
1	CIC Asset Managers	29,717.30	29,784.61	0.9%
2	British American Asset	9,780.44	10,004.44	9.2%
3	ICEA Lion	8,020.37	8,040.88	1.0%
4	Commercial Bank of Africa	7,194.76	7,724.84	29.5%
5	Old Mutual	6,245.85	6,133.07	(7.2%)
6	Sanlam Investments	2,735.42	3,320.20	85.5%
7	African Alliance Kenya	2,082.48	1,883.44	(38.2%)
8	Dry Associates	1,662.44	1,781.43	28.6%
9	Stanlib Kenya	1,917.09	1,419.50	(103.8%)
10	Madison Asset Managers	1,594.61	1,371.96	(55.9%)
11	Zimele Asset Managers	1,099.42	1,102.31	1.1%
12	Nabo Capital (Centum)	1,157.85	940.98	(74.9%)
13	Cytonn Asset Managers	717.33	757.76	22.5%
14	Amana Capital	590.08	597.22	4.8%
15	Apollo Asset Managers	523.05	471.51	(39.4%)
16	Genghis Capital	466.00	458.86	(6.1%)
17	Equity Investment Bank	424.34	397.05	(25.7%)
18	Alpha Africa Asset Managers	164.28	143.39	(50.9%)
19	Co-op Trust Investment Services Limited	5.26	10.84	424.5%
	Total	76,098.4	76,344.30	1.1%
*Annualized Growth

Source: Capital Markets Authority: Collective Investments Scheme Quarterly Report

Key to note from the above table:

• Assets Under Management: CIC Asset Managers remains the largest overall Unit Trust Fund Manager with an AUM of Kshs 29.8 bn in Q1’2020, from an AUM of Kshs 29.7 bn as at FY’2019 translating to a 0.9% annualized AUM growth,
• Market Share: CIC Asset Managers remains the largest overall Unit Trust with a market share of 39.0%, an decline from 44.1% in 2019, and,
• Growth: In terms of growth, Co-op Trust Investments recorded the strongest annualized growth of 424.5%, with its market share declining to 0.01% from 0.9% in FY’2019. Stanlib Kenya recorded the largest decline of 103.8%, with its market share declining to 1.9% from 2.5% in FY’2019.

Among unit trust products, Money Market Funds continued to be the most popular product in terms of market share, with 88.2%, an increase from 87.0% in FY’2019 as shown in the table below;

Assets Under Management (AUM) by Type of Collective Investment Scheme (All values in Kshs mns unless stated otherwise)
No.	Product	FY'2019 AUM	Q1’2020 AUM	FY'2019 Market Share	Q1’2020 Market Share	Variance
1	Money Market Funds	66,193.0	67,358.0	87.0%	88.2%	1.2%
2	Equity Fund	4,485.2	3,631.6	5.9%	4.8%	(1.1%)
3	Balanced Fund	1,312.0	1,166.5	1.7%	1.5%	(0.2%)
4	Others	4,108.1	4,188.2	5.4%	5.5%	0.1%
	Total	76,098.4	76,344.3	100.0%	100.0%

Source: Capital Markets Authority: Collective Investments Scheme Quarterly Report

During the period under review, Money Market Funds recorded 1.8% growth in the Assets under Management, and consequently, their market share rose to 88.2% from 87.0% recorded in FY’2019, driven by local investors’ preference for capital preservation during the period of review defined by high volatility in the equities market. Key to note, risk adverse investors are prone to invest in Money Market Funds in times of high stock market volatility. While Equity Funds have the potential to outperform stock market indices and deliver better yields than Money Market Funds over the medium to long-term, preservation of capital in Money Market Funds is the main contributory factor for its popularity in Kenya. Balanced Funds, on the other hand, ranked third in comparison to other products, with a market share of 1.5% in Q1’2020 from 1.7% recorded in FY’2019. Balanced Funds offer investors a reasonable level of current income and long-term capital growth, achieved by investing in a diversified spread of equities and fixed income securities. Having a medium risk profile, Balanced Funds carry a high potential for growth in the near future, as they are suitable for pension schemes, treasury portfolios of institutional clients, co-operatives, and high-net-worth individuals amongst others. The Other Funds include Income Funds, Growth Funds, Wealth Funds, Diversified Funds, and Bond Funds.

Section II: Performance of Money Market Funds

Money Market Funds (MMFs) in the recent past have gained popularity in Kenya with growth rates outperforming that of bank deposits. According to the Central Bank of Kenya data, the average deposit rate declined to 7.0% post the removal of the deposit rate cap floor from an average of 7.7% when the legislation was in place. Money Market Funds, in contrast, have been able to offer investors more attractive yields from their investments owing to their diversified asset allocation that maximizes returns on a risk-adjusted basis.  As per the regulation, funds in MMFS’ are invested in liquid interest-bearing securities that have a weighted average maturity of less than 12-months. These securities include bank deposits, securities listed on NSE, and securities issued by the government. The allocation to these three asset classes in Q1’2020 was 27.3%, 10.5%, and 50.5% for bank deposits, securities listed on NSE, and securities issued by the Government of Kenya, respectively in Q1’2020. As such, the Fund is best suited for investors who require a low-risk investment that offers capital stability, liquidity, and a high-income yield. The Fund is also a good safe haven for investors who wish to switch from a higher risk portfolio to a low risk, high-interest portfolio, especially during times of high stock market volatility.

1. Top Five (5) Money Market Funds by Yields

During the period under review, the following Money Market Funds had the highest average effective annual yield declared, with the Cytonn Money Market Fund having the highest effective annual yield at 11.0% against the industrial average of 8.7%.

Top 5 Money Market Funds by Yield in Q1’2020
Rank	Money Market  Funds	Effective Annual Rate (Average Q1’2020)
1	Cytonn Money Market Fund	11.0%
2	Zimele Money Market  Fund	9.9%
3	Nabo Africa Money Market Fund	9.9%
3	Alphafrica Kaisha Money Market Fund	9.8%
4	CIC Money Market Fund	9.8%
	Industrial Average	8.7%

Section III: Comparing Annualized Unit Trust Funds AUM Growth with Bank Deposits Growth

Unit Trust Funds assets recorded an annualized growth of 1.1% in Q1’2020, compared to a growth of 26.5% in FY’2019, while the listed bank deposits grew by 14.3% in Q1’2020 compared to a growth of 12.7% recorded in FY’2019.

Year	FY’2018	FY’2019	Q1’2020
Listed Bank Deposit Growth	11.3%	12.7%	14.3%
Unit Trust AUM Growth	4.3%	26.5%	1.1%

The reason for the popularity of Money Market Funds in Kenya is attributable to the fund's affordability in its initial and additional investment requirements, its high liquidity as well as the daily compounding of interest. While initial deposit and additional investments may vary depending on the fund, Money Market Funds present a low risk, affordable and high-yielding investment opportunity for investors and capital preservation, a key feature of MMFs. Other than the ease of investing, Money Market Funds also provide individual investors with economies of scale through pooling their funds together and making investments that would otherwise be out of reach for individual investors. Thus, they benefit from the economies of scale created in the form of diversification, cost savings, and attractive returns on investments.

*Growth is annualized

As shown in the bar chart above, bank deposit growth at 14.3% way outpaced UTFs growth of 1.1%, and save for the year 2019, bank deposit growth usually outpace UTFs growth, an indication that our capital markets potential and growth remains constrained. Additionally, our Mutual Funds/UTFs to GDP ratio at 5.4% is still very low compared to global average of 61.8%, showing that we need to improve our Unit Trust Funds formation.

Source: World Bank Data

We recommend the following actions to improve Unit Trust Funds formation and growth:

1. Expand eligibility of Trustees of Unit Trust Funds to include non-bank Trustees such as Corporate Trustees- The current situation where all Trustees are banks severely constrains capital market growth because of (1), the inherent conflict of interest where banks are Trustees in a market where they are also competing for funds, (2) banks are not best suited to be Trustees in complex financial products, hence this restrains the market to plain vanilla investments such as bank deposits and government debt,
2. Allow Funds to have as many Custodians as it suits the Unit Holders- The current arrangement where UTFs are only allowed to have one Custodian makes it very expensive for Unit Holders to invest. For example, say an investor has Kshs. 1,000 at Equity Bank and wants to invest in a Unit Trust Fund held in Custody say at KCB bank the investor will have to transfer the Kshs 1,000 from Equity to KCB and may incur up-to Kshs 100 in charges, which is already a 10.0% transaction cost before investment. So even if they invest in a money market fund returning 10.0%, it would take a whole year just to recoup back their inward transaction cost. The solution to this would be to allow Fund Managers to open as many Custody accounts as it suits unitholders, in this example, a Custody account at Equity would save the investor the Kshs 100 transaction cost. Other than for an agency’s administrative convenience, it is not clear why in this day and age, Unit Holders would be limited to just one fund account,
3. Intense Conflicts of Interest Retards Market Development: We should not have players in the market also part of a regulatory governance structure, as shown above, limiting Capital Markets Trustees to banks limits the development of capital markets,
4. Allow for sector funds: The current capital markets regulations require that funds must diversify. Consequently, one has to seek special dispensation in form sector funds such as financial services funds, a technology fund, or a real estate UTF fund. Regulations allowing unitholders to invest in sector funds would expand the scope of unitholders interested in investing, and,
5. Reduce the minimum investments to reasonable amounts: Sector funds, in addition to cumbersome incorporate as mentioned above, have high minimums of Kshs 1,000,000, which is way above the median wage of Kshs 50,000. Having sector funds minimum that is 20 times the national income seems unreasonably high.

Section IV: Conclusion

In conclusion, as Money Market Funds continue to lead among unit trust products with a market share of 88.2% in Q1’2020, there is a need to leverage more on innovation and digitization in order to further propel the growth of MMFs in Kenya. For instance, China’s first online money market fund known as Yu’eBao has explosively grown into one of the world’s largest MMF with an AUM of USD 180.6 bn as at 31st March 2020, despite being launched in 2013. Yu’eBao of Tianhong Asset Management was launched as a spare cash management platform, allowing users to transfer idle cash as low as USD 0.15 (Kshs 15.6) into the money market fund, with the use of the Alipay e-wallet. The use of technology as a distribution channel for mutual fund products opened up the fund manager to the retail segment, which is characterized by strong demand among retail clients for convenient and innovative products. The advent of digitization and automation within the industry has enhanced liquidity. Closer home, Cytonn Money Market Fund clients can issue withdrawal instructions and have funds remitted to their bank accounts within 2 – 4 working days while funds withdrawn through the USSD or digital platforms are remitted to their M-Pesa and Bank accounts within 5 minutes and 2 working days respectively; the Cytonn Money Market Fund is accessible through dialing *809#. As highlighted in our topical Potential Effects of COVID-19 on Money Market Funds, we believe that amidst the Coronavirus pandemic, returns for Money Market Funds will remain stable with a bias to a slight increase upwards should rates on government securities increase. They will also remain the most liquid of all mutual funds providing a short-term parking bay that earns higher income yields compared to deposits and savings accounts.

In terms of the top 3 key performance indicators:

• The largest Fund Manager was CIC Asset Managers with a 39.0% market share, followed by British American Asset Managers with a 13.1% market share,
• The fastest-growing Fund Manager was Co-op Trust Investments Services Limited, registering a 424.5% annualized growth, followed by Sanlam Investments with an 85.5% annualized growth, and, Commercial Bank of Africa with a 29.5% annualized growth, and,
• The highest yielding Money Market Fund was the Cytonn Money Market Fund with an average yield of 11.0%, followed by Zimele Money Market Fund and Nabo Africa, which both recorded an average yield of 9.9%.

 

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication 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.