Jul 31, 2022

Unit Trust Funds (UTFs) are Collective Investment Schemes that pool funds from different investors and are managed by professional fund managers. The fund managers invest the pooled funds in a portfolio of securities with the aim of generating returns to meet the specific objectives of the fund. Following the release of the Capital Markets Authority (CMA) Quarterly Statistical Bulletin-Q2’2022, we analyze the performance of Unit Trust Funds, as the total Assets Under Management (AUM) have been steadily increasing and they are among the most popular investment options in the Kenyan market. We will further analyze the performance of Money Market Funds, a product under Unit Trust Funds. In our previous focus on Unit Trust Funds, we looked at the FY’2021 Unit Trust Funds Performance by Fund Managers. In this topical, we focus on the Q1’2022 performance of Unit Trust Funds where we shall analyze the following:

1. Performance of the Unit Trust Funds Industry,
2. Performance of Money Market Funds,
3. Comparing Unit Trust Funds AUM Growth with other Markets, and,
4. Recommendations

Section I: Performance of the Unit Trust Funds Industry

Unit Trust Funds are investment schemes that pool funds from investors and are managed by professional Fund Managers. The fund manager invests the pooled funds with the aim of generating returns in line with the specific objectives of the fund. The Unit Trust Funds earn returns in the form of dividends, interest income, rent and/or capital gains depending on the underlying security. The main types of Unit Trust Funds include:

1. Money Market Funds – These funds invest in fixed income securities such as fixed deposits, treasury bills and bonds, commercial papers, etc. They are very liquid, have stable returns, and, they are suitable for risk averse investors,
2. Equity Funds – These are funds which largely invest in listed securities and seek to offer superior returns over the medium to long-term by maximizing capital gains and dividend income. The funds invest in various sectors to reduce concentration risk and maintain some portion of the fund’s cash in liquid fixed income investments to maintain liquidity and pay investors if need be without losing value,
3. Balanced Funds – These are funds whose investments are diversified across the Equities and the Fixed Income markets. Balanced Funds offer investors long-term growth as well as reasonable levels of stability of income,
4. Fixed Income Funds – These are funds which invest 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, and,
5. Sector Specific Funds – These funds that invest primarily in a particular sector or industry. The funds provide a greater measure of diversification within a given sector than may be otherwise possible for the other funds. They are specifically approved by the Capital Markets Authority as they are not invested as per the set rules and regulations.

As per the Capital Markets Authority (CMA) Quarterly Statistical Bulletin-Q2’2022, the industry’s overall Assets under Management (AUM) grew by 4.5% to Kshs 140.7 bn as at the end of Q1’2022, from Kshs 134.7 bn as at the end of FY’2021. Assets under Management of the Unit Trust Funds have grown at a 5-year CAGR of 20.3% to Kshs 140.7 bn in Q1’2022, from Kshs 55.8 bn recorded in Q1’2017. The chart below shows the growth in Unit Trust Funds’ AUM;

Source: Capital Markets Authority Quarterly Statistical bulletins

The growth can be largely attributed to:

• Low Investments minimums: Majority of the Unit Trust Funds Collective Investment Schemes’ (CIS) in the market require a relatively low initial investment ranging between Kshs 100.0 - Kshs 10,000.0. This has in turn made them attractive to retail and individual investors, boosting their growth,  
• Increased Investor Knowledge: There has been a drive towards investor education on the various products offered by trust funds which has meant that more people are aware and have a deeper understanding of the investment subject. As a result, their confidence has been boosted resulting to increased uptake,
• Diversified product offering: Unit Trust Funds are also advantageous in terms of providing investors with access to a wider range of investment securities through pooling of funds. This allows investors the opportunity of diversifying their portfolios which would have not been accessible if they invested on their own,
• Efficiency and ease of access to cash/High Liquidity: Funds invested in UTFs are invested as portfolios with different assets and the fund managers always maintain a cash buffer. Unit trusts are highly liquid, as it is easy to sell and buy units without depending on demand and supply at the time of investment or exit, and,
• Adoption of Fintech: Digitization and automation within the industry has enhanced liquidity, enabling investors 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 Central Bank of Kenya, more and more individuals are transacting through mobile money services as evidenced by continuous  increase in the total number of registered mobile money accounts which has grown at a 5-year CAGR of 15.4% to to 70.0 mn in May 2022, from 34.2 mn recorded in May 2017. Fintech has increased the efficiency of processing both payments and investments for fund managers and made Collective Investment Schemes more accessible to retail investors.

According to the Capital Markets Authority, as at the end of Q1’2022, there were 30 approved Collective Investment Schemes in Kenya, making up 111 funds in total. Out of the 30 however, only 20 were active while 10 were inactive. The table below outlines the performance of the Collective Investment Schemes comparing Q1’2022 and FY’2021:

Assets Under Management (AUM) for the Approved Collective Investment Schemes
No.	Collective Investment Schemes	FY’2021 AUM (Kshs mns)	FY’2021 Market Share	Q1’2022 AUM (Kshs mns)	Q1’2022 Market Share	AUM Growth FY'2021 –Q1'2022
1	CIC Asset Managers	56,278.4	41.8%	56,919.1	40.5%	1.1%
2	NCBA Unit Trust Scheme	18,003.0	13.4%	19,757.2	14.0%	9.7%
3	BRITAM	14,573.3	10.8%	14,527.8	10.3%	(0.3%)
4	ICEA Lion	13,350.7	9.9%	13,669.2	9.7%	2.4%
5	Sanlam Investments	8,610.7	6.4%	10,205.1	7.3%	18.5%
6	Old Mutual	6,655.0	4.9%	6,713.2	4.8%	0.9%
7	Co-op Trust Investment Services Limited	2,801.0	2.1%	3,294.8	2.3%	17.6%
8	Dry Associates	3,054.4	2.3%	3,215.7	2.3%	5.3%
9	Madison Asset Managers	2,660.2	2.0%	2,794.6	2.0%	5.1%
10	Nabo Capital (Centum)	2,398.3	1.8%	2,719.6	1.9%	13.4%
11	Zimele Asset Managers	1,992.5	1.5%	2,165.8	1.5%	8.7%
12	African Alliance Kenya	1,788.4	1.3%	1,822.1	1.3%	1.9%
13	Cytonn Asset Managers	704.2	0.5%	725.7	0.5%	3.1%
14	Apollo Asset Managers	716.3	0.5%	719.2	0.5%	0.4%
15	Genghis Capital	558.5	0.4%	593.5	0.4%	6.3%
16	ABSA Unit Trust Scheme	-	0.0%	287.1	0.2%	-
17	Orient Collective Investment Scheme	245.8	0.2%	257.4	0.2%	4.7%
18	Equity Investment Bank	246.4	0.2%	249.6	0.2%	1.3%
19	Amana Capital	30.7	0.0%	29.5	0.0%	(4.1%)
20	Wanafunzi Investments	0.6	0.0%	0.7	0.0%	10.5%
21	Genghis Specialized Funds	-	-	-	-	-
22	Standard Investments Bank	-	-	-	-	-
23	Diaspora Unit Trust Scheme	-	-	-	-	-
24	Dyer and Blair Unit Trust Scheme	-	-	-	-	-
25	Jaza Unit Trust Fund	-	-	-	-	-
26	Masaru Unit Trust Fund	-	-	-	-	-
27	Adam Unit Trust Fund	-	-	-	-	-
28	First Ethical Opportunities Fund	-	-	-	-	-
29	Natbank Unit Trust Scheme	-	-	-	-	-
30	GenAfrica  Unit Trust Scheme	-	-	-	-	-
	Total	134,668.5	100.0%	140,667.0	100.0%	4.5%

Source: Capital Markets Authority: Quarterly Statistical Bulletin, Q2’2022

Key take outs from the above table include:

• Assets Under Management: CIC Unit Trust Scheme remained the largest overall Unit Trust Fund with an AUM of Kshs 56.9 bn in Q1’2022, from an AUM of Kshs 56.3 bn in FY’2021, translating to a 1.1% AUM growth,
• Market Share: CIC Unit Trust Scheme remained the largest overall Unit Trust with a market share of 40.5%, a 1.3% points decline from 41.8% in FY’2021. Key to note, the 1.3% points decline in market share was the highest recorded in Q1’2022,
• Growth: In terms of AUM growth, Sanlam Investments recorded the strongest growth of 18.5%, with its AUM increasing to Kshs 10.2 bn, from Kshs 8.6 bn in FY’2021 while Amana Unit Trust Fund recorded the largest decline, with its AUM declining by 4.1% to Kshs 29.5 mn in Q1’2022, from Kshs 30.7 mn in FY’2021. Notably, the decline was slower than the 77.3% decline recorded in FY’2021, pointing towards improving investor confidence,
• GenAfrica Unit Trust Scheme, Natbank Unit Trust Scheme, First Ethical Opportunities Fund, Adam Unit Trust Fund, Masaru Unit Trust Fund, Jaza Unit Trust Fund, Dyer and Blair Unit Trust Scheme, Diaspora Unit Trust Scheme, Standard Investments Bank, and Genghis Specialized Fund remained inactive as at the end of Q1’2022.

Section II: Performance of Money Market Funds

Money Market Funds (MMFs) in the recent past have gained popularity in Kenya driven by the higher returns they offer compared to the returns on bank deposits and treasury bills. According to the Central Bank of Kenya data, the average deposit rate remained unchanged at 6.5% in Q1’2022, as was recorded at the end of FY’2021. During the period under review, the 91-Day T-bill and the average deposit rate continued to offer lower yields at 7.3% and 6.5%, respectively, compared to the average MMF yields of 8.9%.

Source: Central Bank of Kenya, Cytonn Research

As per the regulations, funds in MMFs should be invested in liquid interest-bearing securities which include bank deposits, fixed income securities listed on the Nairobi Securities Exchange (NSE) and securities issued by the Government of Kenya. The fund is best suited for investors who require a low-risk investment that offers capital stability, liquidity, and require 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 portfolio, especially in times of uncertainty. 

Top Five 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 10.5% against the industry average of 8.9%.

Top 5 Money Market Fund Yield in Q1'2022
Rank	Money Market Fund	Effective Annual Rate (Average Q1'2022)
1	Cytonn Money Market  Fund	10.5%
2	Zimele Money Market  Fund	9.9%
3	Nabo Africa Money Market Fund	9.7%
4	Sanlam Money Market  Fund	9.5%
5	Madison Money Market  Fund	9.3%
	Industry average	8.9%

Source: Cytonn Research

Section III: Comparison between Unit Trust Funds AUM Growth and other Markets

Unit Trust Funds’ assets recorded a q/q growth of 4.5% in Q1’2022, while the listed bank deposits recorded a growth of 9.5% over the same period. For both the Unit Trust Funds and bank deposits, this was slower than the growth recorded as at the end of Q1’2021 of 6.1% and 21.8%, respectively as the economy was still in the early stages of recovery. The chart below highlights the Unit Trust Funds AUM growth vs bank deposits growth over the last five years;

Source: Cytonn Research

Unit Trust Funds’(UTF) growth of 4.5% was outpaced by the listed banking sector’s deposit growth of 9.5% in Q1’2022.  We note that the 4.5% growth rate was slower than the 6.1% growth recorded in Q1’2021, an indication of a relative slowdown in our capital markets with the faster growth of bank deposits pointing towards a constrained capital markets. According to the World Bank data, in well-functioning economies, businesses rely on bank funding for a mere 40.0%, with the larger percentage of 60.0% coming from the Capital markets. Closer home, the World Bank noted that businesses in Kenya relied on banks for 99.0% of their funding while less than 1.0% come from the capital markets. Notably, our Mutual Funds/UTFs to GDP ratio at 1.1% is still very low compared to an average of 56.3% amongst select global markets, indicating that we still have room to improve and enhance our capital markets. The chart below shows some countries’ mutual funds as a percentage of GDP:

Source: World Bank Data

Over the past 5 years, the UTFs AUM has grown at a CAGR of 20.3% to Kshs 140.7 bn in Q1’2022, from Kshs 55.8 bn recorded in Q1’2017. However, even at Kshs 140.7 bn, the industry is dwarfed by asset gatherers such as bank deposits at Kshs 4.4 tn and the pension industry at Kshs 1.5 tn as of the end of 2021. Below is a graph showing the sizes of different saving channels and capital market products in Kenya as at December 2021:

*Data as of December 2020

Source: CMA, RBA, CBK, SASRA Annual Reports and REITs Financial Statements

On a REITs to Market Cap Ratio, Kenya still has a lot of room for improvement. The listed REITs capitalization as a percentage of total market cap in Kenya stands at a paltry 0.1%, as compared to 2.2% in the US and 1.6% in South Africa, as of 29^th July 2022. Below is a graph showing comparison of Kenya’s REITs to Market Cap Ratio to that of United States (US) and South Africa:

Source: Online research, Nairobi Securities Exchange (NSE)

Section IV: Recommendations

 In order to improve our Capital Markets and stimulate its growth, we recommend the following actions:

1. Reduce the minimum investments to reasonable amounts: Currently, the minimum investment for sector specific funds is Kshs 1.0 mn, while that for Development REITS is currently at Kshs 5.0 mn. The high minimum initial and top up investments amounts are unreasonably high and as such, put off potential investors. According to the Kenya National Bureau of Statistics, 74.4% of all employees in the formal sector earn a median gross income of Kshs 50,000 or below per month. It therefore locks out a lot of potential investors. Additionally, these high amounts discriminate against most retail investors, giving them fewer investment choices. This is the key reason why the listed REITS to Market cap ratio for Kenya remains at 0.05% compared to South Africa’s at 1.5% and US at 3.0%,
2. Allow for sector funds: Under the current capital markets regulations, UTFs are required to diversify. Consequently, one has to seek special dispensation in the form of sector funds such as a financial services fund, a technology fund or a Real Estate UTF fund. Regulations allowing unit holders to invest in sector funds would go a long way in expanding the scope of unit holders interested in investing,
3. Eliminate conflicts of interest in the governance of capital markets and allow different services such as the opening up of Trustees to non-financial institutions: The capital markets regulations should foster a governance structure that is more responsive to both market participants and market growth. Specifically, restricting Trustees of Unit Trust Schemes to Banks only limits choices, especially given that banking markets and capital markets are in competition,
4. Provide Support to Fund Managers: We are of the opinion that the regulator, CMA, needs to integrate market stabilization tools as part of the regulations/Act that will help Fund Managers meet fund obligations especially during times of distress such as mass withdrawals. We do commend and appreciate the regulator on its role in protecting investor interests. However, since Fund Managers also play a key role in the capital markets, the regulator should also be able to protect the brand image of various fund managers in the industry. This can be achieved by working together with industry players to resolve matters rather than alienating and publicly ostracizing industry players facing challenges as this may not particularly be in investors’ interest,
5. Create increased competition in the market by encouraging different players to set up shop: Increased competition in capital markets will not only push Unit Trust Fund managers to provide higher returns for investors but will also eliminate conflicts of interest in markets and enhance the provision of innovative products and services, and,
6. Improve fund transparency to provide investors with more information: Each Unit Trust Fund should be required to publish their portfolio holdings on a quarterly basis and make the information available to the public so as to enhance transparency for investors. Enhanced accountability by providing investors with more information will help both investors and prospects make better informed decisions and subsequently improve investor confidence.

In May 2022, the Capital Markets Authority (CMA) publicized the Draft Capital Markets Public Offers Listing and Disclosures Regulations 2022, meant to replace the Public Offers Listing and Disclosures Regulations 2002, which have been in place since 2002, with the only amendments done in 2016. The main aim of the Draft Regulations is to provide a more enabling environment in Kenya’s Capital Markets in order to spur more listings in the Nairobi Securities Exchange. As highlighted in our Cytonn weekly#18/2022, we expect more corporates to take advantage and seek capital markets funding through IPOs, which will further help to increase the percentage of funding for business by the Capital Markets. Additionally, In June 2022, the Capital Markets Authority (CMA) published the final draft regulations; Capital Markets (Collective Investment Schemes) Regulations 2022 and the Capital Markets (Alternative Investment Funds) Regulations 2022. The proposed regulations seek to update the current Collective Investment Scheme and Alternative Investment Funds Regulations given the change in market dynamics as well as address emerging issues.

We believe that for continued growth of the capital markets, there is a need to leverage more on innovation and digitization. The use of technology as a distribution channel for mutual fund products opens up the funds to the retail segment, which is characterized by strong demand among retail clients for convenient and innovative products. The regulators should promote and facilitate growth and diversification of UTFs, instead of impeding their expansion, which will enhance growth of capital markets and encourage entry of new players into the market.

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.