Hitting the sweet spot
Akinwunmi Adesina, President of the African Development Bank (AfDB), recently grabbed global headlines.
At this year’s just-concluded G7 Summit in Biarritz (France), Adesina had impressively talked his way into a US$251m deal that would see G7 members support AfDB’s Affirmative Finance Action for Women in Africa (AFAWA), an initiative of the Bank that was launched in 2016 to promote women access to finance and entrepreneurship in Africa.
A few weeks back, Adesina was similarly in the news, this time for sounding an alarm over Nigeria’s escalating debt profile. The Nigerian government seems to have taken the cue, making what appears to be decisive moves to slow down on borrowing, and boost revenues.
But there are consequences. Against a backdrop of reduced government borrowing, dipping crude oil prices, recession fears and continued uncertainty about interest rates, unsettled investors are fleeing for safer investment vehicles.
‘Safety’ continues to translate into deft moves away from a wobbling stock market, bearish Bond and Treasury Bills markets – and into Money Market Funds (MMF) that hit the sweet spot between appreciable-yield, low-risk, and highly-liquid investments.
Retreating from risk
While maintaining a wait-and-see position, in anticipation of continued market volatility, advisors are nudging investors towards increasing cash positions in their portfolios. An excellent way to earn attractive interest rates on cash and cash-based money in the short term is through a money market investment account.
Treasury Bills Yield: Secondary market
DAYS TO MATURITY
Week beginning September 02, 2019 (Numeris Research, FMDQ OTC)
Money Market Funds offer investors capital preservation and regular income, through a broadly diversified portfolio of low-risk, short-term, very liquid and high quality assets that include Certificates of Deposit, Commercial Papers, Bankers Acceptance, Treasury Bills, Collaterised Purchase agreements, and other fixed income investments. These instruments, through the power of pooling, attract rates that are ordinarily only available to institutional investors, resulting in higher returns on investment (RoI) than traditional savings accounts with yields that average 4.1% per annum.
Between June and August 2019, effective yields for Money Market Funds have been in the range of 11.55% – 13.27%, with minimum investment amounts starting as low as NGN1,000.
THE MIRACLE OF COMPOUNDING
Your investment portfolio is built around your risk appetite. If market movements make you nervous, it could be a signal to reduce the amount of risk in your portfolio by moving some of your holdings to cash.
Cash is an important part of any financial plan. Advisors recommend generally setting aside at least three to six months’ worth of income in emergency savings — which essentially means having a liquid account you can access without worrying about the securities markets’ effect on its value. These savings will earn higher returns when placed in a Money Market Fund.
For retirees – advisors often recommend keeping two to three years’ worth of income in investments that are not subject to the whims of the stock market. Depending on a person’s particular situation, part of that strategy could include a cash component.
For long-term investors — for example, younger workers saving for retirement — the secret of systematically building wealth through Money Market Funds lies in the power of compound interest (or earning interest not only on your original investment, but also on the interest accrued, over many years).
The total Net Asset Value (NAV) of mutual funds in Nigeria rose from N170.33 billion in April 2014 to N798.04 billion in August 2019, representing a CAGR of 36.2 per cent. Between August 2018 and August 2019, NAV rose from N649.775 billion to N798.04 billion (22.82 CAGR). (Source: Numeris Research, Securities & Exchange Commission (SEC) – August 2019)
Clearly, the soaring interest in Money Market Funds (see below: ‘Mutual Fund Composition’) reflects investors’ retreat from riskier assets, in an attempt to shelter from the uncertainties that have sent prices on government bonds, bills and equities inching downwards in recent weeks and months.
Mutual Fund Composition By Underlying Assets
(Numeris Research, Securities & Exchange Commission – May 2019)
*Disclosures: This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. ARM Investments (ARMI) advises investors to independently evaluate particular investments and strategies, and seek the advice of a financial advisor or wealth manager. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.