June 29, 2022/Coronation Research
One year after our publication ‘Comparing Mutual Funds – Apples & Oranges’, we return to the subject of comparing the performance of Nigeria’s mutual funds. This year we take a deep dive into the differences between the amortised accounting method, which most funds in Nigeria use, and the international mark-to-market accounting method, as applied to Fixed Income funds.
We find that the amortised accounting method has a fundamental flaw when it comes to dealing with interest rate fluctuations; so much so that we think it could lead to systemic risk in future. Hence the title of our report this year, ‘Comparing Mutual Funds II – Apples & Oranges, and a Hand Grenade’.
The mark-to-market method of accounting for Fixed Income funds is not simply a matter of following Global Investment Performance Standards (GIPS). Mark-to-market is by far the safest method of accounting for Fixed Income securities in a mutual fund, guaranteeing that fund managers only show a Unit Price (UP) to investors that reflects what can be realised in the market.
This year, and after a 10.6% decline in total assets under management (AUM) during 2021, the mutual fund industry is growing again, with total AUM up 8.7% in the first five months of the year to N1.52 trillion (US$3.64bn). The compound annual growth rate for the industry between 2015 and 2021 was 33%, or 14% per annum in inflation-adjusted terms. We are convinced that Nigerian savers are making the long-term transition from building savings with banks to a culture of saving with mutual funds.
At just 11% of the size of the pension fund industry, we believe that the mutual fund industry needs to support its momentum with confidence-building measures, first among them the adoption of market-to-market accounting and Global Investment Performance Standards (GIPS).
Adopting GIPS would enable a true comparison between the performance of funds rather than the Apples & Oranges we have now. GIPS would open the door to credible fund comparison services such as Morningstar, Yodelar and the Financial Times fund comparison service. These advances would pave the way to significant industry expansion and international investor participation.
