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'Fixed Income Instruments Better for Risk Averse Investors'

June 30, 2014

The Managing Director/CEO of SFS Capital Nigeria Limited (a member of the Skye Financial Services Group) Patrick Ilodianya, spoke with Goddy Egene on investments and SFS Fixed Income Fund, the company's new product.

The Nigerian financial market is reputed to be one of the best in terms of returns on investments. However, the downturn of 2008 is still affecting the way investors are patronising the market currently. What are the investments outlets available to the average Nigerian?

Investments generally available to Nigerians can be grouped into equities, fixed income, real estate and foreign currency. Under Equities, an investor can invest in equities of companies, which are publicly quoted on the Nigerian Stock Exchange (NSE) or NASD Plc. Equities of profitable companies not listed on the NSE, like MTN Nigeria and WAMCO and equities in privately-owned companies about to list on the NSE. Generally, investors in equities may trade constantly or hold for a long period.

It is generally advised that investors in equities have a long term investment horizon of above three years. Seeing that we are approaching elections, returns from equities can be volatile, anyway. Under fixed income, an investor can simply open a savings account with a bank; have a fixed deposit with a bank; purchase bonds with fixed interest rates from state government, federal government or corporates. An investor can decide to purchase commercial papers issued by companies; or invest in treasury bills issued by the Central Bank of Nigeria. Fixed income investments are generally regarded as low risk investments due to the relative certainty of the projected returns. Generally, investors in Nigeria are very fortunate because the returns on fixed income are materially higher than in other similar frontier markets. Risk-averse investors should allocate much of their investments to fixed Income.

And under real estate, an investor can choose to take on real estate projects themselves by buying or building directly or through an investment club made up of friends. Investors may also choose to invest in a Real Estate Investment Trusts (REIT) like the Skye Shelter Fund (Nigeria's first listed real estate investment trust). Investing in real estate can be very rewarding in the long-term and provides a diversified return. But the high interest rates in Nigeria make borrowing funds from banks to engage in real estate ventures highly risky! A well-structured REIT is, therefore preferable. Under foreign exchange, an investor may simply purchase foreign currency from friends, family and anyone willing to sell and depositing same in a domiciliary account with a bank; an investor may also purchase long tenured US dollar-denominated bonds issued by Nigerian banks and corporates or the Federal Government of Nigeria to earn interest in US dollars ranging from three per cent to 10 per cent per annum.

Where do you recommend investors should put their money for the rest of 2014?

Where you invest would be dependent of a couple of factors which include your age, size of your wealth, projected future responsibilities and their timing and the currency of your future obligations. But in general, most experts would recommend that a larger portion of anyone's investment for the second half of 2014 should be allocated to fixed income investments followed by foreign currency investments. The political and economic uncertainties are likely to have the least negative effect on fixed Income investments in both local and foreign currency.

You recently launched a new product. Can you give more details on the product?

The SFS Fixed Income Fund is a double A rated and carefully designed savings/financial planning product. SFS Fixed Income Fund has a target interest rate of return of about 12 per cent p.a. in addition to the principal invested irrespective of the time of entry and exit. The minimum investment tenor is one month. Exit from the investment takes maximum of five days after a request is made. The SFS Fixed Income Fund is authorised and regulated by SEC. A lot more information can be obtained from the prospectus.

Who are the parties to SFS Fixed Income Fund?

The investment decisions are made by the fund Manager - SFS Capital Nigeria Limited. Other parties include; Skye Bank(Receiving bank); Skye Financial Services Limited(Issuing house); Skye Trustees (Trustees) Stanbic IBTC Bank(Custodians) and Securities Africa Financials (Stockbroker). All the parties are regulated by SEC.

You said it has a target of 12 per cent return p.a. What will the funds be invested in to achieve these returns? The fund managers will achieve this by investing exclusively in the following FGN Backed instruments, which include FGN bonds and treasury bills which are Triple "A" rated and FGN Guaranteed. The fund managers will also invest in fixed income instruments issued by blue chip corporates with a minimum "A" rating.

Can you tell us the specific advantages of investing in the fund from the investors perspective?

There are many advantages including security, liquidity, competitive yields and expertise among others. In terms of security for instance, the fund has an AA rating. This is partly because the fund focuses on investing in risk-free FGN backed instruments and blue chip corporate fixed income instruments with a minimum of "A" rating. The funds focus on fixed Income emphasises that the fund's primary focus is capital preservation with constant appreciation of value.

Talking of liquidity, the fund is very liquid and payment will be effected within five working days of the fund manager's receipt of the redemption form and electronic certificate while in terms of competitive yields by combining long and short dated fixed income instruments, we expect the yields offered by the fund to be more competitive than the rates paid on similar investments. As I said before we target a minimum yield of about 12 per cent p.a. based on projections as published in its prospectus. We are optimistic that the yield would turn out higher.

Also investing in the SFS Fixed Income Fund offers you the opportunity to enjoy the professional fund management expertise of the fund manager. The fund managers are very experienced and by leveraging on other companies within the group have rear access to profitable fixed income investment opportunities.

There is the advantage of investment diversification: The SFS Fixed Income Fund is a unit trust that holds investments in a full range of instruments with numerous institutions, thereby offering the opportunity to achieve good returns from a diversified portfolio of fixed income investments while minimising risks. Besides, the fund is a financial planning product, and subscribers are constantly updated with financial planning tools, advice and recommendations on loans, mortgages, insurance, education planning. Investors are advised to read through the prospectus in details and seek professional advice from accountants, lawyers and stockbrokers for additional clarification at all times.

Can retail investors participate in the SFS Fixed Income Fund and how attractive is this?

The SFS Fixed Income Fund is formed by pooling funds of several individual and corporate investors which gives the fund greater "bargaining power" to obtain higher levels of interest rates when investing. In addition, the fund utilises an innovative means of seamlessly establishing a standing instruction (monthly & quarterly) with any account with a Nigerian Bank using a one step process. Retail investors may save in a convenient manner towards any financial target with the expectation that invested funds will keep appreciating. Investments can be targeted at payment for a house, wedding, rental, school fees among others. In addition, the investment can be used as collateral to acquire urgent loans. Retail investors would also be constantly given financial planning tools and recommendations. It is possible to invest for minors, investment clubs and groups.

Why is the fund attractive to institutional investors?

The fund has a double "A" rating and is approved by the SEC it therefore qualifies as an allowable investment for pension fund administrators, insurance companies, sinking funds by trustees among others. The ease of exit from the fund (maximum of five days) serves as a very liquid and high yielding investment for institutions. In addition, the careful mix of money market instruments and bonds helps diversification. As previously stated, the fund managers are very experienced and by leveraging on other companies within the group have rear access to profitable fixed income investment opportunities.

Can international investors participate?

Yes, international investors can take advantage of high naira interest rates. Entry and exit would be seamlessly coordinated by the fund m anagers at the prevailing exchange rate of the CBN.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: AllAfrica

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