THE NEW DAWN FOR NIGERIA'S EQUITY MARKET, MUTUAL FUNDS
Olumide Oyetan is the chief executive officer of Stanbic IBTC Asset Management Limited. In this interview with BUKKY OLAJIDE, Oyetan bares his mind on the Nigerian equity market, power sector reform and expected contributions of mutual funds to funding projects in the sector, growth of mutual fund and its contributions to the Nigerian economy, as well as, the different mutual funds managed by Stanbic IBTC Asset Management Ltd.
MANY analysts say the worst is behind us in terms of equity pricing on the Stock Exchange. Do you share this optimism?
Yes we do. The bear trend that persisted since the crash that started in 2008 has been broken and the market has begun to stabilise. The all share index fell by 68.62 per cent from an all time high of 66,371.20 in March 2008 to 20,827.17 as at December 2009.
This trend was driven by significant overvaluations, the exit of foreign portfolio managers due to the global credit crises, the regulation of margin loans and later by CBN's intervention in troubled banks.
In recent times, however, these market drivers have corrected. Nigeria is now one of the cheapest investment markets in sub-Saharan Africa, trading at an average forward price to earnings estimate of 7x.
In addition, strong macro-economic indices such as rising oil prices, growing GDP, increased transparency in the market and confidence have boosted the participation of foreign investors. Lastly, we expect the implementation of the AMCON bill to clear the overhang created by non- performing loans related to margin facilities and the equities market generally.
Do you think the market has put in place adequate safeguards to prevent a recurrence of the massive loses assets experienced in the recent past?
Assets experienced losses as a result of two things, the market was over-priced locally and the global economic meltdown. With both of these issues, the market would not be able to alienate itself as they relate to perception and behavioural finance.
However, the effect was greater as a result of weaknesses in the financial sector. The regulators have attempted to tackle these weaknesses and thus, we believe adequate safeguards are being put in place to avoid re-occurrence.
Example of such safeguards include, the new margin lending limit for banks (10 per cent of total loans and advances), greater focus on risk management framework, Board restructuring to combat corporate governance issues e.t.c
In spite of the market turbulence, the Nigerian Equity Fund maintained respectable earnings ratios. How was this achieved?
The Stanbic IBTC Nigerian Equity Fund ('NEF') has outperformed the NSE all share index by 450 basis points year to date in 2010, returning 24.74 per cent compared to a 20.24 per cent return by the NSE all share index as at 31 October 2010.
This outperformance was achieved through a combination of strategic and tactical asset allocations, sector plus asset class weighting and rotation, market timing and strict adherence to fundamentals.
The fund is now in its 13th year, making it one of the oldest funds in the market. What would you say are the factors that have helped it to weather the storm?
I believe that our ability to maintain a disciplined approach to investing, our strategies and our focus on economic value drivers have been influential in producing consistent excess risk adjusted returns.
There seems to be a plethora of mutual funds listing in the market currently. What are the factors investors should look out for when picking a unit trust scheme they could put their money?
I think the most important factors in considering a mutual fund are the track record of the fund including its strategy, performance, safety, and liquidity, the experience and qualification of the fund manager, their duration of management and the composition of its Board of Directors.
Furthermore, SIAML currently manages five SEC approved mutual funds; Stanbic IBTC Nigerian Equity Fund ('NEF'), Stanbic IBTC Ethical Fund ('TEF'), Stanbic IBTC Bond Fund ('SIBOND'), Stanbic IBTC Guaranteed Investment Fund ('GIF'), Stanbic IBTC Money Market Fund ('SIMM'), to cater for varying risk profiles of investors.
These strategic plays would be expensive for any individual investor to achieve. A sixth mutual fund, which is designed to strike a balance in asset allocation between equities and fixed income securities, will be introduced to the market shortly.
What advantages do mutual funds like yours have over somebody that invests by himself in the Nigerian Stock Exchange?
A professional fund manager provides the benefits of experience, professional and technical know-how, lower transaction costs and an ability to navigate financial markets, which may not be available to retail investors that opt to participate in the market individually.
Also, investing in a fund provides the benefits of diversification, which may not be achievable with individual investing, which would reduce the overall portfolio risk of the retail investor.
Do you think there are strong supporting fundamentals to warrant the new found optimism in the market?
We believe that there is significant value in our market. Our macroeconomic outlook remains stable.
Our equity market remains cheap relative to other sub Saharan African and other frontier markets. We believe that the ongoing reforms in the financial services industry such as the AMCON bill, the banking sector reform, the CBN's risk management focus and the cleansing of the exchange by SEC should also have a positive effect on the economy as a whole.
A few people do actually wonder, there is hardly power, other support infrastructure are almost grounded thereby resulting in closures of factories, and businesses moving to Ghana, and yet the prices of stocks are heading north. Will you advise investors to be wary or cautious?
We acknowledge that the economy has an infrastructure deficit but resolutions are in the pipeline. However, this deficit creates opportunities for long-term investors as most companies listed on the exchange are still profitable and declare dividends annually. Thus, I think investors should focus on fundamentals and this is why we believe investors should select the right Fund Manager with a good track record.
The government is initiating several reforms; with the most exciting being the expected reform of the power sector. How important is this reform to economy? Are we on the right track regarding these reforms?
The power sector reform is one of the most important reforms today. We believe that an industrial revolution will not be possible without power. The government currently plans to generate 40,000 MW of power by 2020.
If this is achieved, we believe that cost of production will become significantly cheaper, operations will become simpler and more efficient, the profit margins of companies will expand and the GDP of the country will rise significantly. The key to a successful reform however remains our ability to execute the power roadmap outlined by the current administration.
What role do you envisage for mutual funds like yours in the new power sector that will be birthed by the reform of the sector?
Mutual funds can be a channel for funding real sector developments that are long term in nature including power sector. Due to the long-term investment horizon of these funds and the size of the assets under management, the funds can be used to contribute to the development of the real sector. However, this is subject to the investment guidelines stipulated by the Fund and approved by SEC.
What is your outlook for next year?
We believe in the growth story for the Nigerian market and its economy. We see a positive link between the reforms, current and proposed, and the growth and development of the economy going forward.
Furthermore, we expect the AMCON to be in full operation next year, mergers and acquisitions to take place, and a successful election and transition into power to occur in May 2011.