The rising expenditure profile of the nation’s fund managers in the management of the mutual funds under their custody is attracting negative reactions following recent scrutiny by the Securities and Exchange Commission (SEC), BusinessDay investigations have shown.
According to the expense profile conducted by SEC from 2008 to the first quarter (Q1) of 2014, seen by BusinessDay, fund managers in Nigeria’s Collective Investment Scheme (CIS) space have spent a total of N1.446 billion to manage various asset classes whose assets are valued at N179.521 billion, implying an expense ratio of 0.81 percent in the review period.
Of much attraction are the fund managers whose expense ratios are above 1 percent of the Net Asset Value of the asset under management (AUM).
Analysts said at the weekend that the move by SEC, the first of its kind, would provide investors and analysts more information for appraising funds for investment decisions, adding that it also had the potential to attract more interests in the collective investment scheme.
“Whilst disclosure of expense ratio in fund account has been a requirement for some years, renewed focus on its publicity by SEC is expected to enhance the cost efficiency of mutual funds,” said Rasaq Abiola, analyst at Associated Discount House Limited.
An expense ratio is a measure of what it costs an investment company to operate a mutual fund. It is usually determined quarterly or annually and based on the average naira value of assets under management. When operating expenses are taken out of a fund’s assets, it lowers the return to a fund’s investors.
The apex regulator had expressed concern about the impact of rising expense ratio of fund managers to the Net Asset Value of the funds under their management, noting that it affects returns-on-investment (RoI) accruable to investors in the mutual fund space.
Details of fund managers’ expense ratio under the review period, according to the document, show that Stanbic IBTC Asset Management Limited, Chapel Hill Denham Management Limited, and Kakawa Asset Management Company Limited are in the lead of higher spenders.
For instance, Stanbic IBTC Asset Management Limited spent N398.9 million to manage its Stanbic IBTC Nigerian Equity Fund valued at N13.002 billion. This represents an expense ratio of 3.07 percent against the fund’s net asset value.
Also in the period under review, Chapel Hill Denham Management Limited, managers of Paramount Equity Fund, spent N398.9 million to manage the fund with NAV at N12.362 billion, representing expense ratio of 3.23 percent against the NAV.
Chapel Hill Denham Management Limited also spent N518.804.50 to manage Denham Management Millennium Fund with NAV of N27.568 million, with expense ratio of 1.88 percent.
Sterling Capital Market Limited, managers of Frontier Fund, spent N1.885 million to manage the fund valued at N156.381 million, which represents an expense ratio of 1.21 percent.
Commenting on the move by SEC, Femi Ademola, head, research and intelligence, BGL plc, said, “I think the exercise will improve quality of disclosure and transparency of fund managers’ operations. It will provide investors and analysts more information to use in appraising funds and fund managers to help investment decisions,” adding that the regulatory step had the “potential to attract more interests in collective investment scheme and increase total fund under management”.
Further breakdown of SEC’s findings shows that in the equity-based funds, FBN Capital Limited, managers of FBN Heritage Fund, was the only fund manager with negative expense of N20.824 million or expense ratio of -0.44 percent against the fund’s NAV of N4.757 billion.
BGL Asset Management, managers of BGL Nubian Funds, spent N2.873 million to manage the fund valued at N235.649 million, representing 1.22 percent expense ratio.
Looking at the bond fund, Kakawa Asset Management Company Limited, managers of Kakawa Guaranteed Income Fund, spent N139.123 million to manage the fund valued at N4.693 billion, which represents expense ratio of N2.96 percent.
In the ethical funds asset class, Stanbic IBTC Asset Management Limited, managers of Stanbic IBTC Ethical Fund, spent N53.745 million to manage the fund for which net assets are valued at N3.240 billion, representing an expense ratio of 1.66 percent.
Also, Stanbic IBTC Asset Management Limited spent N4.035 million to manage Stanbic IBTC Iman Fund valued at N164.979 million, which represents an expense ratio of 2.45 percent.
In the balanced funds segment, Stanbic IBTC Asset Management Limited, managers of Aggressive IBTC Umbrella Fund, spent N16.722 million to manage the fund valued at N533.943 million, indicating expense ratio of 3.13 percent.
For Stanbic IBTC Balanced Fund, the fund manager also spent N17.930 million to manage the fund worth N1.049 billion, which implies expense ratio of 1.71 percent. Also, Stanbic IBTC Asset Management Limited spent N7.331 million to manage its Conservative IBTC Umbrella Fund valued at N666.134 million, representing an expense ratio of 1.10 percent.
Kayode Omosebi, analyst at UBA Capital, said the move by SEC to disclose fund managers’ expense ratio in relation to NAV would result in improved transparency in this space, thereby boosting investors’ confidence.
“This will allow investors compare the cost of funds in relation to the return-on-investment as costs associated with unit trust funds will be in a uniform way. It is about honesty and ethics. I believe this will also boost fund managers’ efficiency drive to deliver real returns to investors,” Omosebi told BusinessDay.
Abiola of Associated Discount House Limited further said the disclosure of expense ratio and the attendant publicity by SEC would make this important fund managers’ performance appraisal a competition benchmark, going forward. Thus, fund managers would have to minimise transaction cost, going forward, to attract new contributions from investors and retain existing ones, he said.
“Ultimately, renewed focus on this benchmark would improve fund performance and, in the medium to long term, deepen the mutual fund industry as improved performance attracts new contributions and retains existing ones,” he said.
IHEANYI NWACHUKWU
