Unit Trust Funds (UTFs) are Collective Investment Schemes that pool funds from different investors and are managed by professional fund managers. The fund managers invest the pooled funds in a portfolio of securities with the aim of generating returns to meet the specific objectives of the fund. Following the release of the Capital Markets Authority (CMA) Quarterly Statistical Bulletin-Q3’2022, we analyze the performance of Unit Trust Funds, as the total Assets Under Management (AUM) have been steadily increasing and they are among the most popular investment options in the Kenyan market. We will further analyze the performance of Money Market Funds, a product under Unit Trust Funds. In our previous focus on Unit Trust Funds, we looked at the Q1’2022 Unit Trust Funds Performance by Fund Managers. In this topical, we focus on the Q2’2022 performance of Unit Trust Funds where we shall analyze the following:
- Performance of the Unit Trust Funds Industry,
- Performance of Money Market Funds,
- Comparing Unit Trust Funds AUM Growth with other Markets, and,
- Recommendations
Section I: Performance of the Unit Trust Funds Industry
Unit Trust Funds are investment schemes that pool funds from investors and are managed by professional Fund Managers. The fund manager invests the pooled funds with the aim of generating returns in line with the specific objectives of the fund. The Unit Trust Funds earn returns in the form of dividends, interest income, rent and/or capital gains depending on the underlying security. The main types of Unit Trust Funds include:
- Money Market Funds – These are funds that invest in fixed income securities such as fixed deposits, treasury bills and bonds, commercial papers, etc. They are very liquid, have stable returns, and, they are suitable for risk averse investors,
- Equity Funds – These are funds which largely invest in listed securities and seek to offer superior returns over the medium to long-term by maximizing capital gains and dividend income. The funds invest in various sectors to reduce concentration risk and maintain some portion of the fund’s cash in liquid fixed income investments to maintain liquidity and pay investors if need be without losing value,
- Balanced Funds – These are funds whose investments are diversified across the Equities and the Fixed Income market. Balanced Funds offer investors long-term growth as well as reasonable levels of stability of income,
- Fixed Income Funds – These are funds which invest in interest-bearing securities, which include treasury bills, treasury bonds, preference shares, corporate bonds, loan stock, approved securities, notes and liquid assets consistent with the portfolio’s investment objective, and,
- Sector Specific Funds – These are funds that invest primarily in a particular sector or industry. The funds provide a greater measure of diversification within a given sector than may be otherwise possible for the other funds. They are specifically approved by the capital Markets Authority as they are not invested as per the set rules and regulations.
As per the Capital Markets Authority (CMA) Quarterly Statistical Bulletin-Q3’2022, the industry’s overall Assets under Management (AUM) grew by 23.1% to Kshs 145.0 bn as at the end of Q2’2022, from Kshs 117.8 bn as at the end of Q2’2021. Assets under Management of the Unit Trust Funds have grown at a 5-year CAGR of 21.2% to Kshs 145.0 bn in Q2’2022, from Kshs 55.5 bn recorded in Q2’2017. The chart below shows the growth in Unit Trust Funds’ AUM;
Source: Capital Markets Authority Quarterly Statistical bulletins
The growth can be largely attributed to:
- Low Investments minimums: Majority of the Unit Trust Funds Collective Investment Schemes’ (CIS) in the market require a relatively low initial investment ranging between Kshs 100.0 - Kshs 10,000.0. This has in turn made them attractive to retail and individual investors, boosting their growth,
- Increased Investor Knowledge: There has been a drive towards investor education mainly by the fund managers on the various products offered by trust funds which has meant that more people are aware and have a deeper understanding of the investment subject. As a result, their confidence has been boosted resulting to increased uptake,
- Diversified product offering: Unit Trust Funds are also advantageous in terms of providing investors with access to a wider range of investment securities through pooling of funds. This allows investors the opportunity of diversifying their portfolios which would have not been accessible if they invested on their own,
- Efficiency and ease of access to cash/High Liquidity: Funds invested in UTFs are invested as portfolios with different assets and the fund managers always maintain a cash buffer. Unit trusts are highly liquid, as it is easy to sell and buy units without depending on demand and supply at the time of investment or exit, and,
- Adoption of Fintech: Digitization and automation within the industry has enhanced liquidity, enabling investors immediate access to funds when withdrawing via M-PESA and receiving their funds within 3 to 5 working days if they are withdrawing to their bank accounts. According to the Central Bank of Kenya, more and more individuals are transacting through mobile money services as evidenced by continuous increase in the total number of registered mobile money accounts which has grown at a 5-year CAGR of 15.5% to 70.3 mn in June 2022, from 34.2 mn recorded in June 2017. Fintech has increased the efficiency of processing both payments and investments for fund managers and made Collective Investment Schemes more accessible to retail investors.
According to the Capital Markets Authority, as at the end of Q2’2022, there were 32 approved Collective Investment Schemes in Kenya, up from 25 recorded at the end of Q2’2021. Out of the 32, only 20, equivalent to 62.5% were active while 12 (37.5%) were inactive. The table below outlines the performance of the Collective Investment Schemes comparing Q2’2022 and Q1’2022:
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|
Cytonn Report: Assets Under Management (AUM) for the Approved Collective Investment Schemes |
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|
No. |
Collective Investment Schemes |
Q1’2022 AUM |
Q1’2022 |
Q2’2022 AUM |
Q2’2022 |
AUM Growth |
|
(Kshs mns) |
Market Share |
(Kshs mns) |
Market Share |
Q1'2022 –Q2'2022 |
||
|
1 |
CIC Unit Trust Scheme |
56,919.1 |
40.5% |
57,126.4 |
39.4% |
0.4% |
|
2 |
NCBA Unit Trust Scheme |
19,757.2 |
14.0% |
20,152.1 |
13.9% |
2.0% |
|
3 |
British American Unit Trust Scheme |
14,527.8 |
10.3% |
13,868.3 |
9.6% |
(4.5%) |
|
4 |
ICEA Unit Trust Scheme |
13,669.2 |
9.7% |
13,669.2 |
9.4% |
0.0% |
|
5 |
Sanlam Unit Trust Scheme |
10,205.1 |
7.3% |
12,676.3 |
8.7% |
24.2% |
|
6 |
Old Mutual Unit Trust Scheme |
6,713.2 |
4.8% |
6,883.6 |
4.7% |
2.5% |
|
7 |
Coop Unit Trust Scheme |
3,294.8 |
2.3% |
3,725.4 |
2.6% |
13.1% |
|
8 |
Dry Associates Unit Trust |
3,215.7 |
2.3% |
3,611.9 |
2.5% |
12.3% |
|
9 |
Nabo Capital Ltd |
2,719.6 |
1.9% |
3,016.0 |
2.1% |
10.9% |
|
10 |
Madison Asset Unit Trust Funds |
2,794.6 |
2.0% |
2,734.3 |
1.9% |
(2.2%) |
|
11 |
Zimele Unit Trust Scheme |
2,165.8 |
1.5% |
2,165.8 |
1.5% |
0.0% |
|
12 |
African Alliance Kenya Unit Trust Scheme |
1,822.1 |
1.3% |
1,743.4 |
1.2% |
(4.3%) |
|
13 |
ABSA Unit Trust Scheme |
287.1 |
0.2% |
1,048.1 |
0.7% |
265.0% |
|
14 |
Cytonn UnitTrust Fund |
725.7 |
0.5% |
771.4 |
0.5% |
6.3% |
|
15 |
Apollo Unit Trust Scheme |
719.2 |
0.5% |
730.5 |
0.5% |
1.6% |
|
16 |
Genghis Unit Trust Funds |
593.5 |
0.4% |
575.1 |
0.4% |
(3.1%) |
|
17 |
Orient Collective Investment Scheme |
257.4 |
0.2% |
262.0 |
0.2% |
1.8% |
|
18 |
Equity Investment Bank |
249.6 |
0.2% |
199.5 |
0.1% |
(20.0%) |
|
19 |
Amana Unit Trust Funds |
29.5 |
0.0% |
27.3 |
0.0% |
(7.5%) |
|
20 |
Wanafunzi |
0.7 |
0.0% |
0.7 |
0.0% |
2.4% |
|
21 |
Genghis Specialized Funds |
- |
- |
- |
- |
- |
|
22 |
Standard Investments Bank |
- |
- |
- |
- |
- |
|
23 |
Diaspora Unit Trust Scheme |
- |
- |
- |
- |
- |
|
24 |
Dyer and Blair Unit Trust Scheme |
- |
- |
- |
- |
- |
|
25 |
Jaza Unit Trust Fund |
- |
- |
- |
- |
- |
|
26 |
Masaru Unit Trust Fund |
- |
- |
- |
- |
- |
|
27 |
Adam Unit Trust Fund |
- |
- |
- |
- |
- |
|
28 |
First Ethical Opportunities Fund |
- |
- |
- |
- |
- |
|
29 |
Natbank Unit Trust Scheme |
- |
- |
- |
- |
- |
|
30 |
GenAfrica Unit Trust Scheme |
- |
- |
- |
- |
- |
|
31 |
Amaka Unit Trust (Umbrella) Scheme |
- |
- |
- |
- |
- |
|
32 |
Mali Money Market Fund |
- |
- |
- |
- |
- |
|
|
Total |
140,667.0 |
100.0% |
144,987.5 |
100.0% |
3.1% |
Source: Capital Markets Authority: Quarterly Statistical Bulletin, Q3’2022, and Capital Markets Authority List of licensees
Key take outs from the above table include:
- Assets Under Management: CIC Unit Trust Scheme remained the largest overall Unit Trust Fund with an AUM of Kshs 57.1 bn in Q2’2022, from an AUM of Kshs 56.9 bn in Q1’2022, translating to a 0.4% AUM growth,
- Growth: In terms of AUM growth, Absa Unit Trust recorded the highest growth of 265.0%, with its AUM increasing to Kshs 1.0 bn, from Kshs 0.3 bn in Q1’2022 while Equity Investment Bank recorded the largest decline, with its AUM declining by 20.0% to Kshs 199.5 mn in Q2’2022, from Kshs 249.6 mn in Q1’2022. Absa growth is be to the fact that it’s a new fund, hence the rapid growth and Equity’s decline is because it is no longer focused on the UTF business,
- Market Share: CIC Unit Trust Scheme remained the largest overall Unit Trust with a market share of 39.4%, a 1.1% points decline from 40.5% in Q1’2022,
- GenAfrica Unit Trust Scheme, Natbank Unit Trust Scheme, First Ethical Opportunities Fund, Adam Unit Trust Fund, Masaru Unit Trust Fund, Jaza Unit Trust Fund, Dyer and Blair Unit Trust Scheme, Diaspora Unit Trust Scheme, Standard Investments Bank, Genghis Specialized Fund, Amaka Unit Trust and Mali Money Market Fund remained inactive as at the end of Q2’2022.
Section II: Performance of Money Market Funds
Money Market Funds (MMFs) in the recent past have gained popularity in Kenya driven by the higher returns they offer compared to the returns on bank deposits and treasury bills. According to the Central Bank of Kenya data, the average deposit rate increased by 10 bps to 6.6% in Q2’2022 from 6.5% recorded in Q1’2022. During the period under review, the 91-Day T-bill and the average deposit rate continued to offer lower yields at 7.9% and 6.6%, respectively, compared to the average MMF yields of 8.9%.
Source: Central Bank of Kenya, Cytonn Research
As per the regulations, funds in MMFs should be invested in liquid interest-bearing securities which include bank deposits, fixed income securities listed on the Nairobi Securities Exchange (NSE) and securities issued by the Government of Kenya. The fund is best suited for investors who require a low-risk investment that offers capital stability, liquidity, and require a high-income yield. The fund is also a good safe haven for investors who wish to switch from a higher risk portfolio to a low risk portfolio, especially in times of uncertainty.
Top Five Money Market Funds by Yields
During the period under review, the following Money Market Funds had the highest average effective annual yield declared, with the Cytonn Money Market Fund having the highest effective annual yield at 10.5% against the industry average of 8.9%.
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Cytonn Report: Top 5 Money Market Fund Yield in Q2'2022 |
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Rank |
Money Market Fund |
Effective Annual Rate (Average Q2'2022) |
|
1 |
Cytonn Money Market Fund |
10.5% |
|
2 |
Zimele Money Market Fund |
9.9% |
|
3 |
Nabo Africa Money Market Fund |
9.7% |
|
4 |
Sanlam Money Market Fund |
9.4% |
|
5 |
Madison Money Market Fund |
9.3% |
|
|
Industry average |
8.9% |
Source: Cytonn Research
Section III: Comparison between Unit Trust Funds AUM Growth and other Markets
Unit Trust Funds’ assets recorded a q/q growth of 3.1% in Q2’2022, while the listed bank deposits recorded a growth of 5.2% over the same period. For the Unit Trust Funds, this was slower than the growth recorded as at the end of Q2’2021 of 6.0%. However, for the bank deposits, it was an improvement compared to a growth of 4.4% recorded in Q2’2021. The chart below highlights the Unit Trust Funds AUM growth vs bank deposits growth over the last five years;
Source: Cytonn Research
Unit Trust Funds’ (UTF) growth of 3.1% was outpaced by the listed banking sector’s deposit growth of 5.2% in Q2’2022. We note that the 3.1% growth rate was slower than the 6.0% growth recorded in Q2’2021, while listed banks deposits growth increased by 0.8% points to 5.2% from 4.4% in Q1’2021, an indication of a relative slowdown and constraints in our capital markets. According to the World Bank data, in well-functioning economies, businesses rely on bank funding for 40.0%, with the larger percentage of 60.0% coming from the Capital markets. Closer home, the World Bank noted that businesses in Kenya relied on banks for 99.0% of their funding while less than 1.0% come from the capital markets. Notably, our Mutual Funds/UTFs to GDP ratio at 1.1% is still very low compared to an average of 69.6% amongst select global markets, indicating that we still have room to improve and enhance our capital markets. The chart below shows some countries’ mutual funds as a percentage of GDP:
Source: World Bank Data
Over the past 5 years, the Unit Trust Funds AUM have grown at a 5-year CAGR of 21.2% to Kshs 145.0 bn in Q2’2022, from Kshs 55.5 bn recorded in Q2’2017. However, even at Kshs 145.0 bn, the industry is dwarfed by asset gatherers such as bank deposits at Kshs 4.6 tn and the pension industry at Kshs 1.5 tn as of Q2’2022. Below is a graph showing the sizes of different saving channels and capital market products in Kenya as at June 2022
*Data as of December 2021
Source: CMA, RBA, CBK, SASRA Annual Reports and REITs Financial Statements
On a REITs to Market Cap Ratio, Kenya still has a lot of room for improvement. The listed REITs capitalization as a percentage of total market cap in Kenya stands at a paltry 0.1%, as compared to 3.0% in the US and 1.0% in South Africa, as of 4th November, 2022. Below is a graph showing comparison of Kenya’s REITs to Market Cap Ratio to that of United States (US) and South Africa:
Source: Online research, Nairobi Securities Exchange (NSE)
Section IV: Recommendations
In order to improve our Capital Markets and stimulate its growth, we recommend the following actions:
- Lower the minimum investment amounts: Currently, the minimum investment for sector specific funds is Kshs 1.0 mn, while that for Development REITS is currently at Kshs 5.0 mn. According to the Kenya National Bureau of Statistics, 74.4% of all employees in the formal sector earn a monthly median gross income of Kshs 50,000 or less and therefore the high minimum initial and top up investments amounts deter potential investors. Furthermore, these high amounts disadvantage the majority of retail investors by restricting their options for investments,
- Update regulations: The current Collective Investments Schemes Regulations in Kenya were formulated in 2001 and have not been updated since, despite the dynamic nature and ever-changing nature of the capital markets worldwide. This has led to the regulations lagging behind by not including provisions for private offers which have grown in importance over the years, and clear special funds guidelines to cater for the sophisticated investors’ interest in regulated alternative investments products. While there is some movement to update the regulations, the same remain in progress and are yet to be completed,
- Allow for sector funds: Under the current capital markets regulations, UTFs are required to diversify. However, one has to seek special dispensation in the form of sector funds such as a financial services fund, a technology fund or a Real Estate Unit Trust Fund. Regulations allowing unit holders to invest in sector funds would go a long way in expanding the scope of unit holders interested in investing,
- Eliminate conflicts of interest in the capital markets governance and allow non-financial institutions to also server as Trustees: The capital markets regulations should foster a governance structure that is more responsive to both market participants and market growth. In particular, restricting Trustees of Unit Trust Schemes to Banks only limits options, especially given the direct competition between the banking industry and capital markets,
- Provide Support to Fund Managers: In our opinion, the regulator, CMA needs to include market stabilization tools as part of the regulations/Act that will help Fund Managers meet fund obligations especially during times of distress like when there are a lot of withdrawals from the funds. We commend and appreciate the regulator’s role in safeguarding investor interests. However, since Fund Managers also play a significant role in the capital markets, the regulator should also protect the reputation of different fund managers in the industry. This can be done by collaborating with industry players to find solutions rather than publicly shunning and alienating industry players facing challenges as this may not be in the best interest of investors,
- Encourage different players to enter the market to increase competition: Increased competition in capital markets will not only push Unit Trust Fund managers to provide higher returns for investors but it will also eliminate conflicts of interest in markets and enhance the provision of innovative products and services, and,
- Improve fund transparency to provide more information to investors: To increase transparency for investors, each Unit Trust Fund should be required to publish their portfolio holdings on a quarterly basis and make the information available to the public. Providing more information to investors will increase accountability by enabling them to make more informed decisions, which will boost investor confidence.
In May 2022, the Capital Markets Authority (CMA) publicized the Draft Capital Markets Public Offers Listing and Disclosures Regulations 2022, meant to replace the Public Offers Listing and Disclosures Regulations 2002, which have been in effect since 2002, with the only amendments done in 2016. The Draft Regulations main objective is to create a more favorable environment in Kenya’s Capital Markets so as to encourage more listings on the Nairobi Securities Exchange. As highlighted in our Cytonn weekly#18/2022, we anticipate that more corporations and State Owned Enterprises will take advantage of this opportunity and seek capital markets funding through IPOs, which will further increase the percentage of funding for businesses provided by the Capital Markets. Additionally, In June 2022, the Capital Markets Authority (CMA) published the final draft regulations; Capital Markets (Collective Investment Schemes) Regulations 2022 and the Capital Markets (Alternative Investment Funds) Regulations 2022. Given the changes in market dynamics, the proposed regulations seek to update the current Collective Investment Scheme and Alternative Investment Funds Regulations while also addressing emerging issues.
We believe that in order to further propel the growth of UTF’s in Kenya, there is a need to leverage more on innovation, digitization and product development in the capital markets. Due to the high demand of innovative and convenient products by consumers in the retail market, the use of technology as a distribution channel for mutual fund products opens up the funds to the retail segment. Furthermore, instead of restricting UTF growth and diversification, regulators should encourage and facilitate it. This will boost the development of the capital markets and encourage the entry of new players.
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.
