The central bank’s latest monetary policy report, in its honesty, meticulously comes to the conclusion that Uganda spends more than it receives. Photo | File
If you were to design capitalism from scratch to make it appealing, one of your first creations would undoubtedly be mutual funds. Over the past decade, these collective investment schemes have revolutionised the global financial landscape, attracting trillions of shillings and granting a new class of investors easy access to financial markets.
In doing so, they have transformed cautious savers into dynamic capitalists who take risks, select their own investments, and leave their mark on the economy. The benefits extend beyond material rewards such as greater choice and higher returns; many people have found the process of managing their finances to be immensely enjoyable.
The brilliance of this revolution lies in its simplicity. By pooling the savings of numerous investors and directing them into liquid assets, mutual funds offer a vast array of investment options in convenient packages. These packages can include anything from treasury bonds and technology stocks to a mix of international equities. An investor merely needs to choose a few from the list, and with less effort than buying groceries, they can swiftly and cost-effectively invest in various sectors of the economy.
This is capitalism in its most accessible and fundamental form. Mr Aeko Ongodia, the founder and chief executive officer of Xeno Technologies Limited, a fund manager, said for an investor to get the best of this they need to have a goal-based aim. His firm has innovated tremendously in that regard.
“We have designed an application that allows you to have a target for a particular goal. You get a recommended amount that you need to set aside at a particular moment in time and then you do that at ascertained time intervals. If you don’t do it that way, more than likely, the time frame you have set up for that goal might need to be increased,” he said.
Innovation
Many of the fund managers that we reached out to said that if it were not for their inventiveness in simplifying the process of saving and accumulating wealth for the general public, the assets they manage, which now amass Shs2.7 trillion as of March 2024, would not have grown to such a size. They primarily attribute this to the growing interest in pension and retirement benefit plans.
These plans have realised how important it is for their members to save and accumulate wealth, and they have discovered that unit trusts are the solution to this problem, said Mr Ongodia. This innovation, he added, is a function of problem-solving for the target market that many fund managers are approaching.
“This has allowed us to construct portfolios that even allowed the industry to grow. But over and above, there is also an interest in just individuals who are seeking interest-bearing instruments,” he disclosed.
As this innovation surges, new products have come up that need to be matched with aggressive protection through intellectual property. Many fund managers are allocating more funds in what they call the umbrella fund. This fund grants access to a wide range of asset classes and investment strategies. This diversification can reduce risk and enhance potential returns by spreading investments across various sectors and markets.
It’s the one that gives the most returns to the investors, with an average monthly yield of around 11 percent. It invests in equities, bonds and money markets.
One potential disadvantage of an umbrella fund is the risk of cross-contamination between sub-funds. If one sub-fund experiences losses or faces regulatory issues, it can affect the overall performance of the other sub-funds within the umbrella.
Some fund managers that don’t have it, like ICEA LION, are fronting the money market fund. A money market fund is more akin to a current account that pays interest, according to Owen Kato, the general manager of ICEA LION Asset Management Uganda Limited, because the money is not just sitting there—it is earning interest every day and can be withdrawn whenever the investor wants.
Industry figures
As of March 2024, Uganda’s collective investment schemes (CIS) managers were handling assets worth Shs2.67 trillion. This is a 15.4 percent increase from Shs2.31 trillion at the end of December 2023, according to data from the Capital Markets Authority (CMA). These assets belong to 79,854 CIS accounts, which is up by 12.8 percent from 70,771 accounts in December 2023.
“This growth can be attributed to two main factors; an increase in the value of underlying assets held and new members joining the managed funds schemes. Additionally, member contributions continue to exceed member withdrawals, creating net inflows,” CMA said in its first quarter report.
The growth in assets and the number of investor accounts is due to several factors. More local investors are becoming aware of the benefits of investing through CIS managers. There are now six CIS managers, and investors feel confident because of strong regulatory protections in place, CMA executives believe.
But data reveals an intriguing trend: the top two CIS managers, UAP-Old Mutual Financial Services Limited (Shs1.9 trillion) and ICEA Lion Asset Management Limited (Shs373.4 billion), dominate the unit trusts market, controlling an impressive 84.3 percent of the total assets under management as of March 31. Other players in the market include Britam Asset Managers Uganda Limited, with Shs164 billion; Sanlam Investments East Africa Limited (Shs163 billion); Xeno Technologies Uganda Limited (Shs58.6 billion); and SBG Securities Limited (Shs33.1 billion).
All six fund managers averagely invested 68.4 percent of the assets they manage into the bond market for its income-generating potential and lower volatility compared to more risky investments such as stocks.
CMA data shows that they put 18.4 percent of their assets in fixed deposits and 6.2 percent of them in the country’s treasury bills. This is the same diversified architecture that pension funds like the National Social Security Fund use in investing funds for their members so that they spread the risk associated with one asset portfolio.
“An analysis of the trend in CIS asset allocation on an annualised basis shows that commercial paper as a percentage of total AUM has increased from 0.2 percent at the end of March 2023 to 1.2 percent at the end of March 2024. The growth in funds allocated to commercial paper is driven by their decent returns,” CMA data shows.
These fund managers sought refuge in the Kenyan bond market in the past year. They invested 1.0 percent more there by March 2024 than they did a year back, which has stalled at 0.001 percent.
According to the capital markets regulator, this surge in Kenyan government bond investments is attributed to the central bank’s stringent monetary policy aimed at stabilising the Kenyan shilling.
UAP-Old Mutual and Sanlam Investments had the fastest-growing assets under management, which increased by 21.9 percent and 17.9 percent, respectively, between December 2023 and March.
Scaling up the industry
Several fund managers contend that this is only the beginning and that if they truly dispel age-old myths, people would be able to invest their money and receive good returns on their daily and monthly compound interest payments.
“I know that people previously had a bad feeling about financial markets, especially when many banks closed down in the country. If we approach them and tell them that the financial industry is evolving and one of the ways you can encourage savings is to have your money kept somewhere and that you will be able to get more value than having money kept in your safe, it will really help,” Mr Kato told Sunday Monitor.
“It works well for people like the traders as they are about to restock, instead of keeping their money, they bring it, save it up in unit trusts and accumulate capital for their business as they are doing their last sale,” he added.
Safety of funds
The safety of these funds, which are held by fund managers, is one of the biggest concerns of investors. But Capital Markets Authority (CMA) is certain that if someone invests Shs1, they should be guaranteed to get their money back, unless they choose to invest in a balanced fund that contains extremely volatile stocks.
“We always ask fund managers to distribute the risks in the portfolios in which they invest their money,” said Mr Denis Kizito, CMA’s director of market supervision, adding that the trust owner does not touch the assets.
And the accounts on which these funds are kept are not on the managers names. This means the manager doesn’t have control, as well as the trustee who has it licensed.
“But there is another person licensed as a custodian to keep these assets. These are banks. So you can see the processes. The manager just issues instructions to the trustee and to the custodian to move the money. We really have good safeguards,” Mr Kizito said.
He added: “The biggest risk we are now facing is that government doesn’t have the resources to counter the risks associated with cyber security and to stop it, additional security layers—such as second authorisation—are required.”
He concluded: “We need to have regulators focus on IT audits. You can order them frequently because, as the regulator, you don’t have money to do those audits.”
UAP-Old Mutual, the largest fund manager, with about 70 percent of assets under management, said: “We actually have a lot of risk and control measures which are in place to prevent anything of that sort to happen.”
Mr Zac Kisesi, the portfolio manager at UAP-Old Mutual, told Sunday Monitor: “We look at the performance of any institution we bank money to. What are the assets of that bank, how strong are they? So we don’t just give a bank money because of the returns they are going to give us. We have extra due diligence.”
He said: “And most of our money is actually in tier one institutions much as we would get a higher return from lower institutions because our focus is more in terms of risk and safety. We also have professionals behind the team with several CFO charter holders. That confidence is why we have 70 percent of the market share.”
