FBN money market fund
With FBN holding being one of the best banking groups in Nigeria, and FBN capital winning the 2015 Global and Intercontinental award for the best investment bank and asset manager in Nigeria, it cannot be an overstatement nor over ambition for me to say that working with FBN would be a dream come true for me. Undoubtedly, my purpose for doing this write up is to weigh the available options for executing my plan of investing in the Nigerian money market and it appears from the look of things that the most advisable financial intermediary to choose is the FBN Capital’s Money Market mutual fund?
Before analyzing the advantages and disadvantages of investing in FBN Money Market fund, let me first discuss the financial markets.
The Financial Market
The financial market is a market in which people trade financial securities, financial commodities and mutually interchangeable items of value at low transaction costs and at prices that reflect supply and demand.
Types of financial market
- Capital Market: A capital market is a market where financial products are traded, such as loans, credit, bonds, stocks etc. Capital market helps in the redistribution of capital, from individuals or institutions with surpluses to individuals or institutions with shortages. Capital markets are long term sources of finance. The life span of instruments issued may range from 3 years to 5 years, 10 years and even 30 years.
Capital market consists of
- Stock Market: The stock market provides the facilities for financing business through the issuance of shares or common stock, with an enabling environment for buying and selling the issued shares. Financing in stock market is done through either the primary market or secondary market.
- Primary Market: This is a market for new issues of stock. The issues are usually done through an IPO (Initial Public Offering) by private companies who want to go public. Funds can also be sourced through the issue of new shares by an already established company.
- Secondary Market: This is a financial market where investors purchase securities from other investors having shares in a company, rather than from that issuing company.
- Bond market: The bond market is a market for trading bond which is a fixed income security. A bond is a debt instrument. The buyer loans money to the issuer for a fixed interest payment to him (the buyer). Issuers of bonds may be corporate companies, sovereign or non-sovereign supernational, structured finance and others. Bonds can be sold or bought by investors in credit markets all over the world.
- Money market: This is a financial market where short term securities are traded. Instruments traded in the money market have short maturities; they are highly liquid and can easily be converted into cash. Money market securities consist of treasury bills, commercial papers, municipal notes, federal funds, and repurchase agreements, certificates of deposits, bankers’ acceptance, euro dollars, federal funds and more.The money market is generally seen as the safest of all financial markets; this is due to its highly liquid and conservable nature. This does not imply that there are no risks in the money market; there could be risk of default on securities in the money market, for example a company issues a commercial paper and defaults in the payment.
- Derivatives Market: In English, a derivative can be defined as something that is based on another source. Also in finance, a derivative is something whose value is derived from an underlying asset or assets. They are usually in the form of a contract, and the contract’s price is based on the market price of the asset.A derivative market can be defined simply as the financial market for derivatives. Derivatives can be held in the form of forwards, futures, options, swaps etc. Derivative market can be divided into two; exchange traded derivatives and over the counter derivatives.
- Exchange traded derivatives: Exchange traded derivative contracts follow due process; they are standardized and traded on an organized futures exchange. Derivatives that could be traded include futures contract and options.
- Over the counter derivatives: They are negotiated directly between two parties, without going through an exchange or other intermediaries. Derivatives such as forwards and swaps are traded OTC.
- Forex Market: The forex market is a market where currencies are traded. The forex market has an average traded value in excess of $1.9trillion per day. It is highly liquid and it includes all the currencies in the world. The foreign exchange market is an over the counter market. Each participant trades directly with others. In the forex market (Fx market), there is an fx rate (foreign exchange rate). The fx rate is the price of one currency in exchange for another currency. The pair is named by a label comprising two tags of three characters and each currency is identified by its tag. The first tag in the exchange rate is the base currency, and the second is the numeraire currency; so, the fx is the price of the base currency in terms of the numeraire currency.Let us take an example: If the dollar to naira fx rate which can be identified by USDNGN is traded in Nigeria, the numeraire currency is the domestic currency which is the naira and the base currency is the foreign currency which is the dollar.The base currency which is the USD in this case is regarded as an asset whose trading generates profit and/ or losses in terms of the domestic currency. The above stated example denotes how much naira 1 US dollar is worth. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
- Interbank Market: The interbank market is the market for banks; it is a market where banks borrow and lend to one another. It serves as a very crucial source of finance in order to cope with liquidity shocks. With interbank market being a source of short term finance, the fund borrowed could be seen as a loan; most interbank loans are for maturities of one week or less, with the majority being overnight.There is an interbank rate which is the rate used to calculate interests on the loan. Effectively, the interbank market rate is the rate of interest charged on short term loans between banks.Banks may venture into the interbank lending market in order to manage liquidity and satisfy regulations such as reserve requirement. The interest rate usually depends on the availability of money in the market, on the prevailing rates and on the specified terms of the contract; although they are well known published rates that could guide a country’s interbank market. Such rates include the LIBOR UK (London interbank offering rate), the federal funds rate USA and the Euribor (Eurozone).There is also an interbank fx market which is a top level foreign exchange market where banks exchange different currencies.Currencies traded at the interbank market could be as a result of short term speculative trading on currencies, or sale of currency investments.
Having looked at some of the markets within the financial market, let us now look at why I wish to invest in a money market mutual fund like the FBN capital money market mutual fund.
- Safe investment with little risk to principal: Investors can keep their money in money market funds when they wish to earn above bank deposit interest rates, and when they are unsure of where to invest their money. As we all know, stocks are extremely volatile and bonds have fixed interests, which can result in loss to investors if the economy substantially improves or if the inflation rate is high; this is because the interest received is fixed. The state of the economy determines the price of a bond.
- The money market can serve as a viable form of investment. The returns are generally more than that of a bank saving’s deposit, and there is low risk of loss to the principal invested.
- Liquidity: Money market funds’ trade is done with securities that are in high demand, which can be easily bought or sold. For example treasury bills.
- Mutual fund shares are not pricey, and individual investors can plug into the idea and make some decent returns on their investment.
- Proper Documentation and financial statement on the fund: Financial statements and other records of a mutual fund are for public consumption. Potential investors can peruse and critically scrutinize the financial statement of a mutual fund before investing in it. Also, mutual funds keep proper records, with the NAV (Net asset Value) of the fund listed daily to enhance easy redemption by investors.
- Purchasing power may decline: This may occur in a situation where the inflation rate is higher than the returns in the mutual fund.
- Costs: When running a mutual fund, there are costs to be incurred. The costs can be grouped into operating expenses and shareholder expenses. Operating expenses include management fees, performance incentive fees, audit fees, registrar fees and custodian fees. Shareholder expenses on the other hand are fees imposed on an investor when, he buys, sells or switches mutual funds. They include purchase fees, redemption fees and exchange fees. Depending on the mutual fund, these fees may impact greatly on the return on investment for its investors.
Why choose FBN Capital?
- FBN Capital has been able to grow their money market fund at an impressive rate. The fund size was 23.449 billion naira as at March 31, 2015 and as at 30th November 2015, it has grown to over 68.50 billion naira. This means people trust them enough to continue to invest their money in them, and they must be managing it well to generate returns that satisfy the investors.
- Professional Management: The management team of the fund headed by Mr Kayode Akinkugbe, and the MD/CEO of the fund, Mr Michael Oyebola has wealth of experience. Investing with them would certainly keep my mind at rest; because to grow the fund to that size within such a short period of time means that they are worth their salt; they obviously know what they are doing.
- Conflict of interest is eliminated: Conflict of interest occurs when the directors of a company place their personal interests above their shareholders’ interests; when the management team is out to enrich the team members only at the expense of their shareholders. But where the directors have high stakes in the business they will not only be working for their interests but by implication the interests of all the shareholders. The three directors of FBN Capital Asset Management: Mr Kayode Akinkugbe, Mr Michael Oyebola, and Mrs Funke Ladimeji have 93,027, 119,151, and 1,225 units held respectively at #100 per unit. With these investments in the business, the directors are bound to work for the maximization of all the shareholders’ wealth.
- The requirement of minimal Investment: You can open an account in the money market mutual fund with as little as #5,000. This makes it easy for low income earners and Youth corpers like me to open an account with them.
- Price stability: The fund manager is required to maintain a stable price per unit of #100, which they have done perfectly since inception.
- Consistent returns: FBN Capital Asset Management has been giving consistent return on investment even during the economic downturn period, with yields between 10% to 13% and some highs of 14% and 15%.
The challenges which investors in FBN Capital’s mutual fund will face:
- Management fees: FBN capital asset management charges 0.75% on the NAV (Net Asset Value) of the fund as management fees. This is charged whether the fund performs well or not. Charging management fee when the fund makes loss or fails to make gain is bad for investors, because, if management fee is charged when loss is made or when there is no gain, part of the principal amount of the investors may be eaten up. When compared with other mutual funds, however, FBN Capital’s 0.75% management fee is not that bad because others charge between 1.5% and 3% as management fees.
- Payment of carried interest/performance incentive: Apart from the management fee of 0.75% of the fund’s NAV, FBN Capital Asset Management takes performance incentive. On examining their 2015 financial statement, I observed that 1% of total income was taken as performance incentive in the last two years, that is, for the year ended 31 march 2014 and 31st march 2015. Total incomes for the period were #845,416,000 (naira) and #3,166,377,000 (naira); for such a large fund and huge income 1% performance incentive could be much indeed.Well, where performance is excellent and surpasses all benchmarks and expectations, people would certainly have no objection to performance incentive deduction from the returns to them
From the analysis made above, I believe that investing in FBN Capital Asset Management would be a wise decision. Though as a Youth Corper, I am risk averse but I desire maximum gain on any investment I make. Judging from the fact that we Youth Corpers are at the bottom of the salary scale in Nigeria (we earn the minimum wage), FBN money market fits my investment goal. I therefore look forward to channeling part of my NYSC allowance into this mutual fund. I shall update you guys when I do. Bye.
Joshua Rosebaum., Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions.
Micheal Shearn., The Investment Checklist: The Art of In-Depth Research.