Mutual fund: it’s a bouquet!

A bouquet, according to the Oxford dictionary is “An attractively arranged bunch of flowers, especially one presented as a gift or carried at a ceremony”. These are flowers which are selected at the discretion of the florist or any other person who chooses to arrange them in a bouquet, and fastened together with a ribbon to match. Other definitions, not necessarily quoting verbatim, add that a bouquet could also describe the scent of this arranged bunch of flowers, or it could also be the blend of scents, like perfume or wine.

The florist or the arranger of the bunch of flowers will pick and choose the type, colour, scent, length, shape and size of the different varieties to create something desirable to meet an intended purpose i.e. as a gift for a particular occasion or merely, as earlier mentioned, to be carried at a ceremony.

Value could be added to these flowers to be transformed into a beautifully scented perfume to last longer.

MUTUAL FUNDS 

A Mutual Fund (“the Fund”) as “An investment vehicle is a product used by investors with the intention of gaining positive returns”, according to the financial dictionary, Investopedia.

Mutual Funds fall under the category called collective investment schemes.  They are mutual because the investor teams up with others who share similar investment objectives. They are collective because the Fund Manager will invest the pooled funds together, including yours, in a collection (carefully selected mix) of investment vehicles (fixed income, shares, commercial paper, real estate, certificates of deposits etc.) with the view to maximizing to “gain positive returns” on your investment.

Mutual Funds are either closed or open ended. Classifying them into either money market (short term or within one year) or capital market (long term or over one year) informs the decision as to which vehicles they will be invested in, either fixed income, equities or a combination of both, and what to benchmark them at, either the 91-day Treasury Bill, the stock exchange or a particular well known market index, like the Ghana Stock Exchange Composite Index (GSE-CI).

It is all about how they are structured or programmed (to borrow the computer language) to perform and achieve their desired objectives for the shareholders!

According the Securities and Exchange Commission (SEC) “the Regulator” of Ghana, as at end September 2017 there were 34 Mutual Funds and 19 Units Trusts.

WELCOME DIVERSIFICATION

 There is power in diversification which can produce benefits of beautiful scents as would be derived from a professional perfumery. This benefit can be achieved in terms of maximized returns when you invest in mutual funds. It is the fund manager’s duty to allocate the funds, pooled mostly in small amounts from various sources, to achieve this desired outcome.

But “buyer beware”! Or simply, make sure you understand the mutual funds you seek to invest in. Simply purchasing a mutual fund might not give you adequate diversification to maximize returns. Do the objectives of the mutual fund align with your appetite and risk profile? Is the fund sector or industry specific. For example, investing in an oil and gas mutual fund might spread your money over quite a number of oil and gas companies, but if energy prices fall, your performance of your portfolio is likely to suffer.

As an individual, you may not have the funds enough to achieve the full benefits of diversification on your own. So, as you seek to invest in a mutual fund do your homework. Get the needed information to understand all the dynamics involved from the mutual fund prospectus or from your financial advisor.

KNOWLEDGE THROUGH THE PROSPECTUS

The florist may have the bunch of flowers tied neatly together, and that will signify an intention to achieve a short term goal. If the flowers are kept in a bowl of water, the intention, clearly, will be to keep it for longer (medium term). Should value be added to this bouquet (call it a portfolio) to be transformed into a sweet-scented perfume, then we are clear in our minds that it is for the long term.

But how would you know which particular flowers went into the special or desirable scent of your perfume? It is a complex mix that would require additional information. That is why a mutual funds’ prospectus is intended to provide you with the information on whether the Fund is a short term or long term or invested in debt or equity instruments, or both. Or which sectors it intends to invest in, fees charged and more. For instance, a mutual fund objective could be to achieve capital preservation and growth in income.

The Regulator requires that you get this crucial information to allow you to make prudent and informed investment decisions. Ask questions as a potential investor. It is your fund manager’s duty to provide answers!

THE CUSTODIAN AND THE REGULATOR

Besides the knowledge gained through the mutual fund prospectus, your funds (including money pooled from various investors) will be held separately by a custodian, also called a trustee in the case of Unit Trusts. It is the intention of the Regulator that the custodian will have oversight over the prudent use of your funds and also ensure that the benefits of diversification are achieved in accordance with the Funds objectives.

Again, a Mutual Fund is a company. The other parties involved in the organization and smooth running of this company or indeed investment vehicle, are the Fund Manager, who must be licensed by the Regulator, and whose duty it is to apply their skills and expertise to achieve suitable diversification and competitive returns for shareholders. There is also a Custodian (which could be a bank or insurance company) who basically keeps custody of the funds.

Both the custodian and the Regulator remain firmly positioned in the picture to help you to mitigate your risks through the performance of their various functions, not least ensuring that funds are invested according to plan, i.e. the funds states objectives!

THE ART OF INVESTMENT MANAGEMENT

Like the professional florist who creates a bouquet of flowers, your fund manager’s duty is to choose and create a collection of attractive investment vehicles in a basket, call it a portfolio of funds, which will be constantly trimmed, pruned and tended with the view to  maximizing returns for the shareholder or the investor. Actively managing the portfolio, backed by market knowledge and research is key.

Let’s study below, the objective, strategy, growth in fund (size), comparison with benchmarks and performance of a mutual fund launched in March, 2017.

IDEAL SIKA FUND FACT SHEET

A. Fund summary                                                             B. Fund performance

C. INVESMENT OBJECTIVE

Ideal Sika Fund is a money market fund with the objective of preserving capital, offering competitive returns and providing liquidity to meet short-to-medium term financial needs. The Fund will invest in a diversified portfolio of fixed income securities and other high quality money market instruments with maturity period of not more than 1 year.

D. INVESTMENT STRATEGY

Ideal Sika Fund seeks to achieve its investment objective by investing primarily in a portfolio of high quality money market securities in order to reduce investment risk through diversification.

E. FUND ALLOCATION                         F. YEAR TO DATE (YTD) FUND PERFORMANCE

      

  • From the beginning of year 2018 to 26th February, 2018, Ideal Sika Fund recorded an annualize yield of 08%. This compared favourably with the benchmark 91-Day T-Bill of 13.35% and the 182-Day T-Bill rate of 13.9% as at 26th February, 2018. It is also above the 1 year Government of Ghana Treasury bill rate of 15% and inflation which currently stands at 10.3% as at the end of January, 2017.
  • The Fund has also recorded a year-to-date (YTD) of 23% since the beginning of this year 2018.
  • THE MONEY MARKET: Based on current market trends, Ideal Sika Fund’s annualized yield of 08 % is among the top 5 performing mutual funds on the market.

The writer, Peter Nii Odoi Charway, is the Head of Research at Ideal. Ideal Capital Partners Limited is a SEC regulated Investment and Asset Management firm engaged in asset/ fund management, corporate finance & advisory services and research.

Location: East Legon, Accra, Ghana.    Customer care: 0302541197 / www.idealcapitalpartnersgh.com                                        

 peter@idealcapitalpartnersgh.com / p.niicharway@gmail.com