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Exchange Traded Funds , Collective Investment Schemes and the NSE

Written by Humphrey Kebaya

Tuesday, 24 June 2008

Traditional investment avenues like equity and bonds may at times not provide the desired level of success and return required by an investor. Depending on the level investment sophistication, an investor can exploit various financial instruments and derivatives that typical investors shy away. With a good risk appetite and curiosity an investor can opt to involve himself in collective investment schemes.

What are collective investment schemes? The Capital Markets Authority cites such investments as pools of funds that are managed on behalf of investors by a professional money manager who buy shares, bonds, or other securities according to specific investment objectives established for the scheme. Typical CIS's available to Kenyans include mutual funds and units funds.

Despite being in existence not far as in the early 1920s these C.I.Ses are still yet to take root in Kenya. Infact the CMA has decried the under-utilisation of Collective Investment Schemes (CIS) which the authority describes as below performance expectations.

Despite being an industry worth over Kshs 20 Billion(less than 2% of NSE Market Capitalisation) coupled with various benefits such as risk diversification, industry experts are concerned about the low investor penetration in CIS.

Some of the impediments to investor penetration I cite include the high cost of investing in mutual funds and unit funds and below industry return derived from these funds. Typical unit trust cost around Kshs 100000 with low yields of 5 - 6 %.An investor would wonder why spend Kshs 100000 on a fund that I am required to exit out only after 2 years?.Recently launched South African Bonds were worth around Kshs 10000!!!! The cheapest fund in the Kenyan Market is the Zimele Fund that went for around Kshs 5000 at its inception.

Seeking to address these and many other issues the CMA organised a workshop to solicit views on how to enrich studies on the impediments to growth of the CIS industry and the viability of the Real Estate Investment Trusts (REITS) in Kenya.

However these recommendations fall abit short.

Why haven't we considered the introduction of Exchange Traded Funds or ETFs as they are commonly known? Exchange Traded Funds (ETFs) are open funds that issue certificates, traded on the stock exchange, against a portfolio of securities, the majority of which, track the performance of one of the exchanges’ price indices. The beauty of ETFs is that they can trade like ordinary shares and even our traditional CDS Settlement System can handle such transactions. Mutual funds are good as they are in the hands of professionals however ETFs are better because they are based on indices, so you get more or less the market return so they are more efficient & economical. Furthermore ETFs are more transparent, and their prices can be viewed & traded any time during the trading session unlike mutual funds which do not trade in the open market. ETFs are more flexible, giving a diversified portfolio of investing in 30 stocks (NSE 20 Index or even The London FTSE at the local NSE trading floor), imagine by just buying one ETF! Now the cream on the cake is that, ETFs have market makers to ensure that they are liquid all throughout the trading session unlike mutual funds with have restrictions on when to exit.it could be 12 months or 18 months depending on the fund agreements. Lastly ETFs have more features, Investors can sell short, use a limit order, buy on margin, and invest as much or as little money as they wish (there is no minimum investment requirement) in ETFs. Mutual funds do not offer these features.

One might wonder are there ETFs in the African Continent and how can I as a Kenyan invest in these funds? Yes there are ETFs in Africa around 6 ETFs in South Africa and one to be introduced in Egypt.

On our next issue we will reveal which local investment firms invest in these ETFs.