12 August, 2020
The outbreak of COVID-19 and its impact on the global economy has made the investment environment unpredictable. By tweaking the approach to monetary policy amid a decline in foreign investor interest in Nigeria, the central bank of Nigeria set yields on government securities significantly lower over the last four (4) months. In the meantime, the inflation rate has risen for 10 consecutive months to 12.56% in June. This means that the returns on virtually all instruments in the local fixed income market are below the inflation rate. Fixed income investors are therefore seeking alternative instruments that can offer superior yield. Cultivating a relationship with a local fund manager could offer several advantages to investors in this season.
One service that a portfolio manager can offer clients is the expertise to spot opportunities. For example, portfolio managers do not only monitor local currency investments, but they often explore foreign currency investment opportunities. The attractive yields offered in the Nigerian Eurobond market is an example of an opportunity that many investors are unaware of. However, some securities in the Eurobond market are currently delivering higher yields than local currency instruments with similar tenors and risk profiles.
While the Eurobond market may offer more attractive returns, investors should embrace a culture of diversifying their portfolio in this season. The search for higher yields could tempt some investors to stake their bets in higher yielding securities but at the cost of the higher risks related to the volatility of returns or the liquidity of the instrument that they may consider. It is the fund manager’s job to review the client’s investment objectives in the context of the economic circumstances of the client. This points to one value of signing up to a discretionary portfolio management agreement with a fund manager. However, there are other benefits to ceding the management of your portfolio to a professional.
If you have done it for a while, you will soon realise that investing in financial markets can be an emotional roller coaster. Markets can be intoxicating when they are rising like they did between January 2006 and March 3, 2008, when an economic boom and elevated foreign investor interest in Nigeria saw the NSE All Share Index rise 176%.
However, markets can also be devastating when they are falling as we saw in the subsequent four (4) years when the NSE All Share Index declined by 69% from its historic peak. This steady decline eroded the wealth of individuals and institutions with some still struggling today under the pressure of share purchase loans.
The volatility and potential losses from ill-advised investments is just one reason why everyone, regardless of age or economic circumstances, should consider employing the services of a fund manager. Furthermore, keeping up with events that can impact the value of your portfolio can be a challenging and time-consuming endeavor.
Using a discretionary portfolio manager relieves you of the pressure associated with constantly monitoring financial markets that are often complex. Financial markets these days are very fast-moving and comprise several elements such as stocks, bonds, exchange rates and commodity prices. The last four (4) months since the spread of the COVID-19 virus across the world has shown that these elements can fluctuate dramatically, sometimes on the smallest piece of news.
Subscribing to a discretionary portfolio management service takes away the headache of continuously monitoring your portfolio. The fund manager takes the decision on what to buy and sell. If you enter a discretionary investment management relationship, what you will be delegating is the execution of an agreed overall investment strategy to a firm with the investment skills and experience to help you succeed.
Achieving success at investing by achieving risk adjusted returns requires discipline. Portfolio rebalancing is one of the keys to successful investing over time.
It is the process of adjusting your holdings by buying and selling certain stocks, funds, or other securities to maintain your established asset allocation. This process is important because it keeps your tolerance for risk at the most comfortable level. For example, if you defined your asset allocation is sixty percent stocks and forty percent bonds. If stock prices go up for a few months, your allocation to them might rise to seventy percent. That means you have to sell some stocks to get back to your desired level. It’s important to maintain your asset allocation because it keeps your tolerance for risk at the most comfortable level. Considering what we know about typical human nature, it is useful to cede this responsibility to a fund manager.
Finally, taking advantage of the discretionary portfolio management service also provides access to structured products. These are investment products in the form of notes issued by entities that could be related or unrelated to the fund manager but secured by underlying assets. While they are often more risky than traditional fixed income instruments, they often offer higher yields and indirect access income yielding assets in the local or in foreign markets. For example, they could offer indirect exposure to bonds issued by Africa governments and corporations. These products may not be for everyone, but they may be an acceptable addition to a diversified portfolio.
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