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Retail investors are better off investing in mutual funds – Adewumi

By on February 1, 2015

The Group Managing Director, Lead Capital Plc, Mr. Wale Adewumi, talks about investments in the Nigerian capital market and how domestic market participation can be improved, among other issues, in this interview with SIMON EJEMBI

There have been complaints about the shortage of products in the capital market. With the current economic situation, do you think we are likely to have a significant increase in the number of products?

Why not? The market is getting more and more sophisticated by the day. Likewise, investors are getting more and more learned by the day on the different products on offer. It is a joint responsibility for both the regulators and market operators to be able to sensitise investors about the opportunities in the market; not only about buying shares in a company but investing in mutual funds as well. Such funds are even more recommended because for the average retail investor in the market, who may not be sophisticated and knowledgeable enough about the downsides and upsides associated with every investment. By going into a fund, you leave that responsibility to the fund manager who is an expert, he can invest in various investment instruments that are available, thereby relieving the retail investor, whose knowledge of these investment products is limited, of the day-to-day monitoring.

The issue of investor education is, however, a long-term issue. Right now in the capital market, what is being considered by stakeholders is to include capital market studies in the curriculum of our institutions; right from primary and secondary school and even in the universities so that right from the early ages, Nigerians can begin to understand our capital market products and investment. That way, as they grow up they will be able to safely participate or invest in the market from an informed position. Unlike the situation where people without the requisite knowledge invest on their own and when it doesn’t work out, what you have is complaint after complaint.

You said mutual funds are ideal for retail investors, yet we hear more about bonds and equities with only few mutual funds available in the Nigerian capital market. Why are we not seeing more mutual funds in the market?

Like I said, it has to do with awareness by the investors. Again, we are coming from a situation where investors experienced considerable shock, that’s talking about the 2008/2009 market crash. A lot of investors invested directly in equities and when the market crashed, a lot of them were devastated as a result of the loss of their investment. That is why we, operators in the market, have been canvassing a shift from investing directly in equities, which the average retail investor may not be knowledgeable to handle on their own, to investing in funds. The advocacy is for the average investor to look towards funds more than investing directly in equities on the Nigerian Stock Exchange. By putting your money in funds, you are sure that you have a professional manager that is able to handle your money without you losing your investment.

Part of the challenges the NSE faced last year was the exit of a large number of foreign portfolio investors from Nigeria. The development has led to calls for increased domestic participation in the market. How do you think that can be achieved?

I guess the issue of apathy towards the market by Nigerians is coming from the experience that people had. But like I said, for anybody to go into investment, they need to have an investment adviser and they need to consult before they go into the market. It is risky to go into any investment. So, there is the need to talk to a financial adviser or investment adviser about what you have and what we call investment horizon. That is, how long can you stay in the investment? The specialist will then be able to guide you on which instrument to go into and which instrument to avoid. Again, they can also help you to review the amount you have, split it and guide you on what instrument to put the different bits into. The golden rule is, do not put all your eggs in one basket. So, if your total resource is N1m, for instance, it is not ideal that you put everything in one category of investment because if there is a downturn in that particular instrument, it is likely that all your money will go down with it.

With many Nigerians already challenged financially, some investors have lamented that the cost of professional services in the country is too high. Do you agree with that?

I don’t think it is an issue of cost here because if you consider the cost of ignorance on its own, it can be as high as 100 per cent. That is, you lose everything if you are not informed. Even if it is real estate, if you don’t consult an expert and you go and buy a land and the next day some people come and chase you out of the land, even if you go to court, it might take years before the matter is resolved; that is even if you succeed at all. So, it is better to be informed in getting into something than to just try to do it based on your own crude knowledge, which may land you in trouble. Coming to the issue of cost of advisers, typically, if you engage a professional to give you advice for your investment, the fee range is between one and two per cent, which means for the money you took there, if the adviser asks for one per cent of the money and you still have 99 per cent and you are sure that the adviser can grow that 99 per cent for you to recoup that cost you paid, then you are better off.

A lot of reforms have taken place in the capital market in recent years. What role would you say the issuing houses have played, what has really changed for them?

Well, the issuing houses have always been there traditionally as facilitators, as those who help those that need money to access the funds that they require. So, we are part of the reform process and the reforms are all about a change in the rules, tilting it in a bid to either ensure greater efficiency or to reduce cost to those that are raising the money and those that are investing. We have always been involved in the process and our desire is to ensure that the investment climate is improved and there is better understanding from the investing public, especially the retail investors. With institutional investors there are no problems because they are professionals in their own rights. It is the retail investors that need to be helped to be able to have better appreciation and understanding that will help their confidence grow because there is a whole lot that the average person can make by investing rather than just keeping their money in savings account or current account. Some retail people for the fear of losing their money keep it in current accounts, earning next to nothing on it or in savings accounts, earning three per cent. Whereas there are some investment products that guaranty returns; some pay close to eight or nine per cent, some pay up to 12 per cent. It is rare that the average retail person can manage investments, so you need a professional to help you with that.

From your experience, over the last five years, what has been the situation in terms of new issues in the market?

New issues have slowed down, coming from the recession of 2008. So, the rate at which new issues are hitting the market has been slow, principally due to confidence issues. Mostly, now, those who need equity capital have adopted the rights issue method rather than the public offer for subscription method because the rights is targeted towards existing shareholders, who are already part of the company and understand what is going on. All these are because of the apathy, which we are hoping will coalesce very soon and we will begin to see improved investor appetite. That on its own will attract fresh issues of shares.

What would you say to Nigerians at this time when investors are panicking?

I would say that the capital market, like every other market, is a market to make money and if you go into it with good analysis, if you have good information and you go into it, there is always very handsome returns that you can get from it; there is no doubt about that. Again, the capital market, unlike other markets, is not a market where you go in and within a short period, you want to see big returns. You must be patient and be prepared to wait for the medium to long term before you can see the good returns that we talk about. So, it is not a market you go into with a short-term mindset; you must be prepared for the long haul. Also, the kind of money you put there must be money you are prepared to leave for a long period.

 

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  • Ahmad Rufai Hassan

    The information is quite a pieces, wish to know more. We are of course saddle but with conscience.