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Fund Credit Quality Rating in Nigeria

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Recently in Nigeria, the Debt Mutual Funds (DMFs) have gained significant prominence. A considerable variety of DMF schemes with diverse investment styles and objectives are readily available in the domestic market today. Fund Managers have a variety of options to construct their portfolios and as a result, diverse credit views are now more important than ever before.

Fund Credit Quality Rating (FCQR) is aimed at enhancing its understanding for investors. The FCQR captures the Fund’s overall exposure to the default risk, based on the credit quality of individual securities in the portfolio. The objective is also to provide an independent opinion on its credit quality and act as a tool for the investors to evaluate the credit risk of such fund schemes.

The FCQR index should never be seen as a recommendation to purchase, sell, or hold a security/fund. It does not address or comment on the current market price, suitability for a particular investor or the prospective performance of the fund concerning appreciation, volatility of Net Asset Value (NAV), or yield of the fund.

In rating a Fund’s credit quality, it is important to evaluate the Fund’s investment strategy and portfolio credit risk. Also, it involves the evaluation of the credit quality of individual securities as well as the diversification of portfolios.

A quick overview of the mutual funds scheme in Nigeria shows that 48.5% of the listed 134 funds recorded positive growth in January 2022, while 27.6% of the listed funds closed flat and 23.7% of the funds recorded price decrease in the reviewed month. Although, on average, the market recorded a 0.02% negative ROI, the industry net asset value increased from N1.41 trillion recorded as of 31st December 2021 to maintain a balance of N1.42 trillion by the end of January 2022.

Over the years, the hurdles faced by Fund Managers resulted from challenging macroeconomic conditions, political instability, and foreign exchange volatility. However, Private Equity Firms (PEFs) continue to identify ways to transform their portfolio and deliver long-term value, whilst taking advantage of the opportunities presented by a growing consumer market amongst other trends.

In a symposium titled “Capital Market Inclusion as a Vehicle for achieving Economic Growth and Inclusion” held in Abuja on Tuesday, June 21st, 2022, the Director-General of SEC outlined some factors that will drive inclusion in the market. According to him, Availability, Affordability, Accessibility, Awareness and Adequacy of capital market products will drive inclusion in the market across the country.

Considering the trends of Mutual Funds in Nigeria, there is considerable growth potential, and therefore the need for Asset Managers and Regulators to actively support the awareness drive of the benefits and stability that this Asset class brings to the market.

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