Uganda’s state controlled social security fund is to hire fund managers to take charge of its substantial equity portfolio at the local bourse.
According to a top official in the National Social Security Fund (NSSF) who requested anonymity, the Fund has taken this path because of increased risks of fraud and insider trading attributed to direct dealings with stockbrokers.
“We have so far selected a local bank to serve as one of the custodians,” said the official.
NSSF’s deployment of fund managers is expected to eliminate significant risks attributed to direct transactions with stockbrokers.
The Fund’s incompetence in managing investment operations has in the past exposed it to fraud by stockbrokers who take some of its internal weaknesses.
Political interference is also blamed for perpetuating fraud within the Fund and overshadowed its impressive growth which has pushed its total asset base to over Ush1 trillion($508m) in the past two years.
NSSF’s long absence from trading at the Uganda Stock Exchange has reportedly attracted pressure from some stockbrokers eager to sell huge volumes of shares in the current bearish market.
Despite an increase in good bargains, the Fund became suspicious fearing potential insider trading reflected in many individual trading proposals submitted to it coupled with influence peddling.
By choosing fund managers, costs of investment operations will be reduced.
According to Gary Watson, an investment expert with African Alliance, an asset management and stock brokerage firm in East and Southern Africa, NSSF’s funds are yet to be applied efficiently despite accounting for Uganda’s greatest source of long term domestic savings.
Mr Watson contends that appointment of external fund managers for NSSF’s investment portfolio would help in accelerating the flow of badly needed funds into the Ugandan economy.
“Fund managers have got many checks and balances for monitoring finances. They are also relatively cheap with a minimum fee of 2 per cent of invested funds coupled with performance based incentives,’ said Kenneth Kitariko, General manager of Africa Alliance Uganda.
But some in the capital markets , like Equity Stockbrokers Ltd’s Edward Ruyonga, of argue NSSF should accord more priority to improving its internal oversight systems than outsourcing critical functions.
“Instead of having one person signing off trading transactions, NSSF needs to establish a team to monitor, review and evaluate its trading activities to enable the Fund detect incidents of fraud and insider trading, he said.
Barclays Bank Uganda Ltd has been selected as one of the custodians for NSSF’s investment monies. However, conditions of service for the fund managers are subject to the Solicitor general’s approval.
NSSF is the largest institutional investor on the USE with an estimated 20 per cent stake of all listed shares and commands the largest trading volumes when active on the bourse.
The USE’s total market capitalisation is estimated at Ush5 trillion($2.5billion) with 10 listed companies, four of which are cross listed.
Though the former NSSF board had set a Ush30 billion($15.2 million) ceiling for the Fund’s investment portfolio at the USE, it was exceeded in 2008 because of participation in the Uganda Clays and New Vision Rights Issues.
The Fund spent an estimated total of Ush5 billion ($2.5 million) on the two transactions bringing its total equity portfolio to Ush35 billion($17.8m) on the local bourse.