Five new players entered the unit trust market in Uganda in July, attracted by pension reforms and improved economic indicators.

Unit trusts are collective investment schemes that attract savings from low income earners for investing funds in assets that yield strong returns.

Following its annual licence review last month, Uganda’s Capital Markets Authority issued three new unit trust management licences, and two for unit trust custodians after almost nine years of inactivity, a move that reflects a positive outlook from the regulator and more attractive market conditions.

Stanlib Uganda, Insurance Company of East Africa Uganda and UAP Financial Services Ltd received unit trust management licences in early July, bringing the number of licensed players to four, alongside African Alliance Uganda, the pioneer.

Standard Chartered Bank and KCB Uganda received unit trust custodian licences, bringing the total number to three, including DFCU Bank.

Licensed custodians, besides holding funds on behalf of unit trust schemes, also manage funds for clients, creating additional opportunities for banks to accumulate cheap deposits for competitive lending.

Lack of widespread distribution channels and a single custodian bank has led to poor performance among pioneer players, resulting in low growth in the unit trust market. African Alliance suspended its unit trust business in 2011, while weak growth in the market also affected DFCU, which almost quit the business.

However, ongoing pension reforms and signs of economic recovery have lured new players into the market. Inflation eased to single digit levels last year, and a relatively stable shilling has boosted net returns on investment linked to consumers’ saving.

Whereas the new entrants are banking on small pension schemes and countrywide distribution channels to grow their portfolios, the growing number of young professionals saving for medium and long term needs is an opportunity for individual based products.

According to regulations issued by the Uganda Retirement Benefits Authority, pension schemes can invest 100 per cent of their funds in a collective investment scheme. These changes have prompted the return of African Alliance, set for September, to reclaim ground lost to the new players.

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“Besides tapping into small pension schemes seeking cheaper avenues to manage their funds, we are targeting ordinary business people with spare cash to invest and young professionals keen to save for mortgage facilities and further studies. Our unit trust products will provide for exit at short notice without incurring penalties.

“Through our parent company’s countrywide network, we intend to dig deeper into the retail market and enrich our product portfolio over the long term,” said Patrick Ndonye, general manager at UAP Financial Services.

Widespread

UAP has several retail outlets in Uganda, with a focus on general insurance products.

The increase in unit trust custodian agents is also expected to minimise transaction costs for scheme managers, according to the CMA. The monopoly previously enjoyed by DFCU was partly blamed for low entry rates in the market, due to the high fees charged.

“The increased number of custodians has created room for lower professional fees with new players offering discounted rates. This will enable us to slash overall administration costs by 50 per cent, resulting in annual management fees of 1.5 per cent, compared with two per cent in the past.

“The pension reforms will also help us mobilise corporate clients with small pension schemes under a unitised investment scheme that bears lower administrative costs and higher returns for our business,” said Peter Jarvis, head of East Africa at African Alliance Asset Management Division.

However, worries about clashing interests among banks and sister companies offering unit trust products have already emerged.

According to Annette Rumanyika-Mulira, General Manager at Stanlib Uganda, they anticipate some friction between Stanlib and sister company Stanbic Bank as the former digs deep for clients with significant savings suitable for their business.