Uganda’s fund managers face low returns as inflation falls

Saturday August 31 2013

Traders at the Uganda Securities Exchange. Interests on bonds bought this year are likely to be lower than in 2011. Picture: File

Fund managers in Uganda are expected to report lower returns this year, caused by depressed earnings from their bond holdings amid a continued drop in interest rates.

In 2011, managers reallocated their investments, reducing their equities holdings in favour of government securities, to take advantage of the inflation-induced rise in interest rates.

In September 2011, with inflation at 30.5 per cent and the CBR rate at 23 per cent, many fund managers opted for two-year bonds at high interest rates. Many bonds bought in this period matured in 2012.

While results for that year were stellar, 2013 is likely to be a lot weaker.

“Many fund managers are likely to earn windfall incomes tied to government bonds and fixed deposits locked in during 2011. Lower rates on fixed deposits and government bonds however could affect industry earnings for 2013,” said Paul Bwiso, general manager at Dyer and Blair Uganda Ltd.

With interest rates on two- and three-year bonds averaging 18-20 per cent, and fixed deposit rates at 19-22 per cent highs in the second half of 2011, most fund managers chose to hold these investments to maturity — a scenario that is yielding massive gains.


Analysts say fixed income assets, like Treasury bonds and fixed deposits, account for 70 per cent of assets held by local pension schemes, with many constituted by financial assets acquired in 2011.

Inflation averaged six per cent in 2012, down from 23 per cent in 2011, according to data compiled by the Uganda Bureau of Statistics.

Looming maturity dates for most of the windfall assets have created some panic among fund managers eager to sustain large returns, with NSSF looking to Kenyan and Rwandan financial markets for more opportunities.

“Some of the fixed deposits negotiated in that period bear interest rates of 20-25 per cent, far higher than current market rates. Seeing that most of them are expected to mature by the end of this year, we are investing heavily in Kenyan bonds with 15- and 20-year maturity periods, alongside new opportunities in the young Kigali market so as to bridge the anticipated investment gap,” said Geraldine Busuulwa, NSSF’s deputy managing director.

The fund declared a 10 per cent interest on members’ contributions for 2011, four per cent higher than 2010, from strong earnings on fixed income assets.

Currently, interest rates on medium term deposits have dropped to 6-8 per cent under rising liquidity levels on the interbank market that have reduced the cost of borrowing between commercial banks.

Last week, overnight and one week lending rates stood at 6.5 per cent and 11 per cent, according to the Stanbic Bank market report.

Research data from Uganda’s Capital Markets Authority shows that the share of bank deposits in NSSF’s portfolio stood at 45 per cent in 2010/11, and dropped to 25 per cent in 2011/12.

The share of government bonds rose from 23 per cent to 48 per cent during the same period. In comparison, the share of equities increased marginally from 10 per cent in 2010/11 to 12 per cent in 2011/12.

Total funds under management rose to Ush446 billion ($172.4 million) in 2011, but dropped to Ush407 billion ($157.3 million) in 2012, a trend blamed on the dissolution of some pension schemes that reportedly were not comfortable with new industry legislations on their activities.

By March 2013, total funds under management had rebounded, grossing Ush511 billion ($197.5 million) due to mobilisation of new clients by some fund managers.

“Increased efficiency levels among fund managers are beginning to pay off. The significant reallocation of resources from equities to fixed income assets experienced since 2011 has clearly boosted fund managers’ earnings.

“The new spirit of competition under a liberalised pension industry has put pressure on many players to up their game, and NSSF is likely to follow suit despite its shortcomings,” said Patrick Ndonye, general manager at UAP Financial Services Ltd, a stockbrokerage and asset management firm.

But some investment analysts have criticised fund managers’ obsession with annual inflation patterns, and believe a three-year assessment benchmark would offer better quality reviews of investment performance.

Patrick Mutimba, a member of the Uganda Society of Investment Professionals, said, “Inflation movements can only be weighed effectively after 36 months against a fund’s returns, when dealing with significant investments in fixed income assets."

"Despite bureaucratic investment procedures, NSSF looks well placed to deliver another double digit return backed by 70 per cent exposure to interest rate driven assets.”

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