Collective investment schemes (CISs) have grown in popularity and attention over the last 30 years and this trend is expected to continue tremendously. At the end of 2020, the world’s mutual fund industry had US$ 63.1trillion in total net assets (Investment Company Fact Book, 2020), a significant growth from US$ 24.7 trillion in 2010. The United States and Europe are the largest regulated fund markets with 29.3% and 21.8% respectively of the world’s $63.1 trillion in regulated fund total net assets. The Asia-Pacific region has 8.8% of the world’s total net assets, while the remaining 3.2% is attributable to the rest of the world.
Globally, the mutual fund industry can be traced back to the early 1770s, after a financial crisis shook Europe. The stock market crash of 1929 followed by the collapse of the American economy and recessions led to a higher demand for mutual funds as investors diversify away from the stock market risk. The mutual fund industry, over the past decade, has seen substantial growth as evidenced by the year-on-year increase in the net asset value of the various mutual fund companies. Investors across the globe have established strong demand for regulated open-ended mutual funds and unit trust mainly due to the benefits derived from holding shares/units in a fund including professional management, diversification of risk at a minimum cost, liquidity, and competitive return.
The Mutual Fund Industry in Ghana
The Ghanaian CIS industry, a frontier market, has seen robust growth in its total assets over the past 10 years. The first mutual fund, Epack Fund Limited, was launched on 19 October 1996. Since 1996, the number of mutual funds in Ghana has increased significantly. The net asset value of the industry at the end of 2021 stood at GHS7,442,854,183.60 (SEC quarterly newspaper, December 2021) compared to GHS 193,307,218.00 at the year-end of 2010. (SEC Annual Report, 2010) This translates to a growth of 3850% over the past decade. The total number of mutual fund companies and unit trusts in Ghana at the end of December 2021 stood at Sixty-Nine (69) (SEC quarterly newspaper, December 2021).
Evolution of Assets of CISs in Ghana
The asset value of the industry increased sharply from 3,142,376,958.70 in 2020 to 7,442,854,183.60 in 2021 partly due to the agenda of the Securities and Exchange Commission to have all wealth managers move all clients with a total investment of less than GHS 100,000.00 to mutual funds or unit trusts. The growth in the number of CIS and the net asset value of the industry is expected to accelerate as asset management firms without mutual funds continue to launch new funds to meet the needs of clients that fall outside the high-net-worth category. The collective investment scheme industry in Ghana is highly concentrated with the top firms controlling a higher percentage of the industry’s AUM.
With mutual funds and unit trusts being licensed, we foresee a highly competitive market where smaller firms will compete with market leaders for clients. Investors would have numerous options they can select from to achieve the same investment objective. We foresee a customer-centric market where power shifts to the investor, and this could require asset managers to take practical steps not only to meet but exceed the expectations of customers.
Growing AUM of Fixed Income and Money Market Funds
Investors’ demand for money market and fixed-income funds have increased over the years as these funds constituted the largest part of the total AUM of the industry. In 2019, money market and fixed-income funds overwhelmingly constituted about 84.86% of the total AUM of the industry while equity and balanced funds constituted 6.29% and 7.15% respectively. It could be inferred from this trend that most fund investors are risk-averse and thus are not willing to stomach the fluctuations that come with equity and balanced funds. Further, it could also be inferred that the average investor is more biased toward short-term investment as money market and fixed-income funds are within the short to medium-term horizon. The industry is thus dominated by money market and fixed-income funds owing to the volatility of the market at the longer end which makes long-dated instruments unattractive.
The Way Forward
The CIS market in Ghana is a growing industry. We have observed a significant increase in AUM by 136.85% from GHS 3,142,376,958.70 in 2020 to GHS 7,442,854,183.60 in 2021 and the launch of at least 4 funds in quarter 1 of 2022. We expect this trend to continue on the back of mutual funds and unit trust being the main product for retail clients of asset management firms, and the benefits it offers to clients are not limited to affordability competitive returns, diversification of risk, liquidity, and convenience. We advise market players to adopt the measures below to lay a strong foundation for their businesses in upcoming years.
Customer-Centric Approach
An increased number of funds in the market supposes that investors can easily switch between funds at little or no cost. In as much as every rational investor may consider the return on investment decisions, investors may rate asset management firms based on how brilliant and agile their customer service is. The industry would gradually gravitate toward a customer-centric approach where wealth managers will have to be well-positioned not only in meeting the expectations of clients but to exceed them. Asset management firms would have to fully understand their clients and what they value most.
Digitalization - the new normal
In an ever-increasingly competitive business environment, digitalization should be the priority of every business leader in order to thrive. The COVID-19 pandemic has further highlighted the importance of expanding digital financial inclusion. Asset management firms must invest in cost-effective technology and also equip personnel to fully utilize them to boost productivity. Investing should be super convenient and at little cost. By embracing digitalization, Asset Management firms will move operations beyond the traditional boundaries of 8 am – 5 pm and also widen their reach to financially excluded and underserved populations. Digitalization will foster speed, and transparency and also serve as a panacea to distance. Digitalization is the new normal and firms that do not rally behind it will fall out. Smaller asset management firms that lack the resources to invest in technology could partner with third-party companies to leverage their technological resources to drive growth.
Financial Literacy
For investors to make sound investment decisions, they need to be well informed and have a clearer understanding of whatever financial product they are signing up to. To improve the financial capabilities of investors and potential clients of asset management firms, financial literacy training is needed. It’s worrying to note that people still confuse asset management firms with microfinance and savings and loans companies. Financial literacy would help investors to understand the benefits and risks of financial investments to make better investment decisions. Asset management companies must be able to take on the issue of financial literacy head-on and provide clients with the assurance they need to stay invested.
Operational Strength
Given the rising competition in the collective investment industry in Ghana, fund managers must rethink and restructure their cost structures to improve operational efficiency, which would eventually increase operating margins. One way out for the managers of mutual funds and unit trusts especially small and medium-sized firms with limited resources is to focus on their core mandate and consider outsourcing functions along the value chain that are not core to their business operations.
Sources of data: SEC Annual reports, annual reports of mutual funds and unit trust, Doobia.com, Annual report Ghana
