Collective Investment Schemes as a safe investment avenue

COMMENT | KEITH KALYEGIRA | Collective investment schemes (CIS) have in recent days been in the news for the right reasons. Savings to the tune of Ugx 1.8 trillion have been mobilized from Ugandan savers for investment purposes over the past five years, representing an annual growth rate of 79%. In the same period, over 60,000 Ugandans have opened CIS accounts enabling them to save through this investment channel. While the growth in assets is commendable and a testament to the hard work of the CIS operators, this represents an annual average account balance of approximately UGX 40 million per saver which is quite high considering the average saving potential of the majority of Ugandans. We would like to see the numbers of savers grow tenfold over the next three years so a lot more education, awareness, and commitment is required from the CIS industry players, the media, Government through ourselves, as well as the public.

The key drivers for the growth of CIS as investment options include: the increase in the number of CIS managers to the current 6 (from 2 five years ago); increased sensitization of the public; a regulatory framework that safeguards savings, driving investor confidence; and the tax-exempt status of distributions to unit holders.

World over, CISs (also known as unit trusts or mutual funds elsewhere), have eased the process of investing in financial assets for the not-so-sophisticated savers. Their growth in Uganda is attributable to the reasonably high returns offered by CIS managers. These returns are largely derived from the interest and dividends from the underlying assets they invest in which are predominantly Treasury bonds and Treasury bills, with two fund managers operating funds exposed to regional equities (shares of companies listed on the Ugandan and Kenyan stock exchanges). T

he flexibility and ease of contributions and withdrawals,  the convenience of having someone administer regular contributions, and compute interest monthly, and periodically issue savers transaction statements, have all contributed to the growing confidence in this form of investment vehicle.

In this article, I will be defining collective investment schemes, identifying investor protection safeguards, the benefits of investing through CIS & finally highlighting the steps needed to invest in collective investment schemes.

Collective investment schemes

A collective investment scheme is an investment vehicle that pools funds from savers. The pooled funds are managed by a professional fund manager based on the investment policy statement and trust deed of the particular scheme. The pooled funds are invested in assets such as shares of publicly listed companies, government bonds, commercial papers, and corporate bonds – the latter two instruments need to be developed in Uganda through reforms of the fixed-income market. In Uganda, CISs’ are known as unit trusts since the funds are managed in schemes established under a trust deed between a trustee and a CIS Manager.

The four main types of CISs (domestic or offshore) are: Money Market Funds (similar to Savings funds) that invest in short and medium-term interest-bearing securities of typically less than thirty-six months; Balanced Funds (sometimes referred to as fixed-income funds) that comprise of short to long term interest bearing securities plus dividend yielding equities; Umbrella funds that invest in medium to long term securities hence suitable to medium to long term investors; and Equity Funds that invest in equities only. Umbrella and Money market funds have attracted most of the savings in CISs, accounting for over 90% of assets under management. In some jurisdictions, umbrella funds include investments in private companies or private equity funds, but this can only happen when the CIS industry assets have grown to the extent that a very small portion of assets is able to make a meaningful investment into private companies or private equity funds.

CIS regulations

CISs are governed by the CIS Act (2003) and four CIS regulations – the Unit Trust regulations; conduct of business regulations; licensing regulations; and finance & accounting regulations, that stipulate allowable asset allocations for the different types of funds, contents of trust deeds, capital requirements for CIS operators, licensing requirements, etc. The regulatory framework delineates the fiduciary duties of the different parties in a CIS structure.

Since a CIS is set up by a trust deed between a fund manager and a trustee, all investor assets are legally owned by a trustee for the benefit of investors.  The trustees are entities that the unit holders can trust with their assets, normally banks in the case of Uganda (Standard Chartered and KCB Banks). The trustees also protect the interests of the investors by monitoring the actions of the CIS manager

Additionally, the CIS structure requires that a custodian holds all investor assets in the names of the trustee. The segregation of duties between a trustee, custodian, and a CIS manager (who essentially provides investment advisory services) ensures that no single entity has control over investor assets. This contributes to better risk management and safeguarding of investor assets. By investing across a wide range of securities, risks are spread out, minimizing the impact of the performance of a single investment on the entire portfolio, as well as providing a saver access to different investment options or with different maturity periods.

CISs are managed by Fund Managers, Trustees and Custodians who are licensed by CMA following a process that ensures that only firms that have the necessary technical and financial competencies to manage savings are licensed.

Where to invest

Normally, an investor would need a substantial amount of money before he or she can create a portfolio of investments directly. If an investor has Ugx 1 million and would wish to invest in all the 10 listed domestic counters at the Uganda Securities Exchange, each investment would be only Ugx 100,000 which is too low when one considers the cost of receiving dividends. On the other hand, the Ugx 1 million can be invested in a CIS fund that can invest in the shares of eight to twelve listed companies, domestically and regionally.

Similarly, with Ugx 1 million it is unlikely that a Treasury or Global Markets official of a bank will pay you much attention when trying to invest in a treasury bond or treasury bill. It makes more economic sense for a fund manager to charge fees for pooled savings in a fund rather than individual savings. The fees charged, when compared to the costs and administrative headache of investing in individual bonds and company shares, and monitoring these investments periodically, makes it worth it. Most importantly, investing through a CIS also gives one the ability to consistently invest a fixed amount of money every month, and get regular updates on the status of their investments through a client statement.

CIS fund managers are also better placed to negotiate better prices in the secondary market, by virtual of their expertise and scale of assets or savings under management, than individual investors. CISs are liquid with savers being able to redeem their units within three working days. This makes them an effective tool for liquidity management by both retail and institutional investors. And despite this, interest accrues every day.

The first step to investing in a CIS is to open a CIS account with a licensed CIS Manager. A list of licensed CIS managers and their contact details is available on the CMA website. Once a CIS account has been opened, and the CIS account funded through a deposit made to the CIS custodian, the process of investing can begin.

In conclusion, we continue to advise Ugandans to only invest in products provided by regulated service providers. Not checking the regulatory status of a service provider before investing exposes one to unnecessary risk, especially when the return on investment seems too attractive. For investors seeking safety, CIS would be an apt investment vehicle. Understanding the benefits, risks, and fees of a CIS is important.

The past performance of CIS managers can also be informative – however past performance does not determine future performance. The key risk of investing in a CIS is the risk of the underlying asset, which fund managers consider when operating CIS schemes. Engaging an investment advisor may ease the process of selecting an appropriate investment vehicle based on an individual’s investment objective(s).

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Keith Kalyegira is the chief executive officer of the Capital Markets Authority of Uganda