Why Unit Trusts are better than Bank Savings Accounts

A guest post by @smartyannette 

We all desire to save and/or invest at some point in our lives but we fail to accumulate the little extra we have or we lack adequate financial know how to do so. Obviously, we are more likely to save if we have an investment goal and that's why I think Unit trusts are a much better deal compared to saving accounts in banks.

Unit trusts are professionally managed collective investment schemes where investors pool their money. The accumulated funds are then invested in a portfolio of assets (stocks, bonds, bills, etc.) and the individual investors gain in proportion of their investment, if the value of the underlying assets increases.

Common Unit trusts are Money Market funds that invests in short term securities like Treasury bills, Equity funds that invest in a variety of stocks, Bond funds for bonds and finally Balanced funds that combines all these asset classes. The money market funds are considered low-risk and tend to have lower minimum balances. The others are mainly long term investment options. Gains from Unit Trusts range from about 8% to 16% per annum based on level of risk. In comparison, Commercial banks offer about 4% per annum and only fixed deposit accounts compete favorably, with some over 10%.

You should probably choose Unit Trusts over savings accounts because the former offer better rates of return. Also, If you desire to invest in the securities market, but want to avoid the risk of investing in one company then you may consider Unit trusts as a safer and more stable option. Unit trusts also enable one to invest in a variety of securities at once and get periodic interest unlike some banks that only award interest at year end. 

Investment Banks are specialized unlike commercial banks and you are more likely to easily access financial information and advice as well as brokerage services from the former. The recently-ended Capital Markets Authority open day expo in Nairobi showcased a variety of firms that offer their customers the option to invest in Unit Trusts.  They Include Old Mutual, Genghis Capital, Stanbic Investments, Dyer and Blair investment bank, Britam, Apex Capital, Apollo and CIC. The minimum balances are as low as Kshs. 500 at Genghis Capital and Kshs. 100,000 (~$1,200) for some of the other firms.

Most firms give a capital guarantee, meaning that the principal you put in is secure, but it is always safe to check. Management fees and initial fees also vary depending on the type of fund, and while some companies charge it based on the interest earned, others may charge it on principal. Some firms also allow you to access your money upon request via MPesa while others require you to wait for 3 business days for payments to clear. In comparison, money in a savings account is only an ATM visit away so chances of misspending are high.

Share Portfolio February 2009

Quarterly portfolio review after last snapshot in November 2008



The Stable
Diamond Trust ↓
KCB ↓
Safaricom ↓
Scangroup ↓
Stanbic (Uganda) ↓

Changes
- Best performer: Diamond Trust -8%
- Worst performer Stanbic – 33%, Safaricom -23%
- In: none
- Out: none, but sold a little KCB in January

Events & Outlook
- Performance: Portfolio is down 20% in the last three months while the NSE Index is down 25%
- Did not buy KQ and Kengen as expected, but that should happen in the next few weeks as prices continue to drop
- Sat out the Co-OP IPO and made just one trade in three months (sold some KCB in January). Are brokers generating enough income to stay afloat? I hope they don’t try and introduce new charges levied on dormant investor accounts
- Money markets: Got started in money markets by signing up with a CBA Unit Trust
- Bond markets: The Government of Kenya has lowered the minimum investment for GoK treasury bonds to just Kshs. 50,000 (~600)
- Investor awareness: The CDSC started sending out monthly statements by e-mail to investors, cutting out the postal service, and alerting investors each time shares are bought/sold using their account.

5 Investments for 2009

The year is about done and its time to start planning for 2009, with alternatives to build alongside the shares portfolio that will be carried into the new year.

1. Money Markets: Unit trusts are currently offered by African Alliance, Old Mutual, British American, Stanbic, CBA, Suntra, Zimele, ICEA. The bare minimums for signing up are about Kshs. 100,000 (~$1,300), initial fee of 2% and annual fee of 2.

2. Real Estate: It’s time for to undertake a real estate investment that should be done in 2009 following the Pesa Tu’s blueprint though financiers have gone rather shy and some developments appear to have stalled. Have we reached a real estate peak after which it becomes a speculative bubble?

3. Social Networks: Need to invest more in offline social relationships – with buddies, friends, mentors, peers, chama societies and sports for spiritual, social, and physical health.

4. Travel more: My passport has grown mould this year and the need to breathe a different sort of air, see new sights and meet new people - locally and internationally is imperative for 2009. I had always wanted to visit Sauri – the Jeffrey Sachs millennium village, now I must add Kogelo to my travel plans for western Kenya

5. Become a pirate?: Investing is about risk and reward and the numbers are there for the new hot profession of late 2008. It’s not very different from what is my daily bread anyway.

Old Mutual Toboa

Old Mutual Loosens Up Part II (Corrected, thanks Joyce)

A few years ago Old Mutual unit trusts in Kenya had a minimum entry amount of Kshs. 500,000 ($7,462). Last September, they dropped this to Kshs. 200,000 and now they have gone even lower.

Old Mutual Kenya has launched the Toboa Investment Plan which costs just Kshs. 7,500 ($112) per month to start other funds in the family are money market and balanced fund. Speakers at the launch included Deputy Prime Minister Musalia Mudavadi, NSE CEO Chris Mwebesa, CMA CEO Stella Kilonzo, the new boss of Old Mutual Kenya, and Laura Chakava head of Old Mutual Assets in Kenya – who all spoke of the need for affordable collective investment schemes in the country

- Mudavadi said that while local government act mandated that the town councils should have savings and capital funds to cater for unexpected expenses, these are largely ignored – with only 40 of the 175 councils able to comfortably pay their salaries. Also high savings are a part of Vision 2030, but Kenyan savings rates which were already below the average of other African countries, were dropping
- Mwebesa lamented the 1.5 to 1.8 million CDS account holders in the country; the number is un-serviceable (mailing budget for statements of the CDSC costs almost $1m per year – and this compared unfavorably to account holder level in South Africa (100,000) and Brazil (500,000). He said more people should access the market through collective investment schemes such as unit trusts but whose entry levels had been high (elitist) until now
- Kilonzo and Mwebesa both alluded to a recent survey on investors (June 2008) that showed the level of investor education in teh country was not good. Most people relied on the media for share investment information, and were ignorant of the risks of investing in shares.
- Chakava said Kenyans have appetite for investment as shown in the IPO queues and pyramid schemes. OM now gives them an affordable, professionally managed vehicle for investment beyond the unpredictable buy low, sell high mantra that most investors try and follow.

Toboa will invest in fixed income, equities and off shore. OM, which pioneered unit trusts in Kenya, manages about Kshs. 10 billion, but CIS only control about 2% of the NSE. Other OM trusts have an initial fee of about 3 – 7% and annual fee of 2%, the Toboa will probably be slightly higher than this and will use Posta (post office) outlets to collect payments.

Edit: Interesting discussion on Old Mutual investment plans from the Stockskenya forum

Old Mutual, Credit Reference, Insular TZ

Old mutual loosens up: Old Mutual , the pioneer of unit trusts in Kenya has made some radical changes to it contractual savings plans to cope with a changing market place with many unit trust choices from a competitive fund and insurance industry. Changes include;
- Plans will no longer lapse if premium payments are stopped. E.g. when people get retrenched
- Savings (in a lapsed plan) will remain invested until maturity or can be paid out early
- If your saving plan was terminated without a payout, consider it reinstated!

Credit reference rules: Former finance minister Amos Kimunya was able to gazette the rules for operations of credit reference bureaus in Kenya before he left office. Provisions include;
- Bureaus will be licensed by the central bank
- Signup costs are 100,000 shillings ($1,500), a bank guarantee for 1 million and another fee of 100,000 per year
- Bureaus may share info only with a customers’ permission (which happens when you sign for a loan)
- They may only share information for business decision making (evaluate credit prospects)
- Bureaus must keep track of all information they share
- Customers are entitled to one free report a year, and within 30 days of a negative referral
- if a customer complains, and bureau not able to complete an investigation of disputed information within a month, information will be deleted as request by customer

Undugu at work: More Tanzanian IPO news with the upcoming sale of 21% of the Tanzanian Government shares of the National Microfinance Bank (NMB) to raise 63 billion shillings ($54 million) and later to be listed on the Dar es Salaam Stock Exchange. But the offer is open to to individual Tanzanians and companies that are whole owned by Tanzanians - unlike Stanbic (Ug) and Safaricom (Ke) (which Tanzanians were also barred from subscribing to)

Issues for Diaspora Investors

Unit trusts
In all the political news this week, some may have missed this story on collective investment schemes (funds, unit trust), who will now have to get more aggressive (take on more risk) to deliver commensurate returns - and are now asking the regulator (CMA) to relax some of the rules that restrict their investments.

A year ago this post discussed unit trusts and the cost of investment being a major deterrent to the returns they offer (and at the time the NSE was in a much better position). I still have issues with the 3 – 5% initial fee and 2% annual fee charged by many unit trusts.

Real estate
The post-election violence will have a mostly negative impact on property values and in rural Kenya, and in towns like Eldoret, Kisumu, Nakuru and especially in Mombasa (where the real estate boom was driven by visitors/tourism numbers). The cost of building will also go up as demand for supplies will be great. So buy cement company shares (Bamburi, ARM, Portland) the day Kofi Annan succeeds in his mediation efforts

In Nairobi, properties near slums like Ayany (adjacent to Kibera) have been badly affected owners and/or tenants moving out. However there is also increased demand in some of the same areas – perceived to be safer parts of the city, such as Kileleshwa and Westlands. They will also benefit from residents of other towns like Kisumu relocating to Nairobi.

These are also the areas that many Diaspora Kenyans have invested in or are considering investing; and while many have postponed their real estate investment decisions, those already in (with mortgages to pay) will have to wait out the storm. Also it may be wise to set up several investment companies to keep rental turnover and sidestep new tax laws

Also Kasarani which is one place you can still buy land cheaply to build, will have values of land increasing as will parts of Central Kenya.

Taxes, IPO's and Unit Trusts

Taxing corruption
So Parliamentdealt another blow to the war on corruption by denying the Kenya Anti-Corruption Commission with the authority to investigate crimes that happened before it was formed (2003).

KACC as a body has aimed high (going after high profile figures - CEO's, Ministers) but mostly caught small fry leaving many Kenyans dissatisfied and who now consider the Commission to be a waste of money

But there’s another public institution - the Kenya Revenue Authority (KRA) that has achieved milestones in the war of corruption that KACC can only dream of. They have gone after untouchables, and some lawyers and MP’s have had their accounts and salaries frozen and asset seized. Now if only they could publicize this.


RICO in Kenya?

Why not legislate a tax on corruption, so if you’re named, you could lose 90% of property, leaving the accused with 10%? This is humane, but is as good as taking back everything - and bypassing court processes. Hitting Pattni with a tax bill would end 10 years of court injunction and delays and realize some significant gains in cash recovered.

Kenye Re slipping away
My strategy to bypass the IPO of Kenya Re not working as well as I thought. I placed orders at 13 shillings, only for the share to zoom. It's tempting to buy the shares at 17 or 18 and then the balance when they drop (if ever).

Unit Trust get more accessible
Market leader, Old Mutual, has lowered their minimum entry amount for unit trusts from Kshs.500,000 to Kshs. 200,000 (about $3,000). The offer runs till December 2007.

Drummond Investment Bank

Yes, the beleaguered stockbroker Francis Drummond is now Drummond Investment Bank as per the latest licensee list from the equally occupied Capital Markets Authority.

Other Notes
- Zimele has two new unit trusts – a balanced and a money market fund
- Suspended Francis Thuo is now missing from the list of stockbrokers, but so is Faida Securities. Is that an omission?
- Uchumi advisers Royal – who later became Amana, are missing as are B A fin. Mgmt and Interglobal who have officially been deregistered. Meanwhile Inter Alliance International are new investment adviser
- Equity Bank now joins the list of authorized depositories

Safaricom Valuation?
The government has valued the 9% of Safaricom shares pledged to banks who advanced a bridging finance loan to restructure Telkom Kenya at 5.835 billion - placing the whole company’s valuation at about 64.83 billion shillings ($926) million and second to EABL at about $1.4 billion)

Edit: Allowing for banks discounting the shares at 60 - 70% of nominal value, puts the value of the company at between 92 and 108 billion shillings.

Are unit trusts for you?

There was a story in the story in the Standard about unit trusts this week.

At the beginning of the year, I considered stepping away from the NSE, cashing in my gains and putting the money in a unit trust. But a conversation with a custody manager put me off this path. He said that with the management fees at unit trusts were too high for individuals, implying that individual investors not see significant gains unless the trust had exceptional returns.

Certainly any investor familiar with the myriad Kenyan and African investment blogs and sites such as Cold Tusker, First Global Select, Kenya Capital Investments, Mwasjad, Nairobist, Outfoxed, Pesa Tu, Riba Capital, Stockskenya, Odeglenyang, Investing In Africa, Kenyan Entrepreneur, Hisagal, Gathinga – could be more informed as any unit trust investor.

Unit trusts

Approved Collective Investment Schemes in Kenya are:

1. African Alliance Kenya Unit Trust Scheme: Kenya Shilling Fund, Kenya Fixed Income Fund, Kenya Managed Fund
2. Old Mutual Unit Trust Scheme : Equity Fund, Money Market Fund, Balanced Fund
3. British American Unit Trust Scheme : Money Market Fund, Income Fund, Balanced Fund, Managed Retirement Fund, Equity Fund
4. Stanbic Unit Trust Scheme: Money Market Fund, Flexible Income Fund, Managed Prudential Fund
5. Commercial Bank of Africa Unit Trust Scheme: Money Market Fund, Equity Fund