Unit trust returns in 2016 dropped on the back of lower interest rates of government securities compared to 2015 and a poorly performing stock market.
Analysis of returns of a sample of money market funds shows that the fall in effective annual return was 5.3 percentage points on average to 9.8 per cent, although this class of collective investment scheme is still one of the higher paying in the financial sector if compared to bank deposits and equities.
Money market funds comprise the bulk of unit trusts, at 75.8 per cent of the total assets under management and were estimated by Kestrel Capital to be valued at Sh50.6 billion by the end June.
Equity funds comprise 14.6 per cent, balanced funds 7.8 per cent and bond funds 1.5 per cent, and others 0.3 per cent.
“The heavy bias on money market funds was attributed to a dearth in bond investment opportunities, poorly performing equity markets and a divestiture out of investment property into fixed income,” said Kestrel Capital head of fixed income Alexander Muiruri.
Money funds invest mainly in short-term government securities, where rates have oscillated between seven and 12.5 per cent in the second half of the year, unlike in 2015 when they would rise up to 24 per cent.
Among the individual unit trust funds, Sanlam, CIC and Madison Asset money market funds are offering higher effective annual rates in the market at between 11 and 11.5 per cent, while a year ago they were offering rates of between 16.7 and 18.8 per cent.
Others are currently offering single-digit annualised returns, such as Old Mutual (6.4 per cent), British American (8.9 per cent), CBA (7.8 per cent), ICEA (9.5 per cent) and Dry Associates (8.2 per cent). A year ago they were offering between nine and 16 per cent in returns.
Going into 2017, the money market funds will be looking to take advantage of the recent changes in bank interest rates to grow their assets under management.
This class of investments was in the last quarter of the year a beneficiary of the rate-capping law, which also introduced a rule stipulating that banks must pay a minimum of 70 per cent of the prevailing Central Bank Rate (CBR) in interest on earning deposits.
This requirement, alongside that on capping interest chargeable on customer loans at four percentage points above CBR, has shrunk bank interest margins.
Also this means that banks are no longer in a position to offer higher deposit rates as an incentive to attract customer money, which plays into the hands of the collective investment funds.
“Money market funds have seen increased inflows. This is because the money market funds compete with the rates that commercial banks give in deposits.
“While the returns for the money market funds have been under pressure they are, however, higher than what most commercial banks are giving on call and fixed deposits,” said Britam Asset Managers CEO Kenneth Kaniu.