New inflation calculation tool likely to boost investment yields

The roll-out of a new measure for the calculation of inflation could trigger increased activity in collective investment vehicles (CIVs) such as unit trusts, government securities, pension funds and insurance investment products, analysts say.

While opinion is still sharply divided on the actual impact of the new tool that has led to a sharp fall in inflation levels, fund managers said the CIVs — whose returns trailed the older inflation over the past two to three years — could become more attractive to investors.

While inflation was at more than 20 per cent, fund managers were giving returns of less than 12 per cent, pointing to a negative return of more than 8 per cent.

But with the new inflation measure, most analysts are predicting intensified activity in such investment vehicles driven by positive returns.

“Investment managers will have less pressure to beat inflation numbers, ” said Mr Alex Muiruri, a researcher at Faida Investment Bank.

“With the new method, they can easily achieve returns above inflation as long as the rate does not rise further, ” he said. Investors will be ready to accept lower returns when they consider the prevailing inflation as per the new measure, he added.

Previously, when an investment was producing a 6-10 per cent return, the high inflation numbers appeared to erode the bigger part of the investors’ income.

“Unit trusts are sensitive to perceptions of real cost of living and the change in the tool is likely to trigger more interest in such products”, says an analysis by Zimele Asset Management Services.

“The investment agreements with unit trust funds that have already been signed are likely to remain more lucrative than those that will be based on lower inflation and low-interest rate environment,” the analysis added.

In November the Government announced a change in the method of computing inflation, ditching the arithmetic tool in preference for the geometric method in compiling the data.

And early this month, the Kenya National Bureau of Statistics launched a new consumer price index significantly reducing the importance of household spending on food and setting the stage for reduced volatility in the measure for price movement in the economy.

Policy makers reckon the new figures should enhance the country’s investment credentials arguing that the previous sky high inflation — which were the highest in the region — had become a deterrent to selling Kenya as a favourable investment destination.

“A fall in the inflation rate will mean higher returns on bonds making the bond market a more attractive vehicle” said Mr Eric Kibe, managing director of Sanlam Investment Management (SIM), a fund management firm.

Investors who had put their money in the bourse’s blue chip firms — most of whom also ditched CIVs — saw their returns diminishing as the stock market experienced a bear run at the same time as inflation rose.