Fund managers turn to state bonds and bills for profits
Kenya Commercial Bank chairman Peter Muthoka (left), Capital Markets Authority CEO Stella Kilonzo and NSE chief Peter Mwangi during KCB’s issue last August. Fund managers are investing in bonds and bills, which have higher returns than stocks. file
Fund managers are getting more attracted to government bills and bonds as they move to protect their assets against inflation and ensure real returns to investors.
They are looking into short-term bonds, less than two years and government securities such as the 91-day Treasury bill since there is uncertainty as to which direction inflation and interest rates will go, making it safer not to commit funds for too long.
“More people are putting money into the short-term securities than the long-term ones,” said Einstein Kihanda, chief investment officer at ICEA Asset Management.
Mr Kihanda said that a mixture of uncertainties is making fund managers to move to short-term securities such as Treasury bills and the two-year bonds over long-term bonds.
Interest rates have an inverse relationship with bond values therefore the higher they go the lower the value of the bonds.
Fund managers say that this explains the demand the Treasury bills as seen by the latest sale by the Central Bank of Kenya (CBK).
Central Bank received bids worth Sh11.47 billion for the 91-day Treasury bill against the Sh2 billion it had asked for which is a 574 per cent oversubscription.
African Alliance Asset Managers chief executive Paul Mwai also said that the rising rates would push money into fixed incomes over other securities. The average yield for the 91-day Treasury bill was 2.18 per cent in November last year but the latest rate is 8.995 per cent. “(Because of increasing interest rates) there might be shift to fixed income because the rates are now more attractive,” said Mr Mwai.
He, however, said that the shift would not be from the selling of shares and reinvesting that money into bonds but rather from new money coming in. “But I do not see it coming a lot from the shares because it is relatively undervalued and you would be selling from a loss position but if it is from a cash position then there might be a shift to fixed income.”
Since January the Nairobi Stock Exchange Index has lost 526.3 points or a 13 per cent decrease since the beginning of the year to 3969.03 points from 4495.41.
James Dry, the managing director of Dry Associates Limited, a local fund manager, said the rates on bonds outweigh returns from stocks.
“The two year bond released yesterday was about 12.59 per cent if you can get that amount of money why invest in stocks,” adding “smart money is tending towards fixed income.”
The top five dividend paying stocks, as measured by their yields are also still not able to offer a higher return than the 12.95 rate of inflation.
BOC Gases has a 8.17 per cent dividend yield, Barclays Bank (7.83 per cent), EA Cables (7.63 per cent), Pan Africa (6.98 per cent) and Bat Kenya (6.78) per cent. Other factors that have made the stock market less active than a similar period last year are the weak shilling and the political scene in addition to the uncertainty of interest and inflation rates.
Foreign investors whose bullishness or lack of it pushes stocks up and down are also affected by these factors.
“These are the same factors which foreign investors look at,” said Mr Kihanda. But he added that managers are caught between a rock and a hard place since the yields on the bonds are barely enough to escape the erosion from the 12.95 per cent rate of inflation but still, they are higher than returns from stocks.
