Unit trust investors brace for lean returns on low T-bill rates

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The money markets have seen reduced trading as uncertainty around the effects of the recent interest rate capping law clouds the sector.

Unit trust investors are bracing for a leaner 2016 compared to last year as returns on money market funds dipped further into the single-digit rate in the third quarter due to lower interest rates on government securities.

The average weighted return for money market funds in Kenya based on assets under management has dropped to 8.26 per cent from 9.1 per cent at the end of June and 13.1 per cent in January, calculations by Kestrel Capital show.

Despite their declining returns, the money market funds mainly invested in short-term government and corporate debt are still one of the better earning investments in Kenya due to underperforming equities and a slowing property market.

Their rates remain above the officially recommended bank deposit rates.

“Based on our survey the return profile on money market funds is 8.86 per cent and 8.26 per cent respectively on either a simple average or on a the asset-under-management (AUM) weighted average basis. We noted a convergence between the two averages in October as the smaller funds lowered their returns faster than larger ones,” said Kestrel head of fixed income Alexander Muiruri in the firm’s latest fixed-income bulletin.

The money market funds have offered a relatively safe haven for depositors fleeing the uncertainties of the banking sector, which has witnessed three banks collapse in the past 18 months.

Kestrel estimates that money market funds account for 76 per cent of the Sh50 billion worth of unit trust assets in Kenya.

READ: Interest rates on T-bills down amid heavy bidding by banks

Among the individual funds, Sanlam Pesa+ and Amana have dropped by 2.9 and 2.4 percentage points since the end of June respectively and are now offering effective annual rates of 10.95 and 11.4 per cent.

Old Mutual, CBA and EIB have seen their annual rates fall by 1.7, 1.8 and 1.6 percentage points respectively over the period to 6.4, 6.8 and 5.7 per cent.

The performance therefore mirrors the trend in interest rates on government securities, where the three and six month and one year Treasury bills have seen a rate drop of 2.6 percentage points on average since the beginning of the year.

Equity funds, which invest in the stock market were 4.4 per cent (0.9 per cent on AUM basis) in the negative in the third quarter of the year, and were outperformed by the benchmark NASI index, which was down 0.2 per cent on a year-on-year basis at the end of September.

The NSE 20 share index is down 15.5 per cent over the past one year.

The Kestrel survey showed a continued exodus in all categories of funds to money market funds as returns on cash were seen as more rewarding.

Analysts also say there has been a reduction in the trading activity of local fund managers, with a lot of activity in the market controlled by foreign investors, who have been averaging over 65 per cent of market participation this year.