Unit trust returns plunge below rate of inflationWednesday November 09 2022
Annual unit trust returns have fallen below the rate of inflation, signalling erosion of investor wealth as the high cost of living continues to eat into household budgets and savings.
Analysis of annual rates on shilling-denominated money market funds shows that the majority of the country’s 20-unit trust schemes are paying between eight percent and 9.5 percent to investors.
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The country’s inflation rate in the meantime climbed to a 65-month high of 9.6 percent in October, following a sustained rise in the cost of food due to drought and supply constraints for key grain and cooking oil products due to the Russia-Ukraine conflict.
Rising inflation has the effect of eroding the value of cash holdings especially when they do not earn lucrative interest and is a big concern in a market such as Kenya where the rate on bank savings accounts is 3.44 percent.
Only African Alliance has a higher annual rate compared to inflation at 10.3 percent, from the sample of 13 schemes seen by the Business Daily.
Unit trusts invest the bulk of their assets under management through money market funds, which are primarily invested in Treasury bills and bank deposits.
These two investments have generally offered a return above the average inflation rate, protecting investor funds from devaluation on real terms while protecting them against the volatility of alternatives such as equities.
Treasury bills investors are currently being paid interest at between 9.1 and 10.1 percent across the three tenors, while the average deposit rate in banks stood at 6.82 percent at the end of September, as per the latest data from the Central Bank of Kenya.
As of June, the funds had invested a total of Sh133.36 billion — equivalent to 92 percent of their total assets under management of Sh144.99 billion— in government securities, fixed deposits, cash and demand deposits.
Some of the securities are, however, held in bond or fixed-income funds, and balanced funds.
The reduced ability of the funds to beat inflation in their annual returns has therefore left them at a disadvantage at a time when they have become increasingly attractive to investors seeking help from professionals to manage their investments.
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With as little as Sh1,000, Kenyans can put their money into unit trusts, for investments overseen by a licensed fund manager and custodian as well as a trustee. These are small savers representing the broader economy and a wide range of aspiring individuals who lack the sophistication to invest in capital markets and so elect unit trusts to do so on their behalf.
The pooled funds are also very liquid, meaning that investors can withdraw their funds at short notice, often within just a couple of days.