Special funds dilute dominance of money market funds

The dilution of assets under MMFs has coincided with the rising popularity of special funds whose share rose to 20.3 per cent in the review period, crossing the 20 percent mark for the first time.

The attraction of special funds has been underlined by above-market returns for investors so far while fund managers have launched these products on less restrictions including the ability to charge higher fees on clients' assets under management (AUM). Special funds closed the period with an asset base of Sh137.8 billion compared to Sh400 billion for MMFs.

A special fund describes a type of collective investment scheme or unit trust that invests based on a fund manager’s investment strategy and largely covers non-traditional assets such as real estate, private equity, offshore stocks and commodities.

Fewer restrictions in this type of scheme means a fund manager can choose to invest exclusively in select asset classes including high risk instruments which can deliver market-beating returns even as it leaves clients exposed to losses.

“Special funds are becoming popular due to fewer restrictions,” CMA said in a statement.

Fund managers have drawn bigger returns from the special funds by charging higher fees compared to traditional funds such as MMFs.

Read: Fund managers draw boom from higher fees on special funds

A prior analysis of disclosures by fund managers showed that the unique funds are charging fees of as high as six per cent per annum, way above the median two percent charged on funds such as MMFs.

The funds can charge fees above the plain management fee including high performance fees and penalties for early exits allowing fund managers to draw even higher fees.

MMFs, on the other hand, have a ceiling on returns which are set by the underlying invested assets of commercial bank fixed deposits and Treasury bills.

Returns from MMFs have slipped in the past year to mirror falling yields on banks' fixed deposits and Treasury instruments.

The return on the highest yielding money market fund has slipped from as high as 17 percent last year to 11.89 per cent as of Friday last week whilst the bulk of MMFs have annualised returns below 10 percent.

MMFs also hurt from a saturation standpoint for fund managers with 41 schemes all investing in the same asset classes.

The saturation has driven fund managers to establish special funds to differentiate themselves from other players.

“Fees on money-market funds are running anywhere from one to two per cent. That market has become so competitive and fund managers must differentiate themselves by seeking higher returns via access to other markets,” Ndovu Wealth Management co-founder and chief executive officer Radhika Bhachu said in a previous interview.

“Starting special funds also makes commercial sense because you can now charge anywhere from three to five per cent, driving revenues significantly.”

Special funds are the second largest type of unit trusts after MMFs with fixed income funds, equity funds and balanced funds holding a lower proportion of assets at 20.1 percent, 0.5 percent and 0.2 percent respectively.

This translates to an asset base of Sh136.7 billion for fixed income funds, Sh3.3 billion for equity funds and Sh1.6 billion for balanced funds.

The number of special funds stood at 33, as of September, while fixed income funds were 38.

Equity and balanced funds have the fewest schemes, at 15 and 14 respectively.

Fixed income funds invest primarily in government bonds while equity funds primarily sink funds in Nairobi Securities Exchange (NSE) stocks with balanced funds investing between the two asset classes.

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