New CMA rules to boost confidence in unit trust pools

Starting January 1, 2021, Kenya’s fund managers will have to comply with new guidelines for Collective Investment Schemes (CIS).

The Capital Markets Authority (CMA) rules are broadly aimed at enhancing a savings culture and provide better access to the capital markets for investors, which in turn should support economic development.

Among others, the guidelines standardise reporting and presentation to clients, require full transparency on CIS fund expenses and adopt Global Investment Performance Standards. These should help entrench international best practice and enhance comparability and boost investor confidence.

For almost two decades, CISs have been regulated by the Capital Markets (Collective Investment Schemes) Regulations, 2001, which provide that each scheme should have both a licensed fund manager and custodian as well as a trustee, which must be a bank or financial institution approved by the CMA.

The CIS then pools monies from many investors and those funds are invested in various asset classes, including stocks, bonds or other approved asset types.

The decisions on where funds are invested are made by licensed fund management companies in line with CMA’s approved unit trust deed.

In Kenya, unit trusts have been offered by a number of fund management firms for well over a decade. According to the CMA’s Quarterly Statistical Bulletin of March 31, there were 19 active and regulated unit trust CISs, with funds totaling Sh76.3 billion.

While this is by no means a small sum, CISs have simply not grown to the level of public prominence, which they experience in many other jurisdictions.

This is a little surprising given the ease with which one can invest in a unit trust, often with Sh5,000 or less. Further, unit trusts are designed to be highly liquid, meaning that investors can withdraw their funds at short notice, often a couple of days.

An additional benefit of pooling funds in this way is that it allows a fund manager to spread risk by investing in a diversified portfolio of securities.

Despite these obvious appeals, one of the reasons the public has not fully embraced the sector is the fear of losing or not having access to their money. Cases abound of how people have lost savings through well-publicised corporate failures, as well as through dubious or unregulated investment products, some of which fashion themselves as licensed CISs.

Certainly, when placing their savings in a CIS, investors have a right to expect that it is a transparent and well-governed product.

That is why, the Fund Managers Association supports the CIS Guidance. Having worked closely with the CMA for over a year in its preparation, FMA believes that the Guidance should go a long way to enhance transparency and increase confidence in unit trusts and CISs generally. This in turn should ultimately deliver economic transformation.