Capital Markets

Unit trust investors now face leaner times as treasuries fall

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Investment brokers at the NSE. Securities are falling on high liquidity. PHOTO | FILE

Money market unit trust investors are staring at lower earnings as treasuries continue on a decline trend that kicked off in January.

Data from various funds show the effective annual rate on the funds — that have been an attractive alternative to the bearish stock market — has dropped by an average of two percentage points over the past two months with no end in sight for the trend.

Madison asset money market fund is down 3.7 percentage points to 15 per cent, the CIC money market fund down 5.01 percentage points to 11.9 per cent and the EIB money market fund has slid by 3.7 percentage points to 10.1 per cent.

Money market funds are normally invested in short-term government and corporate debt, allowing investors who would not otherwise individually afford the high denomination securities to pool their resources and invest through the unit trust manager.

The funds also offer investors an easier exit route from the securities than would be the case if they had invested directly on their own.

“The decline in the rates can purely be attributed to the government pushing down rates on securities as it now has reduced need to borrow, coupled with the high liquidity in the market that has reduced aggressive bidding from investors,” said Genghis Capital fixed income analyst Vinita Kotedia.

The interest rate on the 91-day Treasury bill has declined from its 2016 high of 11.7 per cent recorded in January to 8.8 per cent in last week’s auction.

On the 182 and 364-day papers, the rates have fallen from 14.3 per cent each to 10.8 per cent and 12.2 per cent respectively.

Recent T-bill auctions have attracted heavy bids from investors, with the oversubscription on the 91-day averaging 120 per cent in February, the 182-day averaging 160 per cent and the 364-day 83 per cent oversubscription.

The bid acceptance rate by the government on the T-Bills has been on the lower side, in spite of the heavy bidding, averaging 67 per cent, 49 per cent and 75 per cent on the 91. 182 and 364-day papers.

READ: Treasury bill rates decline in February on high liquidity

Although the rates on the money market funds have been declining, investment managers say it is too soon to expect a migration of capital from these funds to other investment options.

The returns on the money market fund are still higher than what investors would get from other short term investments, while the funds themselves are not given to impulsive movements in the market.

The interest rates on bank deposits for instance are still far below what the funds offer, at 8.02 per cent on fixed deposit and 1.56 per cent on savings accounts.

“We are not at that point yet where people would move their investments out. The equities market for instance is yet to recover, meaning that by taking out investment from the money fund to an equity fund has no opportunity cost or reward,” said Kennedy Muriithi, chief executive officer at Pan Africa Asset Management.

“There is also mixed sentiment in the market over the direction of the rates, with some expecting them to continue coming off in the next few months while others expect upward pressure. A number of money market funds also invested longer positions from October, when rates were high.”

The fall in T-bill rates will, however, allow the Treasury to roll out its Treasury Mobile Direct system enabling individuals to purchase securities for as little as Sh3,000, thus competing with the money market funds service providers.