Investing Successfully in Nigerian Capital Markets

Investors are paid – or earn money – commensurate with the level of risk they take. As such, successful investing critically depends on how risk is understood, anticipated and managed.

The psychology of investors, unsurprisingly, seeks high returns with the guarantee that the capital invested will not be lost. However, this is not 100% possible, as any investment involves an element of risk. In fact, it is the element of risk that determines the return on investment.

As a general rule, investors are usually compensated according to the level of risk they take. The higher the risk, the higher the return. The investment challenge, then, is to balance risk with returns so that investors are not blinded into taking unreasonable risks by the flicker of implausibly high returns.

The level of risk an individual is willing to take is called their risk appetite. Any potential investor must decide whether they are willing to risk losing money for a higher return or adopting a less risky strategy with less chance of losing money, settling for lower or moderate returns.

Once an investor has established their risk appetite, they must match their investments to that appetite. To build the right investment strategy, investors can research various instruments themselves and build their own portfolios. While many investors have learned a lot over the years through trial and error, a better option for new active investors is to contact an asset manager, like Coronation Asset Management, for advice.

Asset managers are able to help individual investors build a portfolio of investments that matches their risk appetite. For active investors who want to track the performance of their investments in real time, it makes sense to work with an asset manager who can regularly report on performance, advise and guide responses. Since this involves practical 24/7 monitoring, reporting and advice specific to individual investors’ portfolios, active investment support comes at a cost.

Today, there are also online investment options supported by digital platforms allowing individual investors to buy, track and sell investment instruments and funds online. Although the effectiveness of these platforms varies, most require a certain level of investment knowledge and experience. Despite the hype and all the advice and guidance they provide, these platforms are not for new investors.

Alternative investments, such as cryptocurrencies, while appealing to younger generations, have a limited performance track record, are harder to understand and research, and currently represent significantly high risk.

So while there are plenty of investment options, instruments, advisors and platforms out there for budding investors, getting it right – minimizing and managing investment risk – takes a lot of time, attention and of knowledge. It also takes experience.

The average woman or man on the street looking to invest discretionary cash to supplement their income simply doesn’t have the time, knowledge, or insight to function as an active independent investor. People have day jobs. Most of them also cannot afford the fees associated with appointing a bespoke wealth manager.

This is where collective investments, usually offered through group funds or mutual funds managed by investment professionals, become important. Most new investors simply don’t have the time or research ability to actively build and manage bespoke portfolios – or pay a bespoke wealth manager to do it for them. Instead, the best way to start the investment journey is with mutual funds.

Mutual funds are investment instruments that allow investors to place money in investment structures representing a set of companies whose profile and performance match their own risk appetite. Coronation Asset Management, for example, has four passive mutual funds appealing to different risk appetites. Coronation Conservative portfolio (Money Market Fund), for example, is made up of 35% treasury bills, 35% fixed deposit investment, 20% commercial paper (CP), and 10% cash.

Commercial papers are short-term, unsecured debt securities issued by corporations. Although we have a preponderance of CP in the market, it is also important to exercise due diligence to invest in well-rated instruments and issuers. On the other hand, treasury bills are short-term debt securities issued by the federal government, with terms varying between 92, 181 and 365 days. The combination of a CP issued by a company with a high investment grade rating, with treasury bills issued by the FGN and a fixed deposit investment presents a portfolio that can be rated 2 on a scale of 10, with returns reflecting the confidence provided by the high investment grade rating.

Thus, Coronation Moderate Portfolio (Fixed Income Fund & Fixed Income Dollar Fund) includes an allocation to short-term FGN bonds and stocks, in addition to Treasuries, CPs and investments. While these higher yielding FGN bond and stock allocations provide the portfolio with a better rate of return, they also introduce a moderately higher level of risk, presenting a portfolio that can be rated 5 on a scale of 10.

Bonds (FGN, State and Corporate) are long-term instruments (greater than 1 year) issued by the federal government, state government or corporations. Because they have a longer maturity, they offer a competitive offer compared to that applicable to short-dated instruments.

Finally, crowning Growth portfolio (Money Market Fund) includes long-duration, high-performance FGN bonds, investments in high-quality corporate bonds, structured products and money market instruments in addition to equities. As such, Coronation’s Growth Portfolio is suitable for investors with a higher risk appetite, with a risk rating scale of 7 out of a scale of 10.

Investment trajectories are also important when considering investments. While Coronation Asset Management advises investors to stay in their investments for a minimum of six months or a year depending on the composition of their portfolio, the longer the better remains an excellent investment philosophy.

That said, investors have different trajectories. Investors looking for a quick, but high-risk, six-month or one-year return should consider a portfolio weighted toward a conservative portfolio. Those with a two to five year horizon would do well with a moderate portfolio. Those with an investment trajectory longer than five years can also comfortably reduce risk with a growth portfolio.

While Nigerians can contact asset managers like Coronation Asset Management for mutual fund advice or more active participation in the country’s capital markets, Coronation Asset Management also works with institutional investors. Like individuals looking to increase their income, institutional investors such as insurance companies, pension funds, and even parastatals also use capital markets to manage risk and increase income. Coronation Asset Management helps investors develop investment strategies that optimally balance growth and risk in accordance with their own investment mandates.

Anyone can create an investment portfolio with Coronation by registering on the Coronation Investment Management Portal. To get started, visit www.coronation.ng/self-service/

https://www.coronation.ng/insights/Investing-successfully-in-Nigeria%E2%80%99s-capital-markets/