Mmegi: May you provide a brief overview of Collective Investment Undertakings (CIUs) Act and its purpose?
White: The CIU Act dates back to an old piece of legislation that was promulgated in the early 1990s and subsequently repealed in 2012. However, it took a long time for it to be reconstituted and the new Act commenced last year in February. It was a replacement of the old Act which modernises the legislation.
The purpose of the Act is to provide a framework for the licensing of investment funds, licensing of management companies, which are effectively fund managers, as well as trusts and custodians. It also broadens and introduces new products such as limited partnerships, which were not there under the old Act.
The new Act gives the custodians the responsibility to oversee the investments and supervise the investments that are being “safekept” under them and these custodians are typically banks.
Mmegi: We frequently hear the term “retail investors.” Who or what are retail investors and what should such prospective investors know before signing an investment agreement?
White: A retail investor is an individual investor like you or me, where we invest at an individual level. There are also corporate and institutional investors; the latter are investors such as pension funds, while the former are typically companies, entities investing through intermediaries.
Retail investors are typically not so sophisticated to know about the products out there in the market and we encourage them to seek out documents from the promoters who are marketing investment products. Although the products are usually explained verbally, retail investors should not part with their money without getting a document explaining what a product is and what they are going to gain from it.
They should feel free to ask questions about the risks around a particular investment and satisfy themselves that the product is suitable for them, given their investment goals. They should read and understand the document and make sure that the promoter marketing the product is properly registered with the NBFIRA. If it’s someone licensed, it’s easy for us to contact that person and make enquiries as the regulator.
All non-bank finance institutions licensed by us are required to display their licences prominently but potential investors can also go onto our website where we publish all licencees.
Mmegi: What are some of the approved investment products that retail investors can consider investing in within the capital markets industry?
White: There are various approved products that are available locally. An investor can start by approaching the stockbrokers as they are very close to the listed companies and they would have access to stocks, bonds, certificates of deposit, treasury bills, Exchange Traded Funds, depository receipts and many others. We do not have much of a market on the futures and options, although there are a few people offering these privately. The broker would provide access to all these.
Asset managers mainly have cash that they want to invest and you will find that some of this money has to be invested in certain instruments in terms of our rules. For example, there is no threshold for investment into government securities and the asset managers can invest up to 100% of the assets they have. The asset managers invest both within and outside the country and also have access to products such as unlisted bonds and others.
On the other hand are the mutual funds which are the CIUs. It’s important to stress the types of products under the CIU Act and these include limited partnerships which are usually in the private equity space, as well as the open and closed ended funds.
Mmegi: What is it that the promoters have to disclose to investors about the product offer at the time of signing the investment agreement and during the investment period?
White: Key information to be disclosed especially for CIUs is to share with the investor the prospectus which would describe the product, the risk and return, the information about the product promoter and their address and contacts. In addition, the prospectus should share the key features of the investment such as how often a dividend will be paid, the price of the investment, whether it’s open or closed ended and in the event that it is a closed ended fund, the date of maturity.
The investor must find out details about the rate of return, the price of the product and the possible rate of loss that they may experience if something goes wrong. Any early redemption costs should also be disclosed and investors should be able to get information on the costs they will incur if they sell out or buy into the scheme. They have to know whom they can go if they have a query.
Investors have to receive a statement of their investments, as a minimum, regularly to show them how their investments are performing. Fund managers also often share their research and forecasts on the economy and the market with investors on a regular basis.
Mmegi: Please explain the benefits and risks associated with pooled investments such as mutual funds or CIUs?
White: One of the benefits of pooled investments is that they spread the risk. Although members are retail investors, they don’t bear the investment risk individually. Any risk that would be associated with a unit trust or mutual fund would be spread.
Also, the cost of accessing such an investment is spread and it becomes more affordable, as opposed to going to buy a share on your own, for example. Another benefit is that there these pooled investments are operated by competent financial professionals who research the market. The retail investors then have the benefit of the research that would have been done by a competent professional.
Pooled investments are considered to be low risk. The risk that could be associated with them is when there’s an information asymmetry where products like CIUs are marketed to people in a way that’s not realistic or permissible. This also involves targeting people who ideally should not be getting into these products.
Where the prospectus promises high returns, we encourage both retail and institutional investors to fund out the products where these funds will be invested in. In the market, if a product is going to yield high returns, it’s usually associated with high risk and therefore, it would be worthwhile for an investor, especially a retail investor, to have more knowledge of where these funds will be invested.
Mmegi: We always hear that investments present opportunities as well as risks. Why is it important to have clear investment objectives and why should retail investors know and understand their risk appetites?
White: As previously explained, a copy of offering documents should be given to the retail investor or they must request them and with CIUs, the investor should be given a copy of the prospectus. Each fund should have that prospectus and within that, it should be disclosed the type of fund that they are going to be investing in.
We broadly have two types of funds being offered by fund managers; being an open ended one and close ended fund.
Retail investors should ask themselves what they want to achieve. An intermediary should be able to find out on behalf of the retail investor, what they want to achieve from their investment and they should have that information readily available. It should be clear whether the retail investor wants to invest for returns or for growth, or for income.
The fund manager should be able to map out what it is that the investor wants. For example, a young investor that just finished college, has a Masters and is just starting work, may go for growth in their investment because they want that capital appreciation. Another investor may perhaps be looking for stable income and therefore, would need less risky investments. The fund manager would then, looking at where to invest, be guided on the assets to invest in.
Within this, there is the open and closed end type of funds. An open ended fund is a rolling investment, which is more like a listed company where you buy and sell shares on an ongoing basis. A closed fund has a fixed maturity; it may target private investments and grow these, before exiting after a specific time.
For the retail investor, they may benefit from consulting with an investment advisor who would assess all the opportunities and risks of an investment opportunity, taking into account the age of the retail investor, the amount of cash they have as well as their immediate and long term financial needs.
Mmegi: Sometimes investors don’t know the right questions to ask service providers. What is some of the important information that a potential investor must expect to receive from their service provider, regarding the service they are receiving?
White: The ideal situation would be for a retail investor to approach a fund manager already knowing the type of product that they want to invest in, but it may not be possible. In terms of our rules, our licencees are not allowed to miss-sell. These are professionally skilled people and they are in a position to advise their clients, having identified what’s best for these clients. They are able to explain further and detail the risks and opportunities of each investment type.
We expect the fund managers to sit down with their clients and explain the various products that they have available.
