Financial marketsMoney Market Funds performance in Kenya in light of Covid-19.

Selina LiyengwaFebruary 4, 202339758 min
Source: Unsplash

The novel coronavirus has inarguably been the topic of discussion since the beginning of the new decade with the first case of the virus being reported on 31st December 2019 in Wuhan, China. In addition to the adverse impact of the virus on the health industry, the virus also affected other sectors in the globe such as international trade and financial markets.

As the virus spread and affected major economies worldwide, most investors opted to place their money in ‘safer’ assets such as gold. This was evident as the demand for gold drove up its price and performance by 9.7% as of 13th March 2020. In Kenya, investors in the stock market reacted by taking a net selling position. Most foreigners who had invested in the Kenyan stock market sold their equity holdings to purchase gold and fixed income securities due to the uncertainty in the market. These alternatives were deemed a safer option given the circumstances.

With investors becoming more and more risk-averse, low-risk investment options quickly gained popularity with investors. One of the low-risk investment options is Unit Trust Funds (UTFs).

According to Cytonn, an investment and real estate company, UTFs are collective investment schemes that pool money together from many investors. The money is managed by professional fund managers, who invest the pooled funds into a portfolio of securities to achieve the objectives of the trust. The funds in the unit trust earn returns in the form of dividends, interest income, and/or capital gains depending on the asset class the funds are invested in.

The main types of Unit Trust Funds include Money Market Funds (MFF), Equity Fund, Balanced Fund and Fixed Income fund. This article majorly focuses on Money Market Funds. MMFs primarily invest in short-term debt securities with high credit quality and minimal investment risks such as fixed deposits, treasury bills and commercial paper. Money Market Funds are conservative funds designed to serve the needs of investors whose primary goal is capital preservation, and who are willing to accept a modest return on their investment portfolio in return for more safety and liquidity. These features attract risk-averse investors especially in times of high stock market volatility.

According to the Capital Markets Authority, Money Market Funds accounted for Kshs. 93.9 billion which makes up 89.6% of all the funds under management by Collective Investment Schemes for the quarter ended December 31, 2020. It was also noted that investments in money market funds have been growing steadily in the last seven quarters compared to the other funds as shown below:

Source: Capital Markets Authority: Collective Investments Scheme Quarterly Report: Quarter 4 2020.
Source: Capital Markets Authority: Collective Investments Scheme Quarterly Report: Quarter 4 2020.

While Equity Funds have the potential to outperform stock market indices and deliver better yields than Money Market Funds over the medium to long term, preservation of capital in Money Market Funds is the main contributory factor for its popularity in Kenya.

The popularity of Money Market Funds in Kenya is attributable to the fund’s affordability in its initial and additional investment requirements, its high liquidity as well as the daily compounding of interest. While initial deposit and additional investments may vary depending on the fund, Money Market Funds present a low risk, affordable and high-yielding investment opportunity for investors and capital preservation, a key feature of MMFs.

Other than the ease of investing, Money Market Funds also provide individual investors with economies of scale through pooling their funds together and making investments that would otherwise be out of reach for individual investors. Thus, they benefit from the economies of scale created in the form of diversification, cost savings, and attractive returns on investments.

As of 31st December 2019, the Money Market industry’s exposure to cash and fixed deposit and securities issued by the Kenyan Government stood at 31.2% and 55.7%, respectively, bringing the combined exposure to 86.8%. This strengthens the assumption that Money Market Funds will remain stable or even increase should rates on government rates increase.

The liquidity of MMFs is elevated by increased digitization and automation. Investors typically receive their funds within 3 to 5 working days if they are withdrawing to their bank accounts, and immediate access to funds when withdrawing via M-Pesa.

In light of current economic conditions, investors are fleeing to the fixed income market. However, it is believed that due to economies of scale, smaller investors are not able to shift from the fixed income market. Money Market Funds allow such investors to re-align their investments with their risk appetites by pooling money together and investing in safe havens.

Selina Liyengwa

Content writer at Cue Africa. Email: LinkedIn: Selina Liyengwa.

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