How to Improve Unit Trust Funds Formation and Growth in Kenya

Capital Markets Authority Reviews Collective Investment Schemes Framework

Unit Trust Funds, “UTFs”, are collective investment schemes that pool money together from many investors and are managed by professional Fund Managers, who invest the pooled funds in a portfolio of securities to achieve objectives of the trust.

Types of Unit Trust Funds include

Money Market Fund: This fund invests in short-term debt securities with high credit quality such as treasury bills and commercial paper. The fund offers high-income yield, liquidity as well as capital stability. Risk adverse investors are prone to invest in Money Market Funds in times of high stock market volatility;

Equity Fund: This fund aims to offer superior returns over the medium to longer-term by maximizing capital gains and dividend income through investing in listed equity securities. To maintain liquidity, the fund reduces its high exposure in the equities market through diversifying its portfolio of shares in various sectors;

Balanced Fund: These are funds in which the investments are diversified across the Equities and the fixed income market. The fund offers its investors with long-term growth as well as reasonable levels of income; and,

Fixed Income Fund: This fund invests in interest-bearing securities, which include treasury bills, treasury bonds, preference shares, corporate bonds, loan stock, approved securities, notes and liquid assets consistent with the portfolio’s investment objective

Expand eligibility of Trustees of Unit Trust Funds to include non-bank Trustees such as Corporate Trustees:  The current situation where all Trustees are banks severely constrains capital market growth because of (1), the inherent conflict of interest where banks are Trustees in a market where they are also competing for funds, (2) banks are not best suited to be Trustees in complex financial products, hence this restrains the market to plain vanilla investments such as bank deposits and government debt,

Allow Funds to have as many Custodians as it suits the Unit Holders: The current arrangement where UTFs are only allowed to have one Custodian makes it very expensive for Unit Holders to invest. For example, say an investor has Kshs. 1,000 at Equity Bank and wants to invest in a Unit Trust Fund held in Custody say at KCB bank the investor will have to transfer the Kshs 1,000 from Equity to KCB and may incur up-to Kshs 100 in charges, which is already a 10.0% transaction cost before investment.

So even if they invest in a money market fund returning 10.0%, it would take a whole year just to recoup back their inward transaction cost.

The solution to this would be to allow Fund Managers to open as many Custody accounts as it suits unitholders, in this example, a Custody account at Equity would save the investor the Kshs 100 transaction cost. Other than for an agency’s administrative convenience, it is not clear why in this day and age, Unit Holders would be limited to just one fund account,

Intense Conflicts of Interest Retards Market Development: We should not have players in the market also part of a regulatory governance structure, as shown above, limiting Capital Markets Trustees to banks limits the development of capital markets,

Allow for sector funds: The current capital markets regulations require that funds must diversify. Consequently, one has to seek special dispensation in form sector funds such as financial services funds, a technology fund, or a real estate UTF fund. Regulations allowing unitholders to invest in sector funds would expand the scope of unitholders interested in investing, and,

Reduce the minimum investments to reasonable amounts: Sector funds, in addition to cumbersome incorporate as mentioned above, have high minimums of Kshs 1,000,000, which is way above the median wage of Kshs 50,000. Having sector funds minimum that is 20 times the national income seems unreasonably high.

Source: Cytonn Investments