Unit Trust Funds (UTFs) are Collective Investment Schemes that pool funds from different investors and are managed by professional fund managers.
The fund managers invest the pooled funds in a portfolio of securities such as equity stocks, bonds, or any authorized financial securities, to generate returns to meet the specific objectives of the fund.
The Unit Trust Funds earn returns in the form of dividends, interest income, rent, and/or capital gains, depending on the underlying security.
According to the Capital Markets Authority, as at the end of FY’2022, there were 34 CISs in Kenya, up from 32 recorded at the end of Q3’2022, and a further 20.7% y/y increase from 29 recorded at the end of FY’2021. Out of the 34, 21 (equivalent to 61.8%) were active, while 13 (38.2%) were inactive.
| Assets Under Management (AUM) for the Approved Collective Investment Schemes | ||||||
| No. | Collective Investment Schemes | Q3’2022 AUM | Q3’2022 | FY’2022 AUM | FY’2022 | AUM Growth |
| (Kshs mns) | Market Share | (Kshs mns) | Market Share | Q3’2022 –FY’2022 | ||
| 1 | CIC Unit Trust Scheme | 60,579.0 | 38.9% | 61,263.9 | 38.1% | 1.1% |
| 2 | NCBA Unit Trust Scheme | 23,687.8 | 15.2% | 25,342.0 | 15.7% | 7.0% |
| 3 | Sanlam Unit Trust Scheme | 14,542.6 | 9.3% | 15,841.6 | 9.8% | 8.9% |
| 4 | ICEA Unit Trust Scheme | 14,939.0 | 9.6% | 14,758.9 | 9.2% | (1.2%) |
| 5 | British American Unit Trust Scheme | 13,439.1 | 8.6% | 13,318.0 | 8.3% | (0.9%) |
| 6 | Old Mutual Unit Trust Scheme | 7,363.3 | 4.7% | 7,570.5 | 4.7% | 2.8% |
| 7 | Dry Associates Unit Trust | 3,849.3 | 2.5% | 3,881.8 | 2.4% | 0.8% |
| 8 | Coop Unit Trust Scheme | 3,341.6 | 2.1% | 3,567.4 | 2.2% | 6.8% |
| 9 | Nabo Capital Ltd | 3,158.7 | 2.0% | 3,291.4 | 2.0% | 4.2% |
| 10 | Madison Asset Unit Trust Funds | 2,806.8 | 1.8% | 2,923.2 | 1.8% | 4.1% |
| 11 | Zimele Unit Trust Scheme | 2,485.3 | 1.6% | 2,605.5 | 1.6% | 4.8% |
| 12 | ABSA Unit Trust Scheme | 1,536.3 | 1.0% | 2,342.1 | 1.5% | 52.5% |
| 13 | African Alliance Kenya Unit Trust Scheme | 1,476.6 | 0.9% | 1,579.3 | 1.0% | 7.0% |
| 14 | Apollo Unit Trust Scheme | 809.5 | 0.5% | 871.1 | 0.5% | 7.6% |
| 15 | Cytonn Unit Trust Fund | 795.7 | 0.5% | 774.5 | 0.5% | (2.7%) |
| 16 | Genghis Unit Trust Funds | 626.4 | 0.4% | 608.9 | 0.4% | (2.8%) |
| 17 | Orient Collective Investment Scheme | 247.9 | 0.2% | 248.0 | 0.2% | 0.0% |
| 18 | Equity Investment Bank | 189.3 | 0.1% | 185.5 | 0.1% | (2.0%) |
| 19 | Amana Unit Trust Funds | 27.8 | 0.0% | 27.8 | 0.0% | 0.3% |
| 20 | GenAfrica Unit Trust Scheme | 0 | 0.0% | 2.9 | 0.0% | 0.0% |
| 21 | Wanafunzi | 0.7 | 0.0% | 0.7 | 0.0% | 2.6% |
| 22 | Genghis Specialized Funds | – | – | – | – | – |
| 23 | Standard Investments Bank | – | – | – | – | – |
| 24 | Diaspora Unit Trust Scheme | – | – | – | – | – |
| 25 | Dyer and Blair Unit Trust Scheme | – | – | – | – | – |
| 26 | Jaza Unit Trust Fund | – | – | – | – | – |
| 27 | Masaru Unit Trust Fund | – | – | – | – | – |
| 28 | Adam Unit Trust Fund | – | – | – | – | – |
| 29 | First Ethical Opportunities Fund | – | – | – | – | – |
| 30 | Natbank Unit Trust Scheme | – | – | – | – | – |
| 31 | Amaka Unit Trust (Umbrella) Scheme | – | – | – | – | – |
| 32 | Mali Money Market Fund | – | – | – | – | – |
| 33 | Jubilee Unit Trust Scheme | – | – | – | – | – |
| 34 | Enwealth Capital Unit Trust | – | – | – | – | – |
| Total | 155,902.6 | 100.0% | 161,004.8 | 100.0% | 3.3% | |
Source: Capital Markets Authority: Quarterly Statistical Bulletin, Q1’2023, and Collective Investments Scheme December 2022
Cytonn Investments recommend the following actions that can be taken to stimulate the growth of UTFs in the Kenyan capital market:
- Lower the minimum investment amounts: Currently, the minimum investment for sector-specific funds is Kshs 1.0 mn, while that for Development REITS is currently at Kshs 5.0 mn.According to the Kenya National Bureau of Statistics, 42.2% of employees in the formal sector earn a monthly median gross income of Kshs 50,000.0 or less and another 45.5% earn a gross income range of Kshs 50,000.0 to Kshs 100,000.0, resulting in 87.7% of employees earning below Kshs 100,000.0 monthly.
As such, the high minimum initial and top-up investment amounts for investing in sector-specific funds deter potential investors. Furthermore, these high amounts disadvantage the majority of retail investors by restricting their options for investments.
- Encourage innovation and diversification of UTFs’ investments: The majority of UTFs’ investments are either in fixed income or fixed deposits, highlighting high concentration risks. There is need to encourage fund managers to invest in different sectors of the economy as this will spur diversification of investments, as seen in the US UTF industry, as well as enhance innovation of other investment vehicles.
- Update regulations: The current Collective Investments Schemes Regulations in Kenya were formulated in 2001 and have not been updated since, despite the dynamic nature of the capital markets worldwide. This has led to the regulations lagging.For instance, the regulations do not include provisions for private offers that have grown in importance over the years.
The regulations also lack stipulated guidelines on special funds to cater for the sophisticated investors’ interest in regulated alternative investment products. While there are efforts to update the regulations, we note that they remain in progress and are yet to be completed.
- Allow for sector funds: Under the current capital markets regulations, UTFs are required to diversify. However, one has to seek special dispensation in the form of sector funds such as a financial services fund, a technology fund or a Real Estate Unit Trust Fund.Regulations allowing unit holders to invest in sector funds would go a long way in expanding the scope of unit holders interested in investing.
- Eliminate conflicts of interest in the capital markets governance and allow non-financial institutions to also serve as Trustees: The capital markets regulations should foster a governance structure that is more responsive to both market participants and market growth.In particular, restricting Trustees of Unit Trust Schemes to Banks only limits options, especially given the direct competition between the banking industry and capital markets.
- Provide Support to Fund Managers: In our opinion, the regulator, CMA needs to include market stabilization tools as part of the regulations/Act that will help Fund Managers meet fund obligations, especially during times of distress like when there are a lot of withdrawals from the funds.This can be done by collaborating with industry players to find solutions rather than publicly shunning and alienating industry players facing challenges as this may not be in the best interest of investors. We commend and appreciate the regulator’s role in safeguarding investor interests.
However, since Fund Managers also play a significant role in the capital markets, the regulator should also protect the reputation of different fund managers in the industry.
Key to note, the Capital Markets Authority (CMA) publicized the Draft Capital Markets (Licensing Requirements) Regulations 2023 meant to replace the Capital Markets (Licensing)(General)Regulations, 2002, which have been in effect since 19 July 2002, to revise the fees in the capital markets operations for various industry players.
The key takeout from the new draft regulations includes; increasing application fees for investment banks to Kshs 20,000.0 and that of other firms to Kshs 10, 000.0, from the initial fees of Kshs 2,500.0.
The license fee for the fund managers registered with Retirement Benefits Authority is also set to increase to Kshs 100,000.0 from Kshs 50,000.0, while the renewal fees were maintained at Kshs 50,000.0.
Additionally, the authority introduced a new category in the market, a brokerage dealer, creating room for any firm to either be a broker, or a dealer or combine both in offering brokerage and dealership services.
Despite the growth of Unit Trust Fund penetration in Kenya, the industry still has the potential to grow through the introduction of different innovative products, and the promotion of sector-specific REITs as is the norm in the US with over 172 REITs, pushing the level of innovation higher as the REITs compete for the limited market within the U.S economy.
Additionally, we note that the updated draft regulations set to increase fees in the UTF industry could be more of a disincentive to the majority of the industry players.
Therefore, we maintain that to spur more growth the Capital Markets Authority needs to relax its regulations to support capital markets growth.
Source: Cytonn Investments
