Lack of foreign investment affecting ETF —APT Securities MD

The Nigerian Stock (NSE) recently listed Exchange Traded Funds (ETF). Kehinde Akinseinde-Jayeoba engaged Mallam Kurfi Garba, the Managing Director and Chief Executive Officer of APT Securities on the participation of retail investors in ETF, among other issues. Excerpts:

WHAT is the attraction of Exchange Trade Funds (ETF)?

Exchange Trade Fund (ETF) is a shadow derivative of all the derivatives products. They don’t stay on their own. ETFs stand on other indices. So, whether they are going up or down, it tends to those funds. However, it is not fully derivative because the money is used to invest according to those qualifications.

What Nigerians are used to is the equities because some retail investors go to Annual General Meetings (AGM) and collect their dividend. But ETFs do not declare dividend; they may but not a must. So because of that, we could see that the participation by Nigerians is still very low. And secondary, the ETF is, most of the time. You see that the indices are rising now because they are coming when we have a recession. There is not much of encouragement. Out of about eight indices that we have for the year ending 2016, only a few recorded gains. Those are the prime stock, that of Dangote, First Bank and Zenith Bank. Those were the positive, but others closed negative. So if you have an Exchange Trade Fund, you will see that most of them closed in the negative. They discourage investors from going into them.

Secondly, because of our familiarity with equities and people’s understanding of equities. Most people go for equity than exchange trade fund because for ETF to be successful, we need to get to a situation whereby other stocks and indices are rising. Also we need to do a lot of awareness which must be done by the Exchange Commission, stock brokers. The combination of all will make impact, but I don’t see much being done. It is mostly the foreign investors who understand it. But because there is unusual low patronage by the foreign investors in the equity market, so it’s likely going to affect the ETF fund.

Are you saying, for now the ETF might not be well participated in based on the economic situation?

We are in the index where most of these are based on the market for the first time. In the last 30 years in the Nigerian stock market, we have never experienced three consecutive years of negative index from 2014 where it was about 16 to 17 per cent loss, the worst performance in the whole world. In 2015, we had about 15.6 per cent loss, it was almost the worst performance in Africa. In 2016, we had about six per cent loss, but because of devaluation of naira, we had 41 per cent loss in dollar terms. So, we were the worst performance in dollar terms. It discourages the free flow of foreign investors coming into the market.

During 2007- 2008, we had an average 20 to 25 billion naira per day. Last year, our average was less than two billion naira. We are in time where our average is less than 1.2 billion. It is now we are getting better. This year started with good one. I can tell you this January 2017, we had average of two billion naira, and if this persists, the market will be better off. And we are happy that the oil shine will be positive even though now they are negative, but from all indicators the market will likely be better for 2017.

Stanbic recently listed its Pension ETF where the CEO noted that there is still low ETF education. How do the retail investors get to know more about ETF?

To me, they have to blow their own trumpet. Even if Stanbic will be successful because of their fund affiliation, they still need to create awareness.  If you look at South Africa ETF, each year is a very successful story and they have seen the development. Don’t forget that Stanbic is coming uniquely as the first pension exchange fund. Nobody had introduced it. They introduced it for the first time and you know pension funds have strict compliance with the structure and institution and they came between the two funds.  Two, they are coming with the dollar ETF. Irrespective of the naira devaluation, it will not also affect it. It’s like Gold ETFs, the more the naira devaluation, the more the dollar price rise in the market. That is why it is one of the most successful indexes for last year. It gave over 90 per cent. Everybody is rushing for it and I can tell you that of Gold ETF that was introduced in the last four years. If you see the performance of last year’s that is when it became very active and now gradually these are becoming very high because of high devaluation of the naira.

Last year, a lot of broking houses were sanctioned and some were suspended, is it that the new rules by the regulatory body are too strict?

When the economy is in recession you can’t overlook it. By the time you look at first 10 by value, you will see they control over 70 per cent of the turnover. So, you are talking about 190 houses pursuing the remaining 30 per cent. So how can they pay salary? When this kind of challenge happens in the market, it is bound to have more fractions. The certain issue is that they have gone back to risk bear suspension. Risk of suspension is likely not going to change. They are looking at transactions by transactions, client by client, house by house. This was just introduced by the Security Exchange Commission (SEC). This is a complete change to the system. The regulatory body is not sparing anybody. When the big houses are not spared definitely, the smaller ones will either comply or disappear. I think for now what they are doing really gives confidence to investors.  Last year, SEC set minimum operating standard which compels broking houses to follow best practices.