25 May 2018

Nigeria: 'How Retail Investors Can Hedge Against Stock Market Volatility'

Experts, at the one-day maiden seminar tagged: "National Discourse", organised by the Pragmatic Shareholders Association of Nigeria, have stressed the urgent need for stock market investors to diversify their portfolio by investing in different asset classes through mutual fund platform.

The experts, who spoke on the theme: "Portfolio Investments: Opportunities and Mounting Challenges for Nigerian Shareholders", in Lagos on Wednesday, argued that the inability of the market to commence trading in derivatives, which provides hedging instruments, makes the market more vulnerable to both external and internal shocks.

According to them, one of the major benefits of investing in mutual funds is the professional management of investors' monies, where experts select stocks based on in-depth research that identifies unique opportunities to deliver consistent returns without taking undue risk.

A mutual fund is a pool of money provided by individual investors, companies and other organizations and a fund manager is then, hired to invest the cash contributed.

Instead of buying individual shares, investors are buying shares of mutual funds.

Specifically, the Acting Director-General of Securities and Exchange Commission (SEC), Ms. Mary Uduk, who was represented at the occasion by an official from the commission, Effiong Ekpeyong, encouraged the retail investors to embrace the Collective Investors Scheme (CIS) to diversify their investments.

According to her: "Nigeria is a mono product economy and this has made the stock market very volatile. To this extent, retail investors need to spread their demand for stocks in various classes by patronising mutual funds."

She pointed out that the concept of buying mutual funds allows investors to sit back, relax and outsource the management of their money to professional portfolio managers that would channel the money into investments in the appropriate selected assets based on their investment objective, time horizon and tolerance of risk.

"Here, instead of buying individual shares, investors are buying shares of mutual funds. The fund manager invests the pooled money in certain specified types of assets such as common stocks and bonds, among others. The funds issued to investors entitle them to a certain percentage of the income generated by these assets."

The Managing Director of Cowry Asset Management, Johnson Chukwu, explained that it is easier for a fund manager to switch portfolio in mutual funds than in equities.

"If you have a good fund manager, the manager can actually switch on your portfolio when any of the portfolio risk is on the high side. Also, the monetary policy environment affects the direction of the equities market. If the interest rate is high, portfolio investors like you and I will underweight our portfolio in equity than our portfolio in fixed income.

"Conversely, if the interest rate is low, we will overweight in equities than in fixed income, so it is easier for a fund manager to switch your portfolio, but if it is an equity fund, you cannot switch to fixed income," he said.

The National Coordinator of Pragmatic Shareholders Association, Mrs. Bisi Bakare, called on the shareholders to leverage on the seminar to deepen their knowledge of stock market investment.

She added that the seminar is an avenue for shareholders to categorically identify their challenges towards long-term savings through portfolio investments.


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