The investment business in Ghana has witnessed a tremendous growth in the last few years. According to the Securities and Exchange Commission (SEC) Assets under Management (AUM) in the fund management business went from GH¢981m in 2010 to GH¢34bn as at March 2018. That is about a 56% compounded rate of growth. Over the same period the number of fund managers have almost tripled from 51 to 148.

This growth has presented a great opportunity for many Ghanaians as the interest in investment products among the public has soared. However, the growth has also presented challenges as its sheer pace introduced some practices in the industry that affected the quality of investments offered to the public. The SEC has stepped in to review some of these practices in order to sanitize the industry. These changes are backed by the Securities Industry Act, 2016 (Act 929).

Some of the most important changes are explained below:

1. Fixed Deposits. From December 31, 2018 fund managers will no longer offer fixed interest rates to customers. Investors will either accept to have their funds moved into collective investment schemes (CIS) such as mutual funds or unit trusts or they will have their money returned to them.
2.  High Net Worth Individuals. For investors with less than GH¢100,000 in funds to invest, the only investment option that will be offered to them is collective investment schemes such as mutual funds. However high net worth individuals, in this case those with more than GH¢100,000 to invest, will be offered alternative investments if they so desire.
3.  Related Parties. Fund managers will not be allowed to invest more than 15% of their AUM with related parties i.e. companies they own or have part ownership of.
4.  Investing in other Fund Managers. Fund managers cannot invest any part of their AUM with another fund manager unless it is in a CIS or they buy shares from that fund manager.
5.  Microfinance Institutions & Rural Banks. Fund managers will not be allowed to invest any part of investor’s funds in a microfinance company or a rural bank unless that AUM is guaranteed by treasury bills, fixed deposits with a bank or covered by a licensed insurer.

These changes are significant given the current state of the fund management industry. Ordinary investors are going to be affected in many ways including the following.

1.  An end to most high yielding fixed deposits. Fixed deposits are among the most popular investment options in the country due to the fact that they offer high yields. However, these options are going to be taken away from many fund management firms due to the new regulations. This will take away a lot of the pressure from these firms to meet interest payments in the short-term. It may also reduce the rate of growth of funds invested in these firms.
2.  Increased importance of mutual funds. If you have not read my guide to mutual funds, you may want to do so. The new regulations will increase the allocation of investor’s funds to mutual funds which I think is a positive development. We are likely to see more purchases of shares on the local bourse which will hopefully improve the performance of the stock market. Current holders of mutual funds could see a positive impact in their returns due to new money flowing into them as fixed deposit investors are migrated there.
3.  Faster redemption of invested funds. One big issue the SEC is trying to solve is the length of time it takes for investors to get their money when they ask to make a redemption. The focus on mutual funds, which requires fund managers to keep a significant portion of the investment in cash, will hopefully speed up the process of redemption as the funds will be more liquid.
4.  More security. The overarching objective of the SEC is to make investors more confident in the fund management industry. Following the new regulation will help to strengthen the industry and give customers more realistic returns. It will also weaken the interdependence among fund managers in the industry thus reducing the likelihood of contagion in the event of the failure of one firm.

If you have any question, kindly leave a comment or e-mail jerome[at]ceditalk[dot]com. If you found the post useful, kindly share.