Until very recently mutual funds used to be one of the most popular investment vehicles in Ghana. They are designed to pool resources from investors to be allocated to different assets selected by an asset manager. Because they offer diversification, liquidity, simplicity, and (let’s be honest) management fees to the asset manager, mutual funds were highly recommended as an investment which one could invest in and sleep soundly.

However, 2022 tested the resolve of mutual funds to the limit. Funds were heavily invested in longer-dated government bonds, but as t-bill rates started to rise significantly in the wake of rising inflation, these bonds looked unprofitable in comparison. As asset managers tried to sell these bonds in order to buy treasury bills, the value of the bonds collapsed and soon the industry was suffering from paper losses and a lack of liquidity to pay investors eager to withdraw their funds.

With fund managers getting increasingly distraught, the SEC stepped in to issue an order for mutual funds to adopt a mark-to-market valuation approach. I explained mark-to-market quite extensively in this post from 2022. The short version though is that funds now needed customer’s accounts to reflect the current market value of their investments rather than what the fund was expecting the value to be. This is why customers started receiving statements showing an amortized balance and a mark-to-market balance which could be anywhere from 15%-50% less. All this fancy finance lingo meant was that if you want your money now, you are going to have to take it at a loss. Customers were understandably not amused.

2023 continued the trend as even after the Domestic Debt Exchange Programme (DDEP) where funds had to exchange their current government bonds for new ones with new interest rates and payment dates, the popular interest in mutual funds have shrunk. My posts on mutual funds used to be among the best performing on CediTalk but traffic has considerably slowed down. Questions I regularly receive on investment now tends to be about treasury bills or USD investments. But could 2024 see a recovery? Let’s look at some important details.

• Mark-to-Market was a painful but necessary change. The assumption that the bonds that mutual funds held are going to be held to maturity, so customer’s funds should not reflect the current market value of the bonds, was a vulnerability within the industry. With this new valuation method customers are given a much more transparent picture of the value of their investment. I believe the benefits of this method would be reaped mostly by new investors even as older investors (like me) have swallowed a bitter pill.
• Low expectations for DDEP bonds could result in surprising upside. I recently wrote about 7 things investors should look out for in the Ghanaian economy and the payment of the coupons (interest payments) on the new bonds is one of them. In August 2023, the government paid GH¢2.4 billion in interest on these bonds. If they should make all due payments this year (February 2024 and August 2024) without a hitch, then the demand for these bonds could rise. This would help mutual funds who are heavily invested in these bonds.
• Declining inflation is a welcome development. Inflation declined from 54% in 2022 to 23% in 2023. The cost of living has spiked significantly over those two years, but I will save that for another post. The good news is that a lower headline inflation rate makes the bonds held by the mutual funds look a little more attractive, and that could translate into better returns for investors.

• Positive stock returns in 2023. 2023 saw stocks on the Ghana Stock Exchange (GSE) return 28% even as the financial sector of the exchange recorded a 7% loss. This positive return was very welcome and mutual funds invested in shares benefited as a result. With banking stocks likely to rebound in 2024, there is some hope that equity mutual funds (mutual funds that invest primarily in stocks on the GSE) will see a rebound.

• Industry innovation. The final point I will consider is how the industry is innovating to stay relevant to investors. There are funds which have launched with mark-to-market as their default valuation model. Funds now also make it much more convenient to track your returns, deposit, and request statements. Understanding the importance of liquidity, some funds have forgone better rates elsewhere and have committed to providing a liquid fund so investors can sleep easy. Some funds have even requested permission from the SEC to invest more than 5% in foreign markets to offer more security to investors. Funds are finding innovative ways to deal with the changing investment climate, and it is likely that after more than 12 months of the mark-to-market regime, they have started to figure out some winning strategies.

We cannot ignore the macroeconomic environment within which these funds are operating. But this must be separated from an analysis of the funds itself if any objective measure of performance is to be determined. As the year goes on, I will be bringing you updates on how the market performs.