Disclosure: This article is written as part of work I am doing for the company in question. I have been paid for this work.
You are a Nigerian and you live in Nigeria. By that geographical arrangement alone, your investment opportunities are mostly restricted to what is immediately available in the country. Thus, the investment portfolio of someone who has $1m will look quite different depending on whether the person is in America or Nigeria. In Nigeria, you might just be restricted to real estate but in America you might be able to put money in the hottest startup in Silicon Valley among many others.
So what are the options available to Nigerians? You need to ensure you don’t lose your hard earned money. You also need to ensure that the money will be available to you in the future when you need it. And of course you need to ensure that the investment is yielding enough returns such that, in reality, your N100,000 has not turned into N50,000 after 10 years. It is this question that Investment One, an asset management and investment firm in Nigeria, have tried to answer with a new report titled Investment One Top 10: A 2018 report on 10 great places to invest in Nigeria.
I’m usually the first person to mock Nigerian banks for their love of Shashe Banking. But the facts of life are that they are not doing anything illegal and the opportunity is available to anyone who wants it, not just the banks. So Treasury Bills, short term lending to the government, is number one on the list. It is remarkable that an investment that carries zero risk can pay up to 22 percent as they did in 2017 but that is the reality. These days t-bills pay around 15 percent so if you are looking for a worry free place to park your money that meets all the investment criteria listed above, then they are your best bet.
Once you leave t-bills, there is no other option that is 100 percent safe. So everything else comes down to how much risk you are willing to take with your money. Sometimes, taking more risks brings more returns. It could also be that you take high risks and all your money ends up in smoke. Next on the list is Commercial Papers (CP) — essentially lending to Nigerian companies (including banks). The data compiled by Investment One shows that in 2017, the CP with the highest yield was by FSDH Merchant Bank at 21.84 percent. Dufil Prima Foods Plc also issued a CP in December 2017 with a yield of 17.50 percent. Both of these examples were for nine months.
Government and State Bonds
Next up is government and state bonds. But wait, if t-bills are issued by the government and carry no risk, why are government bonds, issued by the same government, also not risk free? The simple answer is that even though the same government cannot default on bonds, this type of investment, because it lasts for longer than one year, carries interest rate risk. That is, even though they are currently paying up to 17 percent, there is no guarantee that they won’t pay less in say two or five years time.
Things can change in the economy — inflation might come down sharply, meaning interest rates will also likely come down meaning you earn less on your investment in government bonds. But of course, if anything can go down, it can also go up.
Things are getting riskier. We now come to Corporate Bonds brought to you by the same people who brought you CPs but this time for longer. Because they are issued for longer durations, the chance that a company can go bankrupt and the bond you bought turns to smoke is higher than with CPs.
Which is why the credit rating of the issuing company plays an important part in deciding whether or not to invest. According to a sample of recent corporate bonds from Investment One’s research, Lafarge Africa Plc issued a 3 year bond in June 2016 with a coupon (interest rate) of 14.25 percent. It is rated at A+ which sort of says Lafarge has a good chance of surviving until June 2019 when you will be able to get your investment back plus the interest you’ve earned. Fidelity Bank, rated BBB, also issued a 7 year bond in 2015 with a coupon of 16.48 percent. BBB is a higher risk than A+ but then, the riskier one pays more. Your choice.
Then there’s Eurobonds. Beyond the government, Nigerian companies also issue them, too. Now, in addition to interest rate risk and the risk of the issuing company (or government) going bankrupt, you now have the additional risk of foreign exchange as eurobonds are issued in dollars. But the flip side is that, if the naira suffers another devaluation, your investments in dollars will protect you against that loss.
At the moment, Fidelity, Zenith, GTbank, Diamond and First Bank have outstanding eurobonds all issued in 2013 and 2014 and to mature between 2018 and 2020. The coupon rates vary from 6 percent (GTbank) to 8.75 percent (Diamond). These bonds are traded publicly which means you can still buy into them with the understanding that, depending on the price you pay for them today, you will almost certainly get a different yield from the coupon rates listed above.
Next we come to equities, or ‘shares’ as we like to call them in Nigeria. The best argument for equities is also the biggest risk about them — in 2017, the Nigerian equities market returned 42.30 percent. So what is it going to return in 2018? If I knew the answer to that, I won’t be typing this article. I will sell everything I own (including one of my kidneys) to invest in Nigerian equities. This is the biggest risk with equities — just because it did well this year is no guarantee that it will do well next year. Indeed, in the 3 years before 2017, Nigerian equities delivered negative returns according to Investment One.
So the solution to this is to always take a long term view when investing in equities. Over time, you’ll likely make money once the good and bad years are taken together. But if you’re looking for something short term, then t-bills remain your best. Don’t put your school fees money in equities. Please.
What if you can’t make up your mind about all the different options so far because you like equities, corporate bonds, CPs and other types of assets? If you are in that position, mutual funds make plenty of sense. With mutual funds, the investment company takes money from many different people and then some smart guy working there decides on what percentage to allocate to different assets. You, as the investor, don’t have to worry about this decision making process — you leave it to that smart guy but you have to pay him for this work out of your returns.
Now if the guy turns out to be not as smart as advertised, you may end up paying him most of your returns as fees. According to Investment One, Vantage Balanced Fund, which invests in bonds, real estate and equities, delivered a net 25.06 percent return in 2017. Another fund, Vantage Guaranteed Income, delivered gross 18.41 percent also in 2017. So what does it mean when one fund’s return is stated as gross and another as net. This is an important thing to pay attention to — net is what you get after the smart guy has taken his fees. Gross is before fees have been deducted. To simplify — if you put N100 in a fund and it returns 25 percent gross, you are not going to get N125 at the end of the year. You will get N125 minus whatever the fees for the smart guys are. So always check whether returns are stated gross or net and if they are stated as gross, find out what the fees are.
Real Estate and Venture Capital
Finally, we have Real Estate and Venture Capital. The report does not say how much these returned in 2017 probably because they are so hard to measure. In the case of real estate, there are many different ways to invest in it. Someone might build a few shops in front of his house in Amuwo Odofin and rent them out. Real estate noni. Or someone who made money from oil and gas might build luxury flats in Ikoyi and sell them. Real estate noni. Or a company might set up a Real Estate Investment Trust (REIT) and, just like with mutual funds, take money from many different investors and invest in real estate.
One way to access this type of investment might be through mutual funds. So if you like the idea of investing in real estate but without the stress of chasing tenants all over the place, ask your mutual fund if they invest in real estate. As for venture capital, please I’m not on seat. Only invest in this with money you’re prepared to lose. You can make 800 percent and you can make minus 100 percent.
There you have it. As I said earlier, what you can invest in is determined a lot by where you live. These are some of your best options if you are in Nigeria. The reason why you should invest is because the future will eventually arrive even if you stand still. Investing means you can send your money ahead of you so you are not broke when the future inevitably arrives.
Investment One will like you to make your investments through their firm. By opening an account with them, you can invest in most of the options listed above. Or if you are not yet sure, send them an email to ask questions.
Always remember — just because something returned 25 percent last year does not mean it will do the same this year. It can do more, it can do less. But with any type of investing, it is always better to have a long term view. After all, you are a Nigerian and you live in Nigeria. Neither of you is running away any time soon.
By Feyi Fawehinmi
First published on his blog Aguntasolo.co