Unit Trust Funds In Kenya: What Makes Them Tick?

By Stellar Swakei / Published September 15, 2023 | 2:17 pm

KEY POINTS

MMFs are the most common type of Unit Trust Funds and have generally accounted for over 75% of all the funds under management over the years. They are suitable for both individuals and institutional investors seeking safety, liquidity, and competitive returns on their short-term investments.

KEY TAKEAWAYS

In a Unit Trust, investors purchase units or shares in the fund, and the fund's assets are divided into equal units. The value of the units, known as Net Asset Value (NAV), fluctuates based on the performance of the underlying assets.

A Unit Trust Fund is the main type of Collective Investment Scheme in Kenya. It allows investors sharing the same financial objective to pool their money and invest in a diversified portfolio of assets, managed by a professional fund manager or investment company.

In a Unit Trust, investors purchase units or shares in the fund, and the fund’s assets are divided into equal units. The value of the units, known as Net Asset Value (NAV), fluctuates based on the performance of the underlying assets.

There are 5 major types of unit trusts in Kenya namely;

Money market funds
Fixed Income funds
Equity funds
Balanced funds
Real Estate Investment Trusts

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As of 30^thJune 2023, the total UTFs assets under management (AUM) amounted to KES 176.0 bn. The AUM has grown at a compound annual Growth Rate of 25.4%, from KES 56.8 bn in June 2018. See below the evolution of unit trusts’ AUM over the last six years;

Unit Trust Funds

UTFs typically invest in a variety of asset classes but the specific investment strategy and asset allocation depends on its objectives, as outlined in its offering documents or by the Capital Markets Authority.

The asset classes in which the funds invest include fixed deposits, government securities, cash & demand deposits, listed & unlisted securities, immovable property, and offshore investments.

See below the asset allocation by UTFs:

Unit Trusts

UTFs have over the years concentrated their investments in fixed deposits and government securities. The two asset classes are generally considered low-risk investments as they are backed by government guarantees or the financial stability of banks and financial institutions, providing a high level of safety to investors’ money.

The top 5 Unit Trust Funds in Kenya are;

Unit Trusts

The five control almost 80% of the market share.

Detailed Analysis of the Types of Unit Trusts

Money market funds (MMFs)

MMFs provide a short-term parking bay for surplus funds, particularly in times of market volatility. Institutions in Kenya offer either or both a Kenyan shilling-denominated MMF or a US Dollar US-denominated fund. The advantages of MMFs include;

Liquidity
Competitive Returns
Safety & Stability

In addition to the above, USD-denominated money market funds provide a sense of security, particularly during periods of currency volatility or economic uncertainty. Given the global applicability of the Dollar, USD-denominated MMFs help mitigate exchange rate risks.

Money market funds typically maintain a short duration and invest in high-quality, low-risk assets such as Treasury bills, government bonds, commercial papers, and bank deposits. Currently, there are 33 active money market funds, 24 KES-denominated and 9 USD-denominated and yields vary from as high as 13.5% to as low as 9.5% for the Kenyan shilling funds, in the current environment.

They include GenAfrica, Enwealth, Etica, Apollo, Madison, and Jubilee money market funds.

Fixed income funds

Fixed-income funds, also known as bond funds, are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of fixed-income securities such as government bonds and bills, corporate bonds, and fixed deposits.

Such funds are suitable for risk-averse investors seeking regular income, capital preservation, and liquidity. An investor purchases units in the fund, whose value increases or decreases depending on the performance of the underlying assets.

Notable examples of Fixed Income Funds include; Old Mutual, Britam, ABSA, NCBA, Zimele, and CIC Fixed Income Funds.

Equity funds

An equity fund primarily invests in stocks or equities, representing ownership shares in publicly traded companies. Equity funds pool money from multiple investors to create a diversified portfolio of stocks, allowing investors to gain exposure to a broad range of companies and industries.

Such a fund is ideal for investors seeking long-term capital growth from a well-diversified portfolio and are comfortable with taking on some market risk & potential capital loss. Given the volatility of the underlying asset class, returns from an equity fund are not a guarantee.

Balanced funds

Balanced funds combine both stocks and fixed-income securities within a single portfolio. The primary goal of a balanced fund is to provide investors with a diversified investment option that offers both capital appreciation potential and regular income, while also managing risk – they are designed to achieve a balance between growth and stability.

Balanced funds are suitable for investors who hold large cash balances but need extra returns at moderate risk and are typically ready to invest over the medium to long term.

Most Unit Trust Funds have running Equity Funds and Balanced Funds.

Conclusion

It is important to note that every investment has its degree of risks, including interest rate risk and market volatility. As such, investors should carefully assess their investing objectives, risk tolerance, and currency requirements before allocating funds to any investments. For example, for an investor looking to invest large capital in a money market fund, it is prudent to consider MMFs under big companies that have leverage and larger AUMs for risk diversification.

Consulting with a financial advisor or investment professional helps investors make informed decisions based on their specific financial goals.