Bleak prospects as financial markets flounder in 2008

Evidently 2008 has turned out to be quite a challenging year for the financial industry for quite a number of reasons. The fund management industry which specialises in managing long term cash and pension funds has in no way been exempt from this challenge.

One of the cardinal objectives of the fund management industry which is also referred to as the investment management industry is to out-perform inflation on behalf of clients. This means that for funds held on behalf of clients there should at least be a scenario where the initial capital invested is preserved and further to that the same capital should be able to yield an interest or dividend that is in excess of inflation.

Within the Ugandan economy, inflation over the last few months has been in the range of 15% per annum. This, therefore, means that the cumulative investment carried out by a fund manager should at the minimum be in excess of 15% if the objective of outperforming inflation during 2008 is to be met.

This, however, has been a tall order because a fund manager would offer investments in three basic products, that is; cash, bonds or equity.

Cash holdings can accrue in various currencies ranging from the Uganda Shilling, the United States Dollar to the Euro among a host of other currencies. These are usually placed in Unit Trust holdings or fixed deposit accounts with a view to accruing an attractive yield on behalf of the one for whom funds are being held.

Bonds are financial paper issued by either governments or corporate institutions. Financial paper issued by governments is known as government securities while those issued by corporate institutions are known as commercial paper or corporate bonds. Government securities issued for less than 12 months are known as Treasury Bills while those issued for more than 12 months are known as Treasury Bonds.

Any one interested in buying a bond would issue funds to anyone of the said institutions on the premise that they will be in a position to get their initial capital back along with interest accrued.

Equity is also classified as shares. Shares are usually traded on the stock exchange. If one has funds and they are interested in buying shares, they then approach a stock broker in order to have them broker the purchase of shares. Through the stock broker a given amount of shares can be purchased.

The equity market where shares are traded has suffered quite a number of shocks through 2008 as a result of the global financial crisis and a host of other factors.

For example both globally and within the region we have seen stock markets suffer a credibility crisis where there have been a number of questionable transactions conducted by stock brokers who have been perceived to be diverting funds.

These along with the volatilities that have resulted from the global financial crisis have resulted in a decline in share prices both regionally and globally. Thereby presenting a challenge to fund managers because the returns they were looking for from the equity market are not likely to be forthcoming.

The bond market also doesn’t seem to be providing a formidable alternative to the equity market as across the globe we have seen central banks continually cut interest rates through the year.

In Uganda through 2008 the rates for government securities have tended to range between 8% and 15% with the exception of the Bank of Uganda three year bond which recently rose to 17.4%. It’s therefore evident that for most of the year government securities have been yielding less than the 15% accruing on inflation.

As for cash, unless you’ve been investing in the United States Dollar since July 2008, there has been no place to hide. This is because it’s mainly the US Dollar that has seen appreciation against other currencies from July 2008.

Investing in the US Dollar with such perfect precision and timing would have been difficult to achieve because the US Dollar lost 17% versus the Euro between July 2007 and July 2008 and was therefore not a currency of choice until it suddenly turned around.

It is not my intention to present such a bleak picture, however the realities are such that financial markets both locally, regionally and globally have been challenged. This means that it is very likely that the fund management industry is going to transition away from the objective of out-performing inflation and begin to focus more and more on preserving capital obtained from clients.

This would warrant that assets obtained from clients will increasing be allocated to more conservative assets such as government securities and solid commercial paper as we move into 2009.

Equity may continue to have a limited focus with the focus on companies that demonstrate that they are capable of ably riding the tide as others struggle through these difficult times.