My Experience with a Nigerian Stockbroker
Yesterday afternoon, my boss directed me to attend to some marketers from one of the popular mutual funds in Nigeria. Just like most mutual funds, the chief investment officer of the fund is a qualified stockbroker. I have spoken with many marketers from different mutual funds and turned all of them down; I told all of them to come up with more creative investment vehicles as mutual funds with Nigerian equities and money market investments provided zero diversification benefits for the funds that I manage. I turn down mutual fund marketers on a regular basis but this experience stuck with me for some reason.
Most mutual funds invest their funds in Nigerian equities and money market investments or bonds. A few of them provide little, very little, exposure to some real estate and some private companies like MTN and WAMCO, all with Nigerian flavors. I have a serious problem with investing in these funds that charge between 2 - 5% annually when I can invest directly in the underlying assets without charges. It is also more difficult when I have been able to invest in the Nigerian markets and beat all the relevant Indexes, year in and year out, to be less modest while many of these mutual funds underperform the Indexes on several occasions.
However, I am always open to putting funds in any mutual fund that will closely track the market with very little tracking error as possible but none have met this criteria. None. It shows the dearth of knowledge in the Nigerian market and why it is so easy to beat the market and outperform most of these mutual funds mist of the time.
Now, I asked the chief investment officer of this mutual fund, a stockbroker a few questions just to know if the fund will meet up with my criteria. He is obviously close to my boss and he had this notion that I was a "small boy" so his tone and body language was condescending all through our conversation. I was able to gather that the main strategy of the fund was active investment, with a very high turnover. He said the best way to manage mutual funds is to "go in and out of the market very quickly in order to take profits". He was also of the notion that "you can use technical analysis to accurately time the market and know which stocks to buy". His strategy also involved "exposure to high dividend paying stocks, regardless of the other valuation factors since dividend payments show strong cash flow". He was of the opinion that "you can never go wrong with high dividend paying stocks, regardless of what kind of investor you are".
I asked him if he knew about Enron that paid high dividends but crashed and brought down several investors. He said that kind of thing only happens in America, that was why they had crises in 2008. I also told him that I was more interested in a mutual fund that will closely track the market with minimal tracking risk because research has proven over time that a buy-and-hold strategy has always trumped active strategy over the long term and his response was that "people don't do that any more, active investment is the best and only way to invest in stocks in Nigeria".
I asked him about the returns his equity mutual fund has generated year to date and he said it was about 22% using active strategy. I now reminded him that the NSE Index has returned about 27% year to date and that my equity model portfolio (not personal portfolio) has returned 48% with a turnover of less than 10% year to date. His response was that the return generated by my model portfolio was based on pure luck and that his own lower return was due to the fact that his equity mutual fund was only 90% invested in equities with the balance in money market investment. I brought out a calculator, did a quick calculation and told him that if his money market investments has returned 0%, his equity investment return was still only 24% and still less than the market returns.
Before he could respond to it, I quickly asked him to name one successful stockbroker after giving him examples of buy-and-hold investors like Warren Buffet and Peter Lynch. He still insisted that those kind of investors are "old school and the investment world has changed rapidly now because of high possibilities of market meltdown". Since he could not come up with a successful active investor, I told him that the only example I could think of was Kweku Adoboli. His response to that was that he lacked experience in trading.
I kept quiet after that and let him finish his intelligent talk and leave. I let him leave with the feeling that his mutual fund will be considered, since he is my boss's friend. But he is not getting a dime of the funds I manage.