Uganda's only Unit Trust Fund Bows Out

BY DAVID MUGABE

A weak saving culture and the delayed liberalisation of the pensions sector are at the heart of the recent suspension of Uganda's only unit trust fund.

The African Alliance Unit Trust Scheme started in 2004, was suspended last week after what the company described as "failure to attain a critical mass especially as a retail product." A unit trust fund is a form of collective investment for investors of similar objectives who pool funds which are then invested by a fund manager.

"Due to the unfeasibility of the continued operation of the African Alliance Unit Trust Scheme, we are winding up the Scheme with effect from December 31, 2011," read a notice from African Alliance, the fund managers who have been running the unit trust.

To run profitability, the three-unit trust funds were supposed to have a capitalisation base of sh5-6b. But the fund was operating at a capitalisation base of only sh2b. In comparison, Kenya has 45 unit trusts that collectively amount to approximately 28b Kenya shillings (about sh717b), illustrating the disparity between the two markets. Most of the investors voted for the winding up of the fund at a meeting held last week.

Mona Muguma, the African Alliance head of asset management, explained that the bigger part of the sh2b fund was from institutions with retail individual investors totalling 300 and contributing about sh400m. "Every other month we have been bleeding and it affected other  operations," said Muguma. The fund gave an annual return of between 8-20% depending on the profile.

The profiles were low risk investments like Treasury Bills and bonds, corporate bonds. The third profile was the high risk investments like equity (Uganda and regional) and offshore investments. Uganda Securities Exchange (USE) chief executive officer Joseph Kitamirike said the development is not good because it limits the avenues for investments for those in a pool.

“This is the price you pay for delaying opening up the sector (pensions),” said Kitamirike, adding that the unit trusts are designed to offer very good and competitive returns. Uganda's working class are starved of savings and investment options.

National Social Security Fund, is the only body that manages the retirement benefits of workers and has a statutory entitlement to receive monthly contributions from every employer in Uganda. Pieces of legislation aimed at liberalising the pension sector have been thrown around between Cabinet and Parliament over the years and many times are overtaken by political legislation.

In 2011, Parliament passed the Uganda Retirement Benefits Regulatory Authority (URBA), a body expected to regulate the establishment, management and operation of the retirement benefits schemes in public and private sectors. The URBA Act was assented to by the President on June 28, 2011. Another bill still in the offing is the Retirement Benefits Sector Liberalisation Bill 2011.

The bill seeks to end the monopoly of the NSSF. Experts believe that were the pensions sector to be opened, the level of financial literacy would increase alongside savings and investment options. “When the human resource manager says pick a fund manager, staff start to ask questions - ‘what is a fund manager?’

“Later they start to appreciate and even want to put more money in the funds," said Muguma. Muguma said even the efforts by the Capital Markets Authority (CMA) in the schools capital markets challenge are only sowing the seeds for the future because students don't save or have enough to save.

“Liberalisation will open the market in ways it has not been imagined,” said Muguma. Experts have observed that when savings have been left to be brought on a voluntary basis, it has not worked out partly because of low awareness. Yet in other countries where a similar fund is being operated, they have been spurred on by liberalised markets and aggressive marketing and advertising.

Kenneth Kitariko, the African Alliance chief executive officer said operations have been suspended but not completely wound up “and if the environment improved, the fund would be up in a day.” African Alliance has been the sole provider of unit trusts since 2004.

Kenya has 11 licensed unit trust licensees. “The absence of other players or entry into the market for an eight-year period is telling of the difficulty of the market in its current state,” read a notice.

The advantage with the unit trust is that being a mass scale product, the cost of administration and audits are spread among all the unit holders. “You are cost sharing on running it but benefiting individually on the returns,” said Kitariko,