ARM – Nigeria’s new investment management firm
Excerpts from a recent interview given by Deji Alli, Managing Director and Chief Investment Officer of Asset & Resource Management Co. Ltd.
Q: For those who may not be familiar with your company, can you please tell us about Asset & Resource Management Company, and how you are related to Guaranty Trust Bank.
DA: ARM is the specialised investment management subsidiary of Guaranty Trust Bank, one of Nigeria’s largest and fastest growing commercial banks. The creation of ARM as a subsidiary of Guaranty Trust has, in effect, brought about the existence of two separate entities working together globally, but encouraged to operate independently of each other.
Q: What are your areas of operations and on which asset classes do you focus?
DA: In our domestic operations, we focus on both the equity and fixed income markets; that is, securities listed on the Nigerian Stock Exchange. For our offshore operations however, we cover a number of the international financial markets, with special emphasis on Africa, Europe and North America.
Q: You mentioned Africa, is there really any future for capital markets within the African continent?
DA: Yes. The smaller markets such as those in Africa, South America and some parts of Asia are becoming eligible for those investors seeking attractive returns. The legal structure of some of these exchanges is becoming similar to that of some Western countries. Over time, the global investment arena will have a broader universe of markets and instruments in which to invest. In this regard, African markets are bound to achieve greater significance.
Q: When you say that Africa would soon become eligible for inclusion in the universe of countries that international investors will consider, is this likely to be a fad or are there real long-term opportunities?
DA: Right now, it would be unwise to be over-enthusiastic as one’s comments could be misconstrued. However, for the small- to medium-sized investor, I believe that, clearly, investment opportunities are real and sustainable. In Nigeria for example, ARM has not exactly found it impossible to invest clients’ funds in the Nigerian stock market. We have often seen opportunities to commit as much as N5million (approx. US$62,500) in one single transaction.
As far as returns are concerned, all you need do is examine how well some African Exchanges have performed in the past decade. As an example, although 1994 was not a particularly stable year for Nigeria, due to political crises and other negative socio-economic factors, certain stocks still provided US Dollar returns in excess of 100%. This is after adjusting for the significant depreciation of the Naira in that year.
Q: can you give examples of stocks which reported such returns?
DA: Take Wema and Union Banks Plc. If an investor had bought Wema Bank stocks at the beginning of 1994 and then sold at the end of that year, he would have made US$ returns of over 150%. In the case of Union Bank, his return would have been a little over 120%. And there are a few other examples. For the international investor, there was no way such returns would have been possible in say, the London or New York stock market in 1994. Of course, the converse was the case for stocks such as Evans Medical Plc which registered a US$ return of minus 17.5%.
Q: These sort of returns notwithstanding, I somehow sense that a number of people will still shy away from making medium-To long-term investment decisions in favour of Nigeria versus some other African countries.
DA: This is probably true. The major obstacle for Nigeria remains the extent to which the present government would have a consistent and sustainable policy. To that extent, one should be cautious. The dilemma is clear. How do we overcome the Government’s structural rigidity in order to get the desired effect of the ongoing economic and financial policy changes? With the changes we are witnessing in international business and finance, we require more finely honed and timelier reforms in national policies.
For example, I believe it will probably take some time before the central government will be willing to grant the necessary degree of autonomy to an official institution such as the Nigerian Securities and Exchange Commission, to enable it to, more effectively, oversee and set comprehensive rules and regulations for all key market participants.
I will therefore agree that the Nigerian experience in providing a conducive investment climate has not been as encouraging as a number of African countries such as Ghana, Zimbabwe and perhaps, Morocco, to name a few. ARM’s view for 1995 however, is that there will now be more enthusiasm about investment possibilities in Nigeria. It will of course take some time for this to actually translate into tangible inflows of capital. However, in spite of the scepticism about the country and the stock market, Nigeria remains relatively, well-advanced.
Q: Well-advanced compared to what?
DA: To the other African countries. But it’s all relative. People talk about exchanges in other parts of Africa, but nothing real happens. Most of the time, nothing trades on some of these exchanges, except perhaps in Zimbabwe, Ghana and South Africa. For most of the other countries, the only sensible way that you can invest is on a venture capital basis – certainly not through stock exchange investments.
If you examine Ghana’s exchange, which is roughly capitalised at US$1.9 billion, one single stock, Ashanti Goldfields, makes up as much as 90% of the market capitalisation index. This compares with a figure of 10% for Nigeria’s single largest listed company – Nigerian Breweries Plc.
Once the Nigerian Stock Exchange can advance significantly beyond the idea stage on the computerisation of the settlement system, the market is bound to become a lot more attractive to international institutions.
Q: Earlier you talked about your offshore operations. I believe this puts you in competition with some of the bigger and established foreign institutions who are, presumably, already providing similar services to Nigerians. Can you provide the same quality of service from here in Nigeria?
DA: Admittedly, our single, greatest challenge is that of gaining the trust and confidence of our target client group. Beyond that, I have to say that our objectives, though ambitious, are distinctly achieveable and quite practical. When you look at it closely, there is nothing that specially qualifies Holland to produce tulips over and above other countries. However, a significant portion of the world’s tulips come from that country. In the same vein, with the advancement of technology – i.e., modern communications, information systems etc., there is no reason why we cannot provide an equally effective and efficient investment management service from Lagos, so long as we are able to recruit experienced portfolio managers from any of the major financial centres.
What we have at ARM are a number of experienced professionals whom we have equipped with information systems with which they can monitor client portfolios, international markets, share prices and relevant economic news on a real-time basis. With our basic infrastructure, their reaction time to changing market events is the same as that of their peers in London or New York. You must also realise that there are a few African Central Banks and institutions, such as the African Development bank who have successfully managed their multi-billion dollar portfolio from Africa.
Q: Lets talk about your investment management style. What are the key factors tn your investment style?
DA: This tends to vary from portfolio to portfolio. We tend not to apply a blueprint across the board, since we manage portfolios for clients with different risk-return objectives. Generally, in terms of our offshore operations, key factors that drive our investment decisions are: asset allocation; country selection; sector selection and security selection. For any portfolio, the most important decision is the long-term asset allocation – that is, the break-down of funds between asset classes such as fixed income, equities and cash instruments. In addition, country selection is a factor that domestic (i.e., one country) portfolios don’t have to address. At the end of the day, the key to performance for offshore (global) portfolios is to have the allocation among countries right.
Q: How regularly do you review your asset allocation?
DA: Our asset allocation decisions are always based on the economic scenario. We are not technical investors who change their minds from week to week. We create long-term economic scenarios based on proper study and analysis of the underlying policy fundamentals and break them down into shorter-term, quarterly allocation decisions. We look at each country’s position in the economic cycle – and remember these cycles are not synchronised country-to-country.
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