Balanced funds topped the list of funds recommended by asset managers as the most suitable for investors in 2016, following the Central Bank of Egypt’s (CBE) decision to reduce the rate of investments in monetary funds and fixed income tools from 5% to 2.5% of the deposits of each bank.
Balanced funds rely mainly on the diversification of investment instruments through two axes. The first is comprised of fixed income tools like treasury bonds and bills and high-revenue investment certificates.
The second is represented in long-term investments in stocks with rapidly declining prices, regularly distributing part of the returns to the investors, and allocating other parts to developing the funds’ capital.
The appeal of balanced funds comes as the result of the unavailability of sufficient opportunities for investors to invest in monetary funds and fixed income tools, following CBE’s decision to lower the rate of investment.
Moreover, despite the decline in their investment opportunities, monetary funds nonetheless maintained their appeal to investors, however dropping to second place after having previously dominated as an investment tool.
In third place come growth equity funds, which aim to enhance the growth of the investors’ portfolios throughout the period of investment.
In general, funds constitute a tool that allows investors to purchase investment certificates and are managed by investment managers who conduct studies about the best available companies and fixed income tools.
They also provide strategies that suit the nature of each investor whether aiming to obtain regular and stable revenues with the least amount of risks or high, regular, long-term revenues with high risks.
CEO of Ridge Capital Ahmed Abdul Ghani said that growth equity funds are suitable for the current period since they are invested in stocks over a long period of time, over which they aim to increase the value of stocks to achieve capital growth.
He said this category of funds is suitable for long-term investors who prefer to obtain revenues after a period that exceeds one year. These funds are also characterised by an ability to accommodate the increase in inflation rates and this is most evident when the funds achieve high revenues after an surge in the stock exchange.
Monetary or fixed income funds that invest in treasury bills, bonds, and deposits, achieve returns that are slightly in excess of the inflation rates in Egypt, hence ensuring that investors maintain the value of their money without bearing losses.
CBE announced that the annual inflation rate stabilised at 11.06% in December 2015, recording no changes compared to the same period last year. Inflation is considered one of the indicators that determine the currency’s purchasing power.
Abdul Ghani called on investors not to head towards equity funds since these funds require investors to take major risks before revenues are achieved from investing in shares, which is unsuitable for the current phase since it requires more vigilance.
Managing Director of the asset management department in Cairo Financial Holding Riham El-Saeed said the investment climate is suitable for monetary funds that invest nearly 70% of their money in short-term financial tools, such as deposits and treasury bills.
Monetary funds are characterised by the availability of liquidity, which enables investors rapidly resell certificates. They provide regular returns, which is suitable for investors who wish to maintain a stable income such as pensioners. Monetary funds have the advantage of high returns from deposits as well as treasury bills, especially since returns increase when the state issues treasury bills and bonds to finance the budget deficit.
In the meeting on 28 January, the Monetary Policy Committee fixed interest rates on deposits and loans after it raised them on 24 December 2015 by 0.5%. In light of this decision, the interest rate increased on deposits to 9.25%, and on loan prices to 10.25%.
Returns on treasury bills in the Egyptian market begin at 11.392% for bills with a 91-day term, 11.832% for bills with a 182-day term, 12.05% for bills with a 273-day term, and 12.107% for bills with a 364-day term.
El-Saeed said that fixed-income funds are considered a suitable investment tool since they focus on investing in treasury bills and bonds and long-term investment certificates. They moreover provide regular income, despite fluctuations in capital markets.
The appeal of these funds increased significantly, in particular after governmental banks, like the National Bank of Egypt (NBE) and Banque du Caire, issued investment certificates with high returns, with a 12.5% interest rate and a three-year term. The returns from these certificates are distributed monthly.
El-Saeed said investment opportunities in monetary funds and fixed-income tools will not have sufficient availability for investors as a result of CBE’s decision in January obliging banks that have such funds to reduce the size of investments in them from 5% to 2.5% of the deposits of each bank. This translates into the suspension of subscriptions to such funds until the investments are reduced to 2.5% of deposits.
An official at an asset management company, who preferred to remain anonymous, recommended balanced funds as the best investment tool in the current period. The official said there are three factors that contribute to the appeal of these funds; namely that investors cannot invest in monetary funds and fixed-income tools due to CBE’s decision.
The official also pointed out that a certain aspect of the balanced funds’ management strategy depends on investing in fixed-income tools, such as treasury bills and bonds, results in reducing the amount of risks and turns part of the profits into regular returns for investors in these funds.
The third and final factor is the investment of part of the capital of the balanced funds in stocks over a long period of time whilst employing a part of the profits to achieve capital growth in the value of the investment certificate. This in turn makes it an appropriate investment tool for the current period, which calls for taking advantage of the low prices of stocks through long-term investment.