THE NATION MONDAY, DECEMBER 26, 2011
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PERSONAL FINANCE
Email: taofad2000@yahoo.co.uk
Investor’s Worth
A physician as an investor
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LOROGUN Sonny Kuku’s credentials as a physician are quite intimidating but so also is his passion for enterprise development and investment. In both his primary calling and his hubby-investment, he holds many unequalled firsts and for many decades, he has been the quintessential example of the symbiotic healing between medicine and financial security. The first African Master of the American College of Physicians, the first recipient of the Distinguished Alumnus Award of the University of Lagos and the Ambassador of Goodwill Award of the City of Freetown and the first and only physician to list the shares of a hospital. A long-standing trustee and distinguished fellow of the National Postgraduate Medical College of Nigeria, president and trustee of the West African College of Physicians, chairman, University College Hospital (UCH) Ibadan, Dr. Kuku has been the joint medical director and chairman at Ekocorp Plc, the owners of Eko Hospital, which he co-founded in 1978. In fact, the “K” in the “Eko” represents his surname under the arrangements whereby the name of the hospital was derived from the first letter of the surnames of the three trailblasing partners. A fellow of the Nigerian Academy of Science, Dr. Kuku had variously chaired the Committee of Pro-Chancellors of State Universities, Committee of Chairmen of Federal Tertiary
Hospitals and King’s College Old Boys Association. But while he remains a reference of excellence in medical practice, Dr. Kuku has always been an avid entrepreneur and investor. In 1984, he led the transformation of the Eko Hospital into a distinct corporate entity with the incorporation of Ekocorp. A decade later, Ekocorp made history as the first medical company to be listed on the Nigerian Stock Exchange (NSE). Ekocorp today ranks as the second most capitalised company in the 10-member healthcare sector at NSE with a current market value of about N2.52 billion. Kuku also have a long-standing interest in the financial services sector. He had served on the board of the then Midas Merchant Bank and currently chairs the board of Midas Stockbrokers Limited. With his growing profile as an investment-savvy physician, Dr. Kuku was appointed to the board of Ecobank Nigeria Plc, the Nigerian subsidiary of the pan-African bank-holding companyEcobank Transnational Incorporated (ETI), in 2004. He currently chairs the multinational 14-member board of Ecobank Nigeria. Beside his major equity stake in Ekocorp, another public proof of Dr. Kuku’s investment prowess is his shareholding in Ecobank Nigeria. He holds the second largest equity stake among the directors with his shareholdings more than 167 per cent above the entire direct
End-of-Year Special
Calculating return on investment (ROI)
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turn on investment to aid in his personal evaluation or in understanding reports by investment professionals. The primary motivation of investment is return. Investment planning, strategy and tactics must therefore keep the primary objective in focus. In investment administration and management, measurement of return on investment is the only way of evaluating the performance of the investment vis-à-vis other comparable investments and alternatives. Return on investment represents the amount of monies realised from an investment, expressed in monetary •Sonny Kuku value or percentage value, at a given period. ROI is the reand indirect shareholdings of ward for the assumption of other directors, excluding the risks since there is no risk-free director with the largest return in the real term. Every shareholding. It is noteworthy investment, including soverthat Nigerian citizens and eign instruments and bestgroups only hold 15 per cent rated companies, involves an equity stake in Ecobank Nigeria element of risks, no matter the while ETI owns 85 per cent. degree of certainty of return. Ecobank Nigeria is currently In portfolio management, valued at about N24 billion. it is important to determine With the exchange of Ecobank the ROI for every stock or inNigeria’s minority shareholdstrument and thereafter the ers’ equities for shares of ETI, overall ROI for the portfolio. Dr. Kuku will now hold equiThis enables the investment ties in a multinational bankmanager to decide the holding company. growth-drivers for the period Dr. Kuku, no doubt, has demand possibly review its inonstrated that healthy body and vestment strategy. soul need not only medical preFor fixed-income securities scriptions but also the assurance like bonds, treasury bills, of financial security that comes fixed deposits and others, the with building nest eggs that ROI is simply measured by stream in incomes irrespective the coupon or interest rate, of physical presence or absence. usually expressed in percentThis physician has surely hearkage term. To get the monened to the allegorical “Physietary value (Naira value) of cian! Heal thyself”. the ROI, divide the gross sum of investment by 100 and thereafter multiply the answer with the interest or coupon rate. For example, suppose you invest N2 million in market index. Leveraged or government bond with a couThe most important type of inverse ETF seeks to achieve pon rate of 19 per cent per anexchange-trade products, ETF num, your ROI at the yearmay be attractive as invest- a daily return that is a multi- end will be N380, 000. ple or an inverse multiple of ment because of its low cost, For equity investment, rethe daily return of a securitax efficiency, and stock-like ties index. An important char- turn on investment comes in features. By owning an ETF, acteristic of this type of ETF mainly in two ways, cash inthe holder get the diversifi- is that it seeks to achieve its come and capital gain (loss). cation of an index fund as The other form of return is well as the ability to sell short, stated objectives on a daily scrip or bonus shares. The buy on margin and purchase basis, and its performance cash income refers to the gross as little as one share. Mean- over longer periods of time value of dividend declared by can differ significantly from while, ETF does not sell indi- the multiple or inverse mul- the company while capital vidual shares directly to in- tiple of the index performance gain (loss) is the difference bevestors as only authorised over those longer periods of tween the purchase price per dealers and investors are alshare and the current market lowed to buy the usually time. Active-ETF derives its value per share. name from its management large blocks of shares known Bonus shares result from strategy which entails dayas “creation units”. by-day active trading and distribution of retained earnThere are many types of publication of portfolio hold- ings in the reserves of the ETF. Index-based ETF, like ings on a daily basis. company to shareholders, index fund, tracks specified usually on the basis of the nominal value of the company and proportional to each shareholder’s holding. ROI for investment in quoted equities thus comprises of the totality of all these, expressed in monetary or percentage term. tor reserves the right to ask Is it a stable growing fund or Suppose you purchased question and seek clarifica- a fluctuating fund? This will 100,000 ordinary shares of a tion before making any com- also enable the investor to company at N20 per share mitment. measure the volatility of the with a transaction cost of 4.0 One of the red points to fund. Highly volatile funds per cent at the beginning of watch out for is the cost out- usually come with higher the period, your total cost of lay of the fund. Professional risks and may turn into traps investment will be N2 milfund manager charges fees to in a declining market. lion + N80, 000 = N2.08 milmanage the mutual fund. An It is also important to con- lion. If the company declared investor needs to consider the sider how the mutual fund fits a dividend of 70 kobo per extent of professional fee as into the general portfolio share, your gross dividend or well as other expenses in re- structure of the investor in cash income will be N70, 000. lation to returns. terms of diversification, Where the market value of Also, investors need to con- sectoral allocation, and cash the company has risen to N30 sider the age and size of the flow among others. by the year end, your capital fund to be able to make reaInvestors also need to con- gain is the difference between sonable comparison with sider the fund manager’s in- the opening and closing other similar funds as well as vestment strategy and risks price, which is N10, multiply general market performance. therein in line with their own by the number of shares, The age and size of the fund investment horizons and risk 100,000, totaling N1 million. will paint a vivid picture of appetites. The total ROI in this example its performance track record. in monetary term is therefore S the year rounds off, investors and investment managers are expected to initiate processes to evaluate their portfolio performance in 2011. While the benchmark index at the stock market indicates the possibility of a double-digit negative average return for equities generally, each portfolio is expected to take its unique hue due to the investor’s or investment manager’s assets composition, weights and management strategy. Evaluation is one of the most important elements in any preoccupation. Whether in administration and management planning or physical construction planning, evaluation plays critical roles as the determining factor and gauge for the measurement of the extent of correlation between the objectives and the end results. When it is usually the last element on the planning process, evaluation serves as the initial element or trigger for the next planning and most importantly leads to corrective measures that better guide the planner closer to the realisation of his objectives. While fund managers and other professionals usually prepare investment evaluation report, either as a statutory requirement or for self evaluation, several individual investors lack the basic of understanding of return measurement. It’s important for any goal-minded investor to understand basic elements and calculation of re-
Ask a Broker
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What is Exchange Traded Fund (ETF)?
HE Nigerian Stock Exchange (NSE) last week listed its first Exchange Traded Fund (ETF), a goldbased ETF known as NewGold. NewGold originated from ABSA Capital and was already listed on the JSE Stock Exchange of South Africa. With the cross-border listing in Nigeria, a new investment window is opened to investors. However, investors need to understand the basic elements of the new instrument. ETF is a security that tracks the performance of a specified security or other assets including stocks, basket of assets, indices, commodity prices, foreign currency rates, and derivatives
among others. ETF is distinguished by some defining factors including fixed capital or where the company has variable capital, then the amount of the paid up share capital of the company shall at all times be equal to the net asset value of the company and its shares shall have no par value. An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closedend fund, which trades throughout the trading day at prices that may be more or less than its net asset value.
Ways and Means
What to consider before buying mutual funds
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HERE are some 26 mutual funds quoted on the Nigerian Stock Exchange (NSE). Most mutual funds on the NSE have showed more resilience and largely resisted the sluggish market situation at the stock market but returns on many pools of investments also fell below average market benchmark. A mutual fund is a type of collective investment scheme that pools funds from many investors and invests such pool in previously agreed investments. Each investor thus becomes a co-owner, otherwise known as unit holder, of the fund. Mutual fund usually has a professional fund
manager that oversees the value creation functions of the fund and a trustee that ensures that the underlining agreements setting up the mutual fund are adhered to. Other professional parties include the registrar that keeps custody of the register of members of the funds. While the nature of a mutual fund may create defining peculiarities that set it apart from other funds, there are general factors that could serve as guides to investors in deciding on a mutual fund. As part of disclosure requirements, mutual funds are required to explicitly state most of these considerations but in the absence of any, an inves-
N1.07 million. To further test the return rate of the investment, deduct the exit transaction cost from the ROI to get a net return. Given existing 10 per cent withholding tax on dividend in the Nigerian market, one may further undress the ROI by deducting withholding tax or use the net dividend income rather than gross dividend income in the calculation of ROI. The above example illustrates measurement of ROI in monetary term. To express this in percentage term, simply get the percentage equivalent of the ROI in the total cost of investment. For the above example, this is express as follows: N1.07/N2.08 * 100 = 51.44. Thus the ROI is 51.44 per cent. The percentage return on investment can also be calculated by determining the dividend yield and capital appreciation rate, and then add the two together. Dividend yield means the percentage of dividend per share to the purchased price per share. Dividend yield for the above example is express as follows: 70 kobo/N20 * 100 = 3.5 per cent. Percentage capital gain is the percentage change between the purchased price and the closing price, which for our example is express as follows: N30 - N20 = N10/20 * 100 = 50 per cent. The addition of dividend yield and percentage capital appreciation gives the percentage ROI. Thus, the percentage ROI in this example is 53.5 per cent, which tallies with the monetary value calculation if the cost of investment is discountenanced. For stock with bonus shares, the total volume is taking to be the initial volume and the bonus shares as the bonus share is reflected in the share price of the company. In calculating a comprehensive ROI, any return accruing on the dividend income from a particular investment, should be added to the ROI for that particular stock. For instance, interest earned on a deposited dividend income or capital gains or/and dividend from reinvestment of dividend income. To get a fuller picture of ROI, otherwise called real ROI, adjustment should be made for the inflation by subtracting the inflation rate from the ROI. Thus with an inflation rate of 14 per cent, the ROI in the above example comes down to 39.5 per cent, without adjustments for taxes and charges. Another way of making better meaning of the ROI is by comparing average ROI on a class of instruments, like shares, with average ROI on another class of instruments, say bonds or deposits. Comparison can also be between ROIs of similar instruments, such as ROIs of two cement companies; between different sub-sectors of the economy, like petroleum-marketing and building materials; between the portfolio or stock ROI and the overall market benchmark index, like the All Share Index (ASI) of the Nigerian Stock Exchange (NSE); stock-to-stock comparison. Access Bank vs FCMB; individual portfolio and mutual fund; and between self-managed portfolio and portfolio under investment manager.