Let us assume that you have saved N10 million and you want to deploy that money to work for you. Yes, instead of another car or vacation to Dubai [nothing wrong with that], you want it to work for you and your family.
To offer my perspectives on this 22nd day of August, 2018 and by considering all the major economic and political elements in Nigeria, I will posit on these components. We will first consider the pillars which are very critical in ascertaining the investment thesis.
- Duration: What is the duration you want to deploy this money? Let us assume you want it to work for say less than three years. By making that decision, many options will be cut-out as this is Nigeria. Yes, having duration is vital as this money could be useful for something else at a specific time in the future. We cannot do justice without having a timeframe in mind. One future application may be starting a home project in the village or paying foreign school fees for a child.
- Hedge: We will have some diversifications which are like hedging risks. In other words, we will distribute the 10m into many things to reduce risks in this season of political somersault.
- Country: The country is Nigeria with our political economy, growth prospects, market trajectories, and more. I will take into consideration that the investment will be in Nigeria. This is a country where the only politician who has not changed political party is the President. We have records of the leaders of the Senate, House of Representatives and state governments changing political parties. Simply, there are no core political principles in the nation.
- Indicators: We would consider the time value of money. Yes, inflation is a huge factor as we examine the options. Besides the face value of money, the purchasing power of money over time is critical. In other words, N10m today at $1=N360 may be ‘bigger” (think of value for money due to inflation) than N11.5m in three years if $1 becomes N530 (certainly no one prays for that. Pardon my academic modeling).
- Risk Appetite: I will assume moderate risk for moderate gain but the preservation of principal is important. In other words, you do not want your money to develop wings and fly away as you pursue returns. You want at least to have the principal preserved.
- Others: This investment is open to any sector or endeavor that is legal under local and international laws.
By considering the above pillars, I present these options and from them we would make recommendations on how to deploy this N10 million.
- Fixed deposit: You fix the money for three years in a good bank in Nigeria. The Nigeria Deposit Insurance Corporation (NDIC) insurance will cover a part of the N10 million even in a rare case the bank collapses! So, your risk is fairly managed. Broadly, for 10 million, the interest rate cannot be more than 10% looking at some numbers from most Nigerian banks. In short, the average for 10 million fixed deposits, for three years, is about 6-7%.
- Treasury bills: This is also protected as this is from the Nigerian people and the whole power of the nation of Nigeria. Provided that you believe there would still be Nigeria, treasury bills have no risk. From the Central Bank of Nigeria, the rate hovers around 11% per year. To account for potential changes, let us use 12% on average over the three years of the investment. This is an optimistic model but it is reasonable as this year we have seen the rate moved from 13.70% to 10.70%.
- Stock market: You look for some good stocks especially in banking and invest. The risk is there but most are so beaten that they have no room to fall further. Of course, stocks bring the turbulence and the risk which cannot guarantee the preservation of principal. Due to that, we have to remove stock market in the consideration. Besides, we do think that the global stock market might have peaked: the only movement possible is coming down. When that happens, investors just focus to cover their portfolios thereby reducing liquidity in the emerging markets like Nigeria.
- Money Market / Mutual Funds: This is a highly diversified form of investment which includes many things I have noted already. An example is FBN Money Market Fund – “As an open-ended mutual fund, the FBN Money Market Fund invests in a broadly diversified portfolio of short-term, high quality money market securities such as Treasury Bills, Commercial Papers, Bankers Acceptances and Certificate of Deposits issued by rated banks in Nigeria”. The return falls in the range of TB and fixed deposit but could be higher. Again, unlike TB, you pay tax on money market / mutual fund gains.
- Agribusiness: You explore agro-investing and put money in some of the companies which have emerged to bridge the investment gap in agriculture. I have written on many of these companies here. Also, I listed some in my book. Let me avoid mentioning names. But largely, these companies return about 11% – 14% per year. In some cases, they promised to protect principals. Of course that is not going to be taken like that: there is no way a startup can guarantee principal as the startup can technically fail!
- Micro-Lending: There are some startups which are well backed by solid investors offering at most 15% on interest rates for savings. Those remain risky. Their rates are better than fixed deposits from banks, and always superior to any savings interest. But they are startups and you need to have the confidence to trade in the territory.
- Trade financing: You contribute to finance trade in some Igbo men going to China. But you need to have the right people. They mop money and use that money to bring containers. This is a thriving business in Aba and Onitsha as most have shunned banks due to cost of fees. And with the good returns, some people are taking risks. They offer good contracts and in some cases provide collateral as they own shops. Personally, I have used this model to assist some people. Yes, people I know. Their returns are the highest in Nigeria. The deal happens over four months as that is the typical time to go to China, import items and sell them at wholesale. Please do not ask me for contacts. If you are interested, this is very common in Aba, Onitsha and Lagos where there are concentration of Igbo traders.
- Startup/Angel investing: This is off for you as the 3 years will be too short for any meaningful support to the startup. You need to have a window of about 6 years to invest in this option.
- Crowd-Investing: There are many startups raising funds for logistics, transportation, etc in the broad crowdfunding domain. Some of the interests are decent enough. Unfortunately, most come with huge risks.
After examining the options, there are my recommendations:
Put 60% in treasury bills (TB) for three years with an automatic rollover instruction. They would pay you the interest as it happens which can be good to finance other small things. The advantage of TB over fixed deposit is that government does not tax TB. Yes, TB is tax-exempt and that is huge over fixed deposit which may deliver the same interest rate but taxable.
Put 40% to finance trade. In Aba and Onitsha, some people put money to finance trade. Some men mop cash and travel to China to bring containers. The return can be close to 40% with my recent data in four months. It is a solid business outside the banking sector run by some Igbo men. Say someone needs to import something of N220 million, they pool money and once the items come in, they sell wholesale and balance the people that funded them. This is the real investment and can technically make you whole. But it has risks if you do not know the person. You would not like to give money to someone you do not know.
Enjoy your risks at your risk!