Standard Investment Bank: The Highest Returning Fund Manager in Kenya

Interview with Nahashon Mungai, Executive Director for Global Markets at Standard Investment Bank (SIB)

What is your assessment of the sector? What options do people have? What are the latest trends?

The first asset class is in the stock market. These are typically stocks listed in the Nairobi Stock Exchange. Over the last 10 years, we have seen very little activity in the stock market for various reasons ranging from regulatory to the aggression that has been seen in this market by private equity funds. The stock market has not been as vibrant as we want it to be; therefore, many investors have not received the returns they would have wanted. The second asset class is investment in Kenyan government bonds. This remains a very good option for investors but would typically be a good investment for someone who is looking for consolidative terms. It is quite safe. The third investment class, which is the most popular in Kenya, is in the real estate sector. In real estate, there are two types of investors. First are those who would buy developed properties or develop properties themselves, and the second are those who would speculate on land. The latter is what the typical retail investor would do. They buy land in the hope that infrastructure or development changes around that area will cause the value of that land to increase over time. At some point, that became the biggest asset class in Kenya. It has actually created a crisis in urban development because there are a lot of people buying land, not for the sake of building anything or adding value, but for the sake of speculation. The former as an asset class is also quite popular. Some of our competitors have pushed this as an asset class and a product to their clients. But a lot of land is overpriced due to the speculation around it and it causes a very poor return if you actually develop property for rent or for sale. The average rental yield in this country is around 5% which barely beats inflation which is around the same level. As an asset class, it underperforms in the market. There are other asset classes, but they are unregulated. Investing in cryptocurrency was recently a fad in Kenya. At one point, Kenya was the 7th largest trader of bitcoin in the world. A lot of Kenyans will dabble in small scale agriculture. Someone who works in the city will have some investments back home in some sort of agricultural project. However, they run it as a feel-good business rather than a professional business and they rarely make a return on it. The major categories are the stock market, Kenyan bonds, and real estate segments.

What is Mansa-X?

We have returned 22% annualized returns for our clients. That has beaten any other fund manager in Kenya. We are now the highest returning fund manager in Kenya. We are only one year old. We are very proud that we could come into the market and in our first year beat what the other fund managers are doing.

Mansa-X is a result of these options that exist that we see as a problem. As an investment bank, we are constantly questioned by our clients to create something more exciting for them. We tell them to be patient because the stock market in Kenya is going through a slump, but Kenyans are not patient. Kenyans are also very well informed. Internet usage in Kenya is one of the highest in the continent. People know how the stock market is doing in the US or London. They ask us why we cannot give them options in the global market space. Kenyans have lost money because of using unregulated entities. They even try to invest in asset classes like gold. They are now looking to buy gold physically. They know the price of an ounce of gold three years ago compared to today and they know the price is going up. Kenyans are well traveled. They know they can buy and sell gold in Dubai but want to know why they cannot do the same in Nairobi. There is only so long that our clients can keep asking us these question without us coming up with a solution. Therefore, in 2017, the Capital Markets Authority (CMA) in conjunction with the National Treasury decided to do a survey in Kenya to find out what Kenyans are investing in. They were surprised to find that 50,000 Kenyans were actually trading in the online forex trading space. There are around 200,000 retail investors in the Nairobi Stock Exchange, with about 50,000 being active. This online forex trading business was in direct competition with locally created capital markets. Instead of them seeing this as a negative, they took it as a positive. This was a chance to regulate and create a product around this in Kenya. This is big in Europe, London, and the United States. They regulate these asset classes. They regulated the brokers who were active in that space as well as regulating the funds, hedge funds, money managers, etc., who dabbled in these products. They created the Online Foreign Exchange Trading Regulations in 2017. Under those regulations, they created licenses for entities that can participate in this market. The first entities that were licensed were brokers and they created pricing for the asset classes. Next, the money managers were licensed a year later. Our license allows us to trade in many asset classes, but they can be categorized into five sectors. First, we can engage in the buying and selling of currencies in order to make a profit for our clients. The second asset class we can trade in is precious metals. This includes gold, silver, platinum, palladium, on behalf of our clients. The third asset class is commodities. From Nairobi, on behalf of my clients, local or not, I can take positions on natural gas, oil, WTI, etc. I can also invest in equities, both local and international single stocks. I can also take positions on global stock indices. For example, I can take a long position in the S&P 500 in the US. We are the first to be licensed as a money manager in Kenya and the only ones to hold that license. It is a very new area and we are pioneering in this sector. It is new for the regulator, for us, and for the investors. It is a very exciting space. We then created a fund around this license based on the fact that we have that license as a money manager and also that we have a license as an investment bank. This allows us to put together those two advantages and we created the fund called Mansa-X. Mansa-X is a multi-asset strategy fund meaning we take positions on behalf of our clients in all these assets that we have been licensed to trade in and use our skill sets as traders to then make a return for our clients. This fund also has a few other distinct advantages based on our license. The first is that the Capital Markets Authority allows us the use of leverage in our trading. We are able to make certain leveraged bets within the fund which allows us to improve the return we give our investors. The second advantage we have is that we are able employ what is called a long shot strategy. Almost all the traditional fund managers in Kenya would typically get into asset classes where you can only make returns for your clients if the value of that asset class goes up. If I invest in the Nairobi Stock Exchange, I have to buy stocks with the expectation that the prices will then go up. If I buy property, it is with the expectation that I can sell it at a higher price than I bought it at. If that does not happen, then I cannot make a return for my clients. If it actually loses value, then I lose money for my clients. Our fund allows us to take short positions which is a game changer in Kenya. We can take short positions on assets that might lose value in the short, medium, or long term and be able to use that either as a pure trading play where we make a return for our clients or we can use that as a means to hedge an existing long term position in whatever we are trading. This allows us to do something that has never been done in this part of the world. Traditionally, what has helped hedge funds in Europe and in the to make fewer alpha returns for their clients was their ability to hedge out their plays and you can only do that if you are able to short particular asset classes. You can then be able to use leveraging to augment any return that you are making because it is a very marginal return. This has been available globally in most of the financial cities in the world and we are now offering it to Kenya. We like to think of ourselves as a global fund. The way we operate it, the standards we use, the way we manage our risk, the people that we hire, everything about how we run this fund is international best practice. An investor who is in London or Frankfurt or Paris can actually invest in our fund and have the same expectations as they would have with a fund manager based where they are. We are able to compete at the same level because we have access to similar markets, access to similar systems, and we have very good human resources capacity here.

Do you have only Kenyan assets in Mansa-X? What is it made up of?

Within the fund, the portfolio at any one time will hold a big chunk of positions in G10 currencies. We will buy and sell major G10 currencies against each other. Whether it is the pound, the Euro, the yen, the Canadian dollar, the Swiss franc, we have a basket of currencies we are holding. We have expectations as to what we think will happen to them over time and we like to take longer term outlooks to some of these currencies. For example, changes in the price of oil will affect our position on the Canadian dollar. We have been holding gold as a position for almost a year now. We hold Kenyan assets as well, mostly cash and cash equivalents, as a big portion of our fund because of risk management. Our fund is Kenyan shilling denominated. Next year, we plan to start a dollar denominated fund mostly due to public demand. Everything we do is customer driven. If customers are demanding a certain thing, then we will give it to them. The fund contains all these asset classes. We determine the proportions based on proprietary models that we used based on correlation models and volatility models to minimize risk.

What has been the result of the fund?

We have had a good year. We have returned 22% annualized returns for our clients. That has beaten any other fund manager in Kenya. We are now the highest returning fund manager in Kenya. We are only one year old. We are very proud that we could come into the market and in our first year beat what the other fund managers are doing. Our investors are very excited about this product. Some people think 22% is too high, not sustainable, not realistic, or that our bets are too aggressive. But we are a very conservative fund. Our returns are representative of the kind of returns investors should expect for a Kenya shilling dominated fund.

Who are your clients?

Our typical investors tend to be aspirational Kenyans, middle class. They are trying to make a better living for themselves. They are trying to make their surplus funds work for them. The typical Kenyan’s biggest worry and fear are the immediate costs that could change their life. Your typical middle-class person is worried about healthcare. If any member of his family or he himself gets sick, then there is a very big chance that his savings will be wiped out. That is a very big concern for Kenyans and our typical investors. Medical costs in this country go up year by year. They are now in the double digits. If you are investing your surplus funds in a single digit yielding fund, then clearly, if anything ever happens to you, your savings will not keep up. The other worry is education. The cost of education in this country is very high. This is something that a lot of people in the West do not worry about, but in Africa, it is a big deal, especially if you are an aspirational citizen. You would want your children to go to better schools so you would not put them into public schools, but private schools will raise their fees by double digits every year. Those are our typical clients. They come to us looking for a solution. Therefore, when we give double digit returns in the high 20s, it is the kind of returns fund managers should have been giving in the first place. Other fund managers locally charge fees, just as we do, but they have been very slow to take up alternative investments. There has been over-reliance on the struggling stock market and the real estate sector and that has weighed down on their returns. We are changing the paradigm. Are we going to come here and ask our clients to give us fees to do the exact same thing that has been done for the last 30 years, or are we going to ask them to give us a chance to try something new? We all need to do something different if we are going to survive.

What is your vision for the next two to three years?

It is not a guaranteed fund and we do not guarantee returns, but we really watch the downside. Our entire model is predicated on the fact that if you watch the downside, then the upside will take care of itself. Almost everything we do on a daily basis is designed to protect the downside. At any one time, if you invest in Mansa-X, you invest in a risk management fund as well. I insist, even to our traders here, that we always have to safeguard the downside. I am confident that our investors are safe from that perspective. In the next two to three years, my dream for the fund is bigger than even the fund itself. The dream I have is for Nairobi to become a financial services hub. If you look at Kenyans, a typical Kenyan will use Uber to come to their office. When he gets to the office, he uses M-Pesa to pay. He works the whole day. He might use a food app to order food. When he goes home, he will watch Netflix. He is using internet-based solutions throughout the entire day to do basic things. Kenyans are a very digital lot. Our investment solutions have not kept up with that. After doing all these things, on the weekend, when he meets with his investment friends, the investment solution will be to buy land 20 km outside of Nairobi. There is a misconnect there. You are very switched on in every aspect of your life. But when it comes to investments, you have so few options that you invest in average return investments that are not liquid. If anything happens to him, he cannot sell that property 20 km from the city. As an investment bank, we need to give Kenyans alternative investment solutions and these solutions need to be more easily accessible and reflective of the challenges that Kenyans actually deal with. We need to get into investments that give better returns, protect them from downside risks, and provide better liquidity so that Kenyans can be able to access their money. In the next two to three years, Mansa-X will be able to prove that to Kenyans and will be able to create a whole new way of investing in Kenya. Kenyans will wake up to the fact that alternative investments are the way to go and will come in droves to invest in Mansa-X. One of our other dreams is to inspire other fund managers to copy us and do the same thing. The more funds that are doing this, the more it will be validated as an investment option and the more Kenyans will benefit.

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