Institutional investors, who they are, and why they matter to our markets.
Author:Muathi Kilonzo, Managing Director and Head of Equities, EFG Hermes Kenya.
Institutional investors include domestic and offshore pension funds, mutual and investment funds, insurers, and private equity investors. Over the last ten months, they made up almost all the value of shares traded on the Nairobi Securities Exchange, with offshore institutional investors accounting for nearly 60% of the value traded. In exchange, they become shareholders in the firms in proportion to the shares they purchase, profiting when the value of their share portfolio rises, and they receive dividends. They can also engage in securities lending and borrowing, lending out portions of their share portfolio for short periods for a fee without losing their shareholder entitlements.
Individuals like you and I gain because some of the funds invested by institutional investors are our contributions to our employer-run and private retirement schemes and from the insurers who run our medical plans and insure our assets. Some of the largest institutional investors on the NSE include the National Social Security Funds of Kenya, Uganda, and Rwanda; British-American Investments Company Kenya Limited (Britam); ICEA Lion Group; Jubilee Insurance; the International Finance Corporation (the private sector arm of the World Bank).
Besides the external capital they invest in our markets, offshore investors ideally form a counterweight to the market. Ideally, they should be on the opposite side of local investors, which creates liquidity. A large, deep, and vibrant market attracts more participants, allows innovation and new product development, promotes price discovery, and reduces friction and transaction costs, which improves investment returns. Besides trade execution, institutional investors look for reputable financial services providers that pass their internal due diligence criteria, help them comply with all pertinent Kenyan laws, and maintain client confidentiality. Since opening in 2017, EFG Hermes Kenya has become the largest equities brokerage on the Nairobi Securities Exchange. In 2022, our market share is 35%.
We are leveraging our experience with institutional investors to package our research, trade execution, compliance aspects, and client-first mentality for retail investors to support their trading in shares listed on the Nairobi Securities Exchange through their smartphones. Brands like Standard Chartered Bank Kenya are already delivering offshore portfolio management, fixed-income investments, bancassurance, and lending using the invested amount as collateral (wealth lending) to their retail clients; digitally. Safaricom is positioning itself to offer wealth management, savings, insurance, and credit services.
Most retail investors are generally not as sophisticated as institutional investors but make up for this in their speed to transact and numbers. Sophisticated institutional investors will take more time to understand the risks to achieve returns that satisfy their mandate. These could be short-term arbitrage opportunities for a hedge fund or long-term for a pension fund manager. Hence, by design, these investors are set up to dig deeper into the drivers of economies and firms by doing detailed research and due diligence.
When considering a retail investor, financial literacy – understanding and using financial skills such as banking, budgeting, handling debt, and learning about investing – becomes an important goal. Being financially literate can mean paying off high-interest debt first, understanding different investment assets and strategies, or recognizing the importance of savings and emergency funds.
It is why we are spending time and money to provide financial and investment management tips on our social channels for retail investors to support them on their journey to financial sophistication.