In the past seven to ten years, Uganda has witnessed an explosion of investment clubs. Friends, family members, colleagues at work, former schoolmates and a host of individuals with a common bond have come together to save and invest, as a means of securing their financial future. According to the Investment Club Association of Uganda, there are over 8,000 investment clubs in Uganda. Investment clubs have sought to create wealth for members by investing in a variety of asset classes. Investment clubs typically invest in real estate, transportation and agriculture. Apart from helping in the cultivation of a savings culture among Ugandans and providing financial security for members, investment clubs can be an economic driver by providing long term capital for businesses, if soundly managed with the necessary investment know-how.
There is an old saying that cautions on the risk of putting all your eggs in one basket. Applied to investment clubs, to minimize risk to their members' savings, it is imperative that they invest widely in different types of assets. Investment clubs need to give consideration to the purchase of financial assets by investing in Collective Investment Schemes (CIS) which invest across different other financial assets, selected by a professional manager, rather than the investment clubs' leadership (who are typically comprised of busy full time employees). Diversification through such financial assets can contribute to growing members' wealth in a regulated environment.
A CIS involves several investors contributing money into a common pool, with the funds collected being invested by a professional manager.In Uganda, there are five CIS managers (UAP-Old Mutual, Xeno, ICEA, Stanlib and Britam) who are licensed and closely regulated by the Capital Markets Authority(CMA). The regulation of CIS managers by CMA provides a layer of safety and protection for members’ contributions. Currently the five CIS managers are managing approximately Shs. 45 billion on behalf of Ugandans. In Kenya and Morocco, the total size of assets under management by CIS’s are approximately 1%and 39%% of GDP respectively, the equivalent of which would be assets of between Shs. 1 trillion and Shs. 39 trillion. This therefore presents a huge growth opportunity.
But what is in it for Investment Clubs?
An investment in a CIS is an indirect investment. The CIS manager invests on behalf of the investment club which saves the club members the hassle of undertaking research on what and where to invest. With investment club members most likely being employed elsewhere or engaged in other personal income generating activities, a passive investment such as a CIS saves them the trouble of continuous monitoring of their investments. CIS managers have knowledge and skills to carry out research and allocate funds in investments that will yield higher returns while minimizing risks. Additionally, the CIS managers handle the day to day administrative details of the fund on behalf of the investors, lowering the administrative burden on the members.
Additionally, CIS can invest in a wide variety of assets such as shares, treasury bills and treasury bonds. Investing in all these assets might be an uphill task for a single investment club, considering the huge amount of money required. The CIS can provide exposure to several asset classes without necessarily requiring a high capital outlay from an investment club as funds are pooled from several other investors (both individuals and groups)with a similar investment objective. This helps in diversification of investments, which is good practice in maximizing earnings for the investment club and minimizing risk.
CIS units when held can be converted with great ease to cash.An investment club only needs to complete a sale request and submit it to their CIS manager, with the proceeds being credited to an investment club’s account, usually within four days. This is a relatively easy investment to turn into cash when the need arises, compared to investments such as land that might take a lot of time and effort before the proceeds are received.
How to Get Started
For an investment club to invest in a CIS, an account needs to be opened with a CIS manager. This is an account where all units purchased are deposited by the CIS Manager. Once an account is opened, sales and purchases can be made by placing an order with a CIS manager. A Club can buy as many units as it wants and can sell either part, or all their units at any time of the year. This flexibility is specifically important for investment clubs which oftentimes have members joining or leaving at any time of their existence.
Investment clubs could also commit to saving a fixed amount every month for a long period of time, say 5 or 10 years. This could expose the club to the benefit of compound interest on every monthly investment, as CIS managers compute returns on a monthly basis. It is much harder to save a lump sum for investment purposes, given family and societal demands on our savings.However contractually committing to a monthly saving for 5 or 10 years with a CIS manager, with penalties for early withdrawal, is a powerful way of growing individual or group savings.
With investment clubs becoming a prominent feature in Uganda’s savings culture, mobilization of capital by channeling investment club savings to CIS managers will not only impact the savings of their members, but will also have a positive impact on Ugandan businesses and contribute to economic growth.