Fixed Income Investing in Ghana-A Beginner's Guide [1 ed.]

Table of contents :
Table of Contents
CHAPTER 1-INTRODUCTION TO FIXED INCOME SECURITIES 3
Don’t get fixated on the vocabulary 4
CHAPTER 2 THE GHANA FIXED INCOME MARKET -AN INTRODUCTORY OVERVIEW 6
What Securities are traded on the Ghana Fixed Income Market? 6
Market Infrastructure 6
The Players 7
Membership Rules 7
CHAPTER 3: DISTILLING THE RULES AND REGULATIONS 9
CHAPTER 4-TRADING, TRANSACTIONS AND SETTLEMENTS 11
Trading hours 11
Trading Methodology 11
Halts and suspensions in trading 11
Quotes 12
Settlement Cycles 12
Dispute settlement, penalties and sanctions 12
CHAPTER 5-LISTING OF FIXED INCOME SECURITIES 13
Sponsors of An Admitted Security 13
Fees, taxes and commissions 13
Listing fees 13
Trading Commissions 14
CHAPTER 6- FIXED INCOME FUND PICKING : A PRACTICAL GUIDE 16
The Ecobank Ghana Fixed Income Unit Trust 17
STANLIB Income Fund Trust 19
CHAPTER 7-PUTTING IT ALL TOGETHER-The Ecobank Fixed Income Fund v StanLib Fixed Income Fund 21
Fees 21
Holdings: 21
Risks 21
Minimum Investments 21
Performance Evaluation 21
CHAPTER 8-APPENDIX 24

Citation preview

FIXED INCOME INVESTING IN GHANA A BEGINNER’S GUIDE

BY: Samuel Amankwah

Table of Contents CHAPTER 1-INTRODUCTION TO FIXED INCOME SECURITIES .......................................................................................................................... 3 Don’t get fixated on the vocabulary ........................................................................................................................................................................... 4 CHAPTER 2

THE GHANA FIXED INCOME MARKET -AN INTRODUCTORY OVERVIEW ..................................................................... 6

What Securities are traded on the Ghana Fixed Income Market?............................................................................................................ 6 Market Infrastructure ......................................................................................................................................................................................................... 6 The Players................................................................................................................................................................................................................................ 7 Membership Rules ................................................................................................................................................................................................................ 7 CHAPTER 3: DISTILLING THE RULES AND REGULATIONS ............................................................................................................................... 9 CHAPTER 4-TRADING, TRANSACTIONS AND SETTLEMENTS ............................................................................................................................11 Trading hours ........................................................................................................................................................................................................................11 Trading Methodology ........................................................................................................................................................................................................11 Halts and suspensions in trading .............................................................................................................................................................................11 Quotes ........................................................................................................................................................................................................................................12 Settlement Cycles ................................................................................................................................................................................................................12 Dispute settlement, penalties and sanctions .....................................................................................................................................................12 CHAPTER 5-LISTING OF FIXED INCOME SECURITIES.........................................................................................................................................13 Sponsors of An Admitted Security ............................................................................................................................................................................13 Fees, taxes and commissions .......................................................................................................................................................................................13 Listing fees..............................................................................................................................................................................................................................13 Trading Commissions .......................................................................................................................................................................................................14 CHAPTER 6- FIXED INCOME FUND PICKING : A PRACTICAL GUIDE ..........................................................................................................16 The Ecobank Ghana Fixed Income Unit Trust ...................................................................................................................................................17 STANLIB Income Fund Trust .......................................................................................................................................................................................19 CHAPTER 7-PUTTING IT ALL TOGETHER-The Ecobank Fixed Income Fund v StanLib Fixed Income Fund ........................21 Fees .............................................................................................................................................................................................................................................21 Holdings: ..................................................................................................................................................................................................................................21 Risks ............................................................................................................................................................................................................................................21 Minimum Investments .....................................................................................................................................................................................................21 Performance Evaluation ..................................................................................................................................................................................................21 CHAPTER 8-APPENDIX ...........................................................................................................................................................................................................24

CHAPTER 1-INTRODUCTION TO FIXED INCOME SECURITIES Finance and financial systems seem opaque to many people. What I say to my friends and readers is that all finance is premised on sophistication. And many people in finance have used this as a tool to shut out many would be investors, who, having been spooked by wild finance jargons, have left their finances to “better” people What I want to do is distill fixed income investments and investing for the everyday investor. The structure of this guide is going to be simple. We will do a rough introduction of fixed income securities and cut through the choppy waters of the market structure (trading, regulations and players) and finally end with a practical template for evaluating fixed income funds, the usual medium through which retail investors enter the market. At the end of the guide, I hope to have at least passed on some valuable information that will make many readers bolder in understanding what’s out there in terms of investing. Let us begin Fixed Income Securities Also called fixed income instruments, these securities provide fixed regular payments to investors. The returns are calculated on the invested amounts. These returns, when expressed as percentages, are called coupon rates, yields or more commonly interest rates. There are a ton of investable fixed income securities and depending on what part of the world you are from, you may have access to really different fixed income instruments. I will cover the most basic fixed income instruments 1.Government Bonds and Notes: Governments need money to fund education, health and other social programmes. Governments can fund these programmes through taxes. For less developed countries such as Ghana, funding can come from international firms such as the IMF and the World Bank. Another way governments fund their programs is through issuing bonds and notes. In some nations, government bonds and notes are simply called treasuries.

Bonds v Notes v Bills: What’s the difference? This is a pretty great question. The difference usually comes in maturity periods. Government bills or treasury bills are usually of the shortest maturity periods-3 months to a year. Notes will have longer maturity periods of more than a year but not more than 10 years. Bonds will have much longer maturity periods and could have maturities ranging from 10 years to 100 years. Argentina, which has defaulted on its bonds several times, recently issued a 100-year bond. The Ghana government’s most recently issued bond was in January of 2020.

2. Corporate Bonds and Notes: Like governments, corporations also need to raise money. When corporations are not raising money through self-generated revenues/profits, issuing equities, drawing down revolvers or selling assets, then they turn to corporate bonds and notes. Corporations will raise bonds and notes to buy assets (plants, equipment), to fund stock buybacks or to beef up their cash reserves in periods of triage.

3. Supranational Bonds: These bonds are usually issued by supranational organizations such as the European Union, ECOWAS and the IMF.

4. Commercial Paper: Say you own a company and your receivables are bloated but you have not been able to convert said receivables to cash. You need cash to operate. For a business to remain a going concern, it needs liquidity, which means cash. Without cash, companies become insolvent. So, companies looking to fund inventory purchases and payroll expenses usually do so by issuing commercial paper. Commercial paper usually has short maturity periods and thus very low interest rates. Companies who issue commercial paper then use the money raised to pay staff, suppliers and procure inventory. Commercial paper is just one of a broader securities category called money market securities

5. Fixed Deposits: Some financial institutions such as banks offer a financial instrument that basically works this way: you make a fixed deposit at the bank, which in turn provides a regular stream of returns to the depositor.

6. Statutory Agency Bonds: When government agencies issue bonds, we call these fixed income securities statutory bonds

7. Municipal Bonds: These are bonds issued by municipalities. They serve the same purpose as government bonds in that they are used to fund municipality projects. Municipal bonds are very uncommon in Ghana. These bonds are originally meant to fund community lighting and electrification projects, potable water initiatives and healthcare improvement initiatives.

8. Repurchase Agreements (Repos): Repos are an indirect way of investing in fixed income securities. Here is how they work: Companies and businesses typically get money either from self-generated revenues, debt or equity issuances. If the company decides to finance through debt, it typically provides the safest of collaterals (usually government bonds/bills/notes) to the lender. The lender will then provide the money, usually less than the value of the treasury bond/note, to the company. When the borrower(company) is ready to pay back, it buys back the treasury from the lender at a price that is a bit more than the treasury’s value. The lender’s profit comes from the difference between the money it lent and the money it received. Repo agreements are usually done overnight: borrowing and repayment are done in just over a few hours and are a common way for banks to beef up their capital, though term periods for the repos can be longer than a few hours. What happens if the borrower defaults? The lender can sell the borrower’s security. It is why lender and creditors typically prefer very liquid collaterals for repo transactions. You can look up the first repo agreement here in Ghana: a tri-party $40 million repo trade involving Fidelity Bank, Société Générale and Front Clear, a Euro-African financial institution. The borrowing period is 1 year, and the collateral was a government cedi bond.

Don’t get fixated on the vocabulary As I said, finance seems difficult because of the opaqueness and jargons accompanying it. To make things clearer, I will break down some of the jargons used in fixed income markets and investments.

1. Face Value: The face value of a bond or note or fixed income instrument is the price of the bond when it is first issued. If you like, it’s the principal amount and the amount on which interest is calculated and paid.

2. Coupon Rate: Think of the coupon rate as the interest rate on the bond. It’s what the corporation or government or institution issuing the bond promises the security holder as a return. Coupon payments are made either annually, semi-annually or as defined by the bond’s covenants or prospectus

3. Yield: Yields are similar to coupon rates but differ slightly. You buy a bond of face value GHS 100, whose coupon rate is 14%. That is, you are promised GHS 14 each year until maturity. You sell the bond to someone else for GHS 105.At that price, GHS 14 paid out to the new owner of the bond is a 13.3% return. This is the yield of the bond. Had you sold the bond at GHS 95, the new owner would have enjoyed a yield of 14.7%, much higher than the coupon rate. Remember that the coupon rate remains the same at 14% but the yield changes when the price of the bond changes,

4. Maturity: maturity period always answers the question: how long will it take to get back my principal? A 20year bond means the answer to that question is 20 years

5. Primary Market: Government and corporate bonds and/or notes are usually large in value: hundreds of millions to billions in value. Retail and everyday investors don’t have the capital. There needs to be a market for these bonds then, large enough to absorb their value. These markets are called primary markets and are made up of institutional investors such as pension funds, and hedge funds. These institutional investors are the ones who will initially subscribe (buy) the bond. Unlike secondary markets, primary markets are not structured. Because of this lack of structure, issuers usually need a sponsor who can find these institutional investors

6. Secondary Market: The secondary market is a market where retailers and traders can participate. The secondary market here is the Bloomberg E-Bond Trading platform

So, this was a great chapter. I tried to keep it as simple as possible and hope that the information provided has given you a taste for what is to come. In the next chapter, we will begin to cut through the structure of the fixed income market in Ghana.

CHAPTER 2 THE GHANA FIXED INCOME MARKET -AN INTRODUCTORY OVERVIEW Here, we will discuss the fixed income market in general. It’s good to have an introductory understanding of the fixed income market in Ghana, how it operates and who are those playing in the sandbox. The Ghana Fixed Income Market was put in place to help the trading of fixed income securities in the secondary market .The primary market for the fixed income securities is regulated by the Bank of Ghana(I assume regulation is mostly for government issued fixed income instruments ) and the secondary market by the Securities and Exchange Commission. A fixed income market helps in 1.Price Discovery: When you are buying a security, not only fixed income securities, you want to be sure you are buying the security at the right price. To buy at a good price, and not more and not less, you need lots of people to evaluate the security. Remember that valuation (determining value) is arbitrary. The value of anything is set by the market. The more information the market has, the more “accurate” the valuation. Different traders from different institutions will run pricing computer runs for corporate bonds; institutional investors will pore through balance sheets and, combining them with credit ratings, will evaluate the price of a bond. All these bits of information are brought to bear when investors buy bonds. These bits of information inform investors. Without a fixed income market, there is no place of convergence of information and data and evaluating the fair price of a note or bond becomes a divergent process. In effect, there is little or no price discovery. 2.Market Liquidity: There is a famous quip that market participants harp on about liquidity, liquidity and liquidity but there is not a drop to drink. So, what is liquidity? Let’s assume, you have a security such as a bond or a stock. You want to sell the security because you need the money or because you think you overpaid for it. You decide to sell it. The more buyers you have available, the better your chances of offloading the stock or bond. A market for participants helps to convene buyers. Without a convention of buyers, traders and participants, you have a worstcase scenario of not being able to sell your security or getting a less than fair value for the security

What Securities are traded on the Ghana Fixed Income Market? Fortunately, we have covered many if not all these fixed income instruments and your understanding is very likely implicit. I will run through the list of currently tradeable securities: 1.Government Bonds/notes and bills, including Eurobonds (Eurodollar bonds) 2. Corporate Bonds and Notes 3. Money Market Instruments 4.Supranational bonds 5. Municipal Bonds 6.Repos 7. Quasi-government bonds /statutory agency bonds: think Energy Sector Levy Bond and Cocoa Board Bonds

Market Infrastructure You must be wondering where the fixed income securities are actually traded. Bond trading is a bit interesting. Unlike equities, which are now traded almost exclusively electronically, all over the world, bonds are traded by

phone. When we take that into account, Ghana has done well by making sure all the fixed income securities are tradeable on the Bloomberg E-Bond trading system. Ghana isn’t the only country with an e-bond trading system; Mauritius’s local market makers and the Central Bank of Mauritius launched theirs in 2018. But before you rush off to trade on Ghana’s E-bond system, you should beware that you need to buy the service (Bloomberg Professional Service) and the subscription fee comes in at a hefty $24,000. Per year. Moving on, what bonds can be found on the system? Well, the government’s just-issued, aggregate $ 3 billion bond ($ 0.75 BIL, $ 1.25 BIL and $1 BIL) with coupon rates of 8.875%, 6.375% and 8% respectively and average maturities of 40, 6 and 14 years respectively can be found on the trading system. Since I have you here, let me add that when issuing bonds, you (obviously) need people to buy up the debt, Finance ministers or even presidents don’t have access to an institutional investor who would be willing to buy debt. So, they go to Investment Banks, who have as clients these bond-buyers. They tell the institutional investors of our bonds and how we have priced them. These institutional investors, if they like the bond and its covenants, will then choose to buy. In later chapters, I will cover this in detail Remember we spoke of primary dealers and institutions licensed to trade fixed income securities on the E-bond system. These institutions hold accounts with a local organization called a Central Securities Depository (CSD). When they buy and sell the bonds, the CSD simply “moves” the securities from one primary dealer’s account to another primary dealer’s account. This mechanism is simple and easy. It makes sense for a single organism to handle the transactions at the bottom of the pyramid. The licensed dealers have their internal books and controls and those books and systems will then reflect the sales or purchases of the securities. While it’s a bit more complex than that, at the level we want to discuss fixed income investments, this explanation is fine The CSD (with its accounts) works with a settlement bank, the Bank of Ghana, to ensure funds are transferred to the right dealing members. Note that the CSD accounts are not limited to holding only bonds nor are only institutions allowed to open CSD accounts. The CSD accounts holds equities(stock) and any one individual can open a CSD account. In fact, to trade securities in Ghana, you need a CSD account.

The Players I have spoken of the roles of the CSD, the Bank of Ghana, The Securities and Exchange Commission, The Ghana Stock Exchange and the Licensed Dealers. There are a bunch of other people with related interests whose roles are secondary to the functioning of the entire system: Financial Markets Association Ghana, Ghana Association of Bankers and the Ministry of Finance. In addition to these, there is a governance committee with representation from these institutions. Its job is to make sure the system runs smoothly. There is another oversight committee from the Ghana Stock Exchange that can come in and overrule pretty much anything the governance committee says. To make sure the governance committee is doing its job well, the Ghana Stock Exchange has three representatives on the governance committee.

Membership Rules There are some straight-forward rules on the GFIM. The governance committee does not want to see its hard work ruined, so it has put in some standard rules: To trade on the Bloomberg E-bond system, you must be

1. A primary dealer (authorized by the Bank of Ghana to be a primary dealer) and licensed by the SEC to trade securities. Primary dealers are usually banks such as Cal Bank, Standard Chartered, etc. I will include a list of primary dealers in the Appendix. 2. A non-Primary dealer bank but one that has been authorized by the Securities and Exchange Commission to deal in securities 3. A Licensed Dealing Member authorized by the Ghana Stock Exchange However, the regulations do not end there. These entities looking to become members of the Ghana Fixed Income Market must not have ran afoul of any regulations set by their regulators and must be fully complaint on all regulations set by their individual regulators. Moreover, all three entities must still apply specifically to become Ghana Fixed Income participants. The only participant I have not spoken of is the Bank of Ghana, which has special authority to deal in government bonds and notes on the Ghana Fixed Income Market, mainly because of monetary policy reasons.

CHAPTER 3: DISTILLING THE RULES AND REGULATIONS Members of the GFIM shall provide to the GFIM the names and contact details of their traders. Primary Dealer GFIM members (mainly banks) must provide, on all agreed benchmarked securities, two-way quotes. Non-Primary Dealer members of the GFIM may or may not do so. Let me explain what are two-way quotes. When we say two-way quotes, what we mean is the buy/sell price of a security; said in a more technical way, the two-way quote is the current bid price and the current ask price. The traders in the employ of the GFIM member institutions must be full time employees, relevantly qualified and available for workshops produced by regulators and professional bodies. This rule is a pretty standard one. If you are a retail investor investing with a dealing member, you want those executing deals and trades on your behalf to be relevantly qualified. You want them certified by some professional body. While certifications are no guarantees of quality of service, they at least offer some comfort and assurance of competence. GFIM members must provide clearly written internal controls on personal conduct of their traders, carry out risk management and control strategies, carry out protocols to safeguard personal accounts in whose capacity dealing is done, provide adequate record keeping, silo their duties within operations and provide fidelity insurance cover for their operations. Its obvious that risk management is a big part of securities dealing. Limits on trades need to be set, limits that can be triggered when trades exceed some predefined risk target. This can stay losses for retail investors. Internal controls and siloing operations through a sort of Chinese-wall style arrangement prevents dealers from frontrunning their own clients. Dealers are also required to record their traders’ calls and chats; chats and voice records could be expunged after 2 months. Other records-email, letters, agreements, contracts-can be expunged only after a period of 7 years. We will cover some of the basic things dealing members need to be firm on: 1. Fixed income securities to be dealt in : Dealers need to clearly spell out to clients and the Central Securities Depository the kind of fixed income securities they intend to deal in on the market 2. Traders’ transactional limits: While fixed income instruments are not as heavily traded as equity securities, on an electronic exchange, you’d expect trading to be plenteous, smoother and faster. You would want to limit your traders’ activity, in terms of trading volume, as and when certain market triggers, such as interest rate highs and lows, are met 3.Client information should be kept between dealer and client unless requested by a regulator or a court. 4. Client Accounting: Dealers must render proper accounts on all client monies regarding transactions (securities sold and purchased), trading charges and all other transactions 5. Insider dealing/trading: This is basic insider trading law. Broker-dealers should not look to profit from confidential information, information that has not had time to marinate in public. 6.Know Your Client: Dealers should diligence customer relationships and take apt Know Your Client actions, including reviews of customer information 7. False Information: As stipulated by the Securities Industries Law, a dealer must not provide false information to investors or to regulators

8. False trading: Dealers should not engage in false trading of any sort such as trying to manipulate the market. This includes carrying out a flurry of trades to jack up bond prices and then steeping back in to sell in a now hot market. A solid support system for trading involves the following: 1. Appropriate office infrastructure. This is arbitrary and will probably be decided on a case by case basis. 2 A terminal or platform for trading, subject to approval from the Ghana Fixed Income Market periodically 3. Communication system (I presume an office communication system) 4. Trained and certified personnel (I presume this requirement goes for traders and front office staff and not back office staff) holding ACI (Financial Markets Association), authorized Dealing Officer certificates or any SEC/GFIM approved certification. 5.Risk management systems on trading limits and approval limits 6. Segregation of duties between trading desks and back office, basically saying trading activities need to be properly siloed

CHAPTER 4-TRADING, TRANSACTIONS AND SETTLEMENTS Trading hours 9.am (UTC)-16:00(UTC). Changes in trading hours will be communicated in press releases. Orders will be suspended en masse at 1600(UTC).

Trading Methodology Securities may be traded through: 1. Request for Quotes method: The buyer will generate a request for a quote on a fixed income security. Those dealing members on the Ghana Fixed income market that can meet the demand and price, will then provide quotes for that fixed income instrument. Once the investor is satisfied with the price offered, she purchases it. The request for quotes is usually done in standard amounts or multiples of standard amounts determined by the GFIM. For benchmarked securities, the standard amount for quotes for GFIM dealer to dealer transactions is GHS 500,000 or as determined, from time to time, by the GFIM. For all other quotes on agreed benchmarked securities, the standard amount is GHC 50,000 or as determined by the GFIM. When a requesting trader (dealer asking for the quote) requests a quote not in multiples of the standard amount, the quoting dealer may choose to quote for that exact amount or may quote for what he can. Trades for which quotes are not given are assumed to be quoted on standard amounts. Two-way quotes are valid for 60 seconds o and a quote cannot be changed after it has been accepted. If you are wondering about quotes for non-benchmarked securities, a dealer may choose not to provide them. 2. Voice Trade: As well as request for quotes, trading of fixed income securities can be done via voice trading. With voice trades, a voice trade ticket is entered to validate the trade. All validated trades are then reported to the GFIM. I will add that quotes provided over the phone are valid only for that specific phone call and must be completed in the system within ten minutes from execution 3. Firm orders: Trades can also be executed on firm orders placed into the trading platform. The placement could be done anonymously and is very similar to a good-till-cancelled order. Firm orders work in this way: the trader places an order to purchase or sell a security at a price. Until the price falls or rises to the level, the order is still “open”. Once the price is right, the trader buys up or sells the security. Spreads The maximum spread for all securities listed is 50 basis points (0.5%) but may be changed, from time to time, by the GFIM

Halts and suspensions in trading We previously spoke of trading on inside information. The GFIM may suspend all trading on evidence that a trader has/had inside information that has not marinated in public, on unusual movement in price or volume of an instrument(+3.5%/-3.5%) and on liquidity issues(when investors find it hard to sell securities for what they think these securities are worth).

Quotes All quotes for notes and bonds are done based on yield as well as on the price of the bond less any accrued interest. The price of the bond less any accrued interest is popularly called the clean price of the bond. ( Obviously, once there is a clean price ,there is a dirty price, which is just the price of the bond that includes accrued interest).

Settlement Cycles As I said before, settlements for payments for securities traded on the GFIM are done via two transfer systems: the securities transfer system (done by the Central Securities Depository) and the funds settlement system (done by the Bank of Ghana). The settlement period shall be a T+2 cycle or when permitted by the GFIM, a T+0 or T+1 cycle. What T represents is the transaction date. Said another way, when the transaction was completed. T+2 means that dealers will be recognized as the owners on record two days after the transaction or one day after the transaction(T+1) or on the same transaction day(T+0) and so on. After the settlement of securities is done via the depositary system of the CSD, settlement of cash, that is, transfer of funds will be done by the Bank of Ghana. Just know that, settlements of cash and securities shall be done on a delivery on payment basis, meaning transfer of funds by the buying dealer should be done at the same time or before securities are transferred through CSD accounts. This is perfectly natural: delivery on payment is commonly used in securities settlement across the world.

Dispute settlement, penalties and sanctions Complaints against GFIM members shall be presented written; GFIM Members and traders who violate trading provisions of the GFIM will then be given a hearing, after which the dealer or trader or both could be sanctioned by written reprimand, fine or suspension/expulsion from trading on the GFIM. The entire referral hierarchy for all disputes is : the head of the GFIM(first step), then the GFIM governing committee /board if not resolved in ten business days, then to the Securities and Exchange Commission if not resolved in another 10 business days and finally, when all else fails, to a court. All sanctions on GFIM dealing members will be reported to that dealing member’s regulator, which is either the Securities and Exchange Commission of Ghana or the Bank of Ghana. Just because you are suspended or expelled does not mean you can leave outstanding trades uncompleted; a suspended GFIM Dealing must settle all outstanding trades prior to its expulsion or suspension. .

CHAPTER 5-LISTING OF FIXED INCOME SECURITIES Sponsors of An Admitted Security In any primary listing of a security, the security must be sponsored by an investment house/bank who builds a book of all the institutional investors who would want to subscribe to the security. This is what we previously described in chapter 1 as the primary market. Now, this book building is no different with fixed income securities. The sponsor or underwriter will file all necessary applications supporting the application, ensuring the issuer can honorably discharge the covenants listed in the bond’s prospectus. Companies issuing securities with sponsors who are also associates will need to add another independent unassociated co-sponsor. Below, are the allowed sponsoring or underwriting institutions: 1.Government of Ghana Bonds, notes and bills and all other fixed income instruments issued by the Bank of Ghana must be underwritten or sponsored by the Bank of Ghana or the book builder. The $3billion dollar Eurobond was sponsored by a joint team consisting of the Bank of Ghana, J.P Morgan and Bank of America Merrill Lynch. 2.Corporate debt of no more than GHS 50 million may be sponsored by a Licensed dealing member, an investment advisor or an issuing house. All securities issued must be freely transferable and registered with the Central Securities Depository, should have an issued nominal value (not trading value) of at least GHS500,000 and should have at least 5 primary holders. Before listing, prospectuses will have to be approved by the Securities and Exchange Commission. Prior to issuance, companies who are looking to issue securities must have published at least 3 years’ worth of accounts in accordance with all company code regulations and should have a trailing, three-year, aggregate pre-tax profit, profits not-driven or reduced by non-recurring or extraordinary incomes, revenues or expenses.

Fees, taxes and commissions Taxes paid on interest income vary depending on the residential status of the investor. Non-residential investors who earn interest on their investments must pay tax on those gains. Interests earned on government bonds are not liable to taxes for residents who are citizens. To get a much clearer sense on taxes on fixed income securities you can speak to a securities lawyer. Membership fees for GFIM dealing members include admission fees for PDs and Non-PD Banks. Licensed Dealing Members pay neither admission fees nor annual membership fees. On readmission, members who are suspended, would need to repay admission fees.

Listing fees Instruments listed on the GFIM are subject to listing fees. These fees are categorized based on the maturity of the instrument. For securities with maturities of a year or less, such as money market instruments, commercial papers and certain government bills, there is no listing fee. For notes and bonds issued by the Government /Bank of Ghana and local government, the fees are an application fee ( 0.02% of the face value of the securities that are to be listed),a listing fee(0.01% of the face value of the securities to be listed) and an annual fee(0.01% of the face value of the securities to be listed). For all other securities, the fees are an application fee ( 0.02% of the face value of the securities that are to be listed),a listing fee(0.01% of the face value of the securities to be listed) and an annual fee(0.02% of the face value of the securities to be listed)

Trading Commissions Trading commissions will be paid to regulators on trades on government bonds and bills and other quasigovernment bonds such as Cocoa Board notes. The commission is typically charged on the buy side as well as on the sell side of the transaction. Dealer to dealer transactions also attract a dealer’s commission contained in the spread and a regulatory commission equal to 0.02% of the nominal value. Like the broker’s commission, the regulators’ commission must be embedded in the spread. For dealer to client transactions, the dealer’s commission should be contained in the spread and so should the regulator’s commission of 0.02%. If it happens that a fixed income instrument is rediscounted, that is, discounted a second time, the new discounted price usually contains the regulators’ commission. The regulator’s commissions from both the buying and the selling dealers will be deducted at source during the settlement cycle. The regulators' commission of 0.02% will be split among the Ghana Fixed Income Market (50%), the Central Securities Depository (30%) and the Securities and Exchange Commission (20%)

Delisting a security Securities may be delisted from the GFIM voluntarily or involuntarily(as a penalty).For suspensions at the request of the securities issuer, that is a voluntary delisting, the GFIM will consult with that issuer’s sponsor. Involuntary de-listings or suspensions will be done with input from the Ghana Fixed Income Market’s advisors. Securities could be delisted not only as a penalty for trading infractions but also for several reasons listed below. Prior to an involuntary delisting, the issuer could be provided room to assume compliance to all grounds for that delisting. Once the issuer is unable to comply, the security is delisted. The reasons for delisting could be any of the following: 1. Disposal of collateralized assets /principal assets: issuers generally pledge a company's assets as collateral for the notes. When company management willfully disposes off these assets, the security could be delisted on the grounds that the issuer has technically defaulted on the note by disposing off the collateral. 2. Disclosure: Companies with debt listed on the GFIM need to make sure they regularly file accounts and comply with all regulations. Those who fail to report relevant details could be fined or have their securities de-listed 3. Failure to meet fees: Issuers who fail to pay listing fees, annual fees and any other associated charges could have their issues delisted 4.Going concern: Businesses that are no longer going concerns or that are insolvent may find their issues delisted Voluntary Delisting A company looking to de-list from the GFIM will first hold a general meeting of holders to make that decision. Assuming the decision is to de-list, the issuer could de-list by submitting a written application with reasons three months prior to the delisting date and must support the application by a resolution of securities holders gained from the convened meeting. Applications must be backed by a delisting fee-0.02% of the value of the security being delisted. The largest holders of the security or the promoters of the security must then purchase the rest of the securities from the other holders at a price equal to the average 12 weeks trailing market price of the security or the market price on the day of the general meeting, whichever is higher. Companies not primarily listed on the GFIM can de-list by giving the GFIM 60 days prior notice and by providing to the GFIM its plans to provide liquidity to holders who may wish to relinquish their holdings.

What Next Phew. I know this chapter was difficult reading. If you are not clear on something, you can go back to whatever you feel you couldn’t grasp. We have now had an overview of the fixed income infrastructure in Ghana. My hope is that readers have some sense of how fixed income securities work. In the next few chapters, we will look at practical investing in fixed income securities

CHAPTER 6- FIXED INCOME FUND PICKING: A PRACTICAL GUIDE The good thing about fixed income securities is that, barring credit risk (the risk that the security issuer will default), you can expect a steady stream of payments up until the security matures. However, as a retail investor, it’s quite difficult to buy a corporate bond or a government note not only because of the high subscription fees but also because of the paperwork. For those who want to exit the highs and lows of equity markets, fixed income securities can be a relatively safer haven The best thing to do is to pick a fixed income fund provider. That fixed income fund provider will have a fund made up of different bonds of varying characteristics. Here I will go through what you need to look for when choosing a fixed income fund. Then we will use two fixed income funds, Ecobank Fixed Income Fund and The STANLIB Fixed Income Fund as examples. 1.Management fees: For most actively managed funds there are management fees. It’s what you pay the fund issuer and its managers to hold and invest your money. Management fees are typically quoted as percentages of the invested capital. Fixed income funds should generally have very low management fees. Anything more than a 1% management fee is very steep. But one must consider the investing environment; In Europe and the US, management fees are typically very low because of the proliferation of fund providers. The same cannot be said for Ghana. Something else to consider is whether management fees are upfront or are paid on the invested amount and the returns. In clear sleight of hand, Fund providers can bury this information, leaving unsuspecting clients none the wiser.

2.Redemption fee: When you start a fund, you want investors to keep their monies with you long term. You don’t want them asking for their capital once a month. They need to be in it long term. Some fund providers have very complex redemption processes, mainly to discourage investors from redeeming their monies. But just in case you might want your money back long before the fund’s holdings mature, you need to know the fund’s redemption fees. Redemption fees or charges, like management fees, are also listed in percentages. I have seen redemption charges as high as 5%.

3. Subscription fee: In previous chapters, I spoke of bond subscription. When the government or a corporation needs to issue a bond, it gets a bunch of institutional investors to buy the bond. The institutional investors interested in buying the bond pay a subscription fee to the bond issuer. The institutional investor when it later packages into a fund all the bonds it has bought will charge the retail investor-you and I- this subscription fee. Like the redemption fee and the management fees, the subscription fee is quoted as a percentage of the amount you put up to invest.

4.Net Asset Value: The net asset value of a fund is the difference between the fund’s assets and liabilities expressed as a per unit value of shares. Typically, the larger the net asset value the likelier that the funds fees are

lower. You should be careful: just because a fund has a ton of assets of management does not make it a better fund.

5. Fund shares: Technically when you buy a fixed income fund, you are buying shares of the fund. The fund issuer will typically list the number of shares of the fund. This listing is somewhat important in computing the price of the fund per share, especially when this metric is not given; once you have this value, you can compare price per shares across funds competing for your money

6.Minimum investment: I almost forgot to include this, but this is a very big or small decision point depending on well your wallet power. The size of the minimum investment could make or break your decision to invest in a fund. Generally minimum investments that are very high are reserved for complex investments, which I won’t cover here. Minimum investments amounts could be as low (or high) as GHS 50 or as high(low) as GHS 60,0000. 7. Benchmark: To give investors performance perspective, fund providers usually grade their performance against a benchmark, one that qualitatively and quantitatively resembles their funds.

Fund case study: Ecobank fixed income trust v StanLib income trust fund

The Ecobank Ghana Fixed Income Unit Trust With the information we have so far, we can evaluate basic fund performance. We will use the Ecobank Fixed Income fund as the first proxy to understanding how to pick a fund based on the criteria we have previously discussed. We will then look at another contender, the STANLIB Income Trust Fund. While looking at both funds we will examine a few nuanced metrics that will firm up our decision to pick one of the two funds. Let’s begin with the Ecobank Fixed Income Fund: As of February 2020, last month, the Ecobank Fixed Income unit trust fund had a net asset value of about GHS1.34 billion. Fees: Fee Management Fee Subscription Fee Redemption Fee

Percentage 0.5% frontload 2% per year Nil

Holdings When you buy a unit of a fixed income fund or unit trust, you are essentially buying a piece of the underlying bonds or notes. While some investors care solely about performance, others want to know the holdings from which the units they own are derived. Let’s look at the holdings of the Ecobank Fixed income fund. Now the fund provider has only disclosed the fund’s top holdings.

1.Government of Ghana/Bank of Ghana 10 Year fixed rate note (21.11% of the fund): This is a fixed rate note that matures in ten years. It’s hard to know when this bond was issued since the government has issued three of these notes; each is yet to mature. The first note was issued on 14th November of 2015 and is due to mature in 2025.This note was only offered at a discount (19.00%), meaning subscribers paid 81% of the face value of the bond and at maturity would be paid that face value of the note. The second note was issued on June 11,2018 with an option for either a discount rate or interest rate, both at 17.5%. This bond is set to mature in 2028. The final note, also issued at a discount rate/interest of 19.8%, was tendered on June 24,2019 and will mature in 2029. One can hope that the Ecobank fixed income fund holds the note issued in 2019: it’s the best of the three, by far. When we speak of notes, we speak of risks. In terms of risk, the 10-year fixed note is backed by the full faith of the government of Ghana, and your appetite for risk should be determined by your faith in our government. The other risk for government notes is inflation risk. Inflation is going to eat into the 19.8% returns, especially as the bond matures. Inflation rates currently stand at 9.86% and, adjusted for inflation, you should expect present value returns of something close to 10%.

2. Government of Ghana 5-year fixed income note (10%): Once gain the government issues a ton of 5-year fixed rate notes. There are close to 11 of these notes currently in play; the latest was issued on March 23,2020 and will mature 5 years from then. Like the 10-year fixed rate note, the 5-year note holds inflation risk. You need to adjust the stated coupon rate of the note for inflation. 3. Government of Ghana 2-year fixed rate note (9.58%): There are close to 12 of these notes currently outstanding. You should expect each one to mature in 2 years. The latest issued 2-year government note was issued in February,2020. Barring some extraordinary upward movement in inflation this note’s exposure to inflation is relatively low.

4.Government of Ghana 6-year fixed rate note (7.26%): This bond was issued in February of 2019; Investors who subscribed had the option of buying it at a discount or of receiving regular interest payments. This note has a coupon rate of 21%, a surprising discovery since the 10-year government note’s latest issue comes with a 19.8% coupon rate

5. Energy Sector Levy Bond (20.98%): the entire ESLA bond is a GHC 10 billion bond coming in four different tranches. The fund could hold any of the four issues: the GHC 4.7 billion aggregate amount maturing in 2024 and 2027, the GHS1 billion maturing in 2029 and the close to GHC 430 million, maturing in 2031, issued this year. The coupon rate is 19.8% for the GHC1 billion and 20.5% for the GHC430 million issuance. Any of these issues could be held by the Ecobank fixed income fund

The rest of the fund’s holdings look this way: Asset Percentage Allocation Cash Backed Commercial Paper 1% Fixed Deposits 4% Cash Equivalents 6.9% Corporate Bonds 4% *Refer to the Appendix for definitions of these terms. ECOBANK FIXED INCOME FUND PERFORMANCE Now that we have profiled Ecobank’s Fixed Income Fund, we will begin to look at its performance. We will look at average monthly performance, yearly performance and year to date performance. We will evaluate the fund’s performance with respect to the fund’s chosen benchmark, the 364-day Government of Ghana Treasury Bill. Performance (%)

1-Month

3-Month

6-Month

Ecobank Fixed IFund 364% T-Bill

1.11

3.64

7.38

1.36

4.51

9.25

YTD

1-Year

5-year

2.45

16.09

164.89

Since Inception 356.95

2.9

19.48

154.27

343.57

Looking at the fund’s performance over any of the periods, it’s easy to tell that the fund has underperformed its benchmark. This does not even consider management and subscription fees. Adjusting for a return net of management and subscription fees will paint an even grimmer outlook for the Ecobank fixed Income Fund. Verdict: While I like the fund’s disclosure, the fund’s underperformance against the 364-day T-Bill is worrying. The underperformance isn’t recent but has ran through the investment year. Investors should certainly keep an eye on the fund’s performance. We will make our decision after evaluating the STANLIB FUND

STANLIB Income Fund Trust The STANLIB Income Fund Trust was rolled out in January 2011. The fund’s size, per its last publicly issued fact sheet is GHS 147.5 million. While the fund does indicate its asset allocation and/or holdings, it does not break the asset types into individual bonds or notes. For example, the fund holds government notes but does not specify which notes. Because of this decision, I will provide the funds holdings as at the end of 2018.I expect that these holdings are most likely to be the same holdings at the beginning of 2019. Fixed Income Asset Type Government Treasury Bills Cash and Cash Equivalents Corporate Bonds Money Market Government Bonds

Percentage Allocation 6.2% 18.8% 23.8% 13.1% 38%

Without knowing the comprising bonds in its corporate bonds portfolio, it’s difficult to speak to the risks (mostly credit risks) held by the corporate bonds. Looking at the fund’s performance, my intuition tells me the individual bonds are mostly investment grade bonds. Looking at the money market allocation tells me a significant percentage of funds’ assets are held in money market instruments such as commercial paper. Once again, without knowing the specific money market instruments, we can only speculate. Charges and Investment Amounts Investment Amounts: The minimum investment amount is GHS 20 with expected minimum monthly contributions of GHS 10 Charges and Fees: Fees Redemption/Exit Fee

Charges (in percentage) 2% in the first year;1% in the second;0% in all other years Nil 2% 0.25%

Subscription Fee Annual Management Fee Trustee Fee FUND PERFORMANCE

The fund has picked for its benchmark the average return of the 1-year and 2-year treasury bill Period 1 year 3 years 5 years Since Inception

Cumulated Aggregate Return- Fund 17.5% 21.6% 22.5% 19.62%

Cumulated Aggregate ReturnBenchmark 15.6% 18.7% 20.1% 16.5%

CHAPTER 7-PUTTING IT ALL TOGETHER-The Ecobank Fixed Income Fund v StanLib Fixed Income Fund Fees: They both charge a management fee of 2% and no matter the reasons, this fee is very steep. The case for a high fee could be made if one considers the fact that there are very few investment funds in the country. The redemption fee for investors in the Ecobank fund is nonexistent while for STANLIB retail investors, you will pay redemption fees in the first and second year but none for any years after that.

Holdings: The holdings are similar but the curiosity for the STANLIB fund is the percentage allocation in corporate bonds, an allocation much higher than that of the Ecobank fixed income fund. The STANLIB fund is therefore exposed to higher credit risks, even if the corporate bonds are investment grade.

Risks: Without knowing the holdings of the STANLIB fund, evaluating credit risks for the bonds is difficult. One should expect corporate bonds to hold bigger credit/default risks. Since the STANLIB’s fund holds a larger percentage allocation of corporate bonds, I will expect the fund’s exposure to credit risks to be higher than the Ecobank Fund’s. Inflationary risks are held equally by both funds. Short term instruments such as money market instruments and commercial paper have lower risks because of their shorter maturity periods

Minimum Investments: The minimum investment for the STANLIB fund is GHS 20 while that of the Ecobank fund is GHS 50. The lower investment amount for the STANLIB fund makes it more attractive to retail investors with very little disposable income.

Performance Evaluation I know you have one eye on performance. We will evaluate the funds on the year to date returns, that is nonaggregated return on a GHS 1 investment made in a year. In effect, we want to ask: If you had placed GHS 1 with fund managers from STANLIB and The Ecobank Fixed Income Fund, where would you have received better value.

PERFORMANCE EVALUATION

Fig.1.

Note: The STANLIB fixed income fund has not provided the calendar year return for 2019. The STANLIB fund has in recent years done a bit better than the Ecobank Fixed Income fund. Looking at the individual graphs for the funds’ performance against their benchmarks, you can see that the STANLIB fund has outperformed its benchmark by some margin. The Ecobank fund seems to be seeing flagging returns when compared to its benchmark. The Ecobank fund’s 1 month,6-month and 1-year performance against its benchmark is really worrying and seems to tell the story that this year’s returns will be frankly below par. The difference in returns could be because STANLIB’s allocation percentages to corporate bonds is very high; however, that should be offset by the Ecobank fixed Income funds large allocation to the ESLA bond, a relatively high yield bond. With all said, we will vouch for the ECOBANK fixed income fund. Yes, its minimum investment is higher compared with that of the STANLIB fund, but that difference should not significant, even to small retail investors. Given how often retail investors seem to liquidate their investments, STANLIB’s first year redemption charge of 2.0% is a pretty big price. Sure, the Ecobank fund has underperformed its benchmark for most of the past year. But without STANLIB’s 2019 returns, we can’t confidently vouch for it. Funds absolutely need to provide returns disclosures for every operating year. Until we can evaluate STANLIB’s 2019 performance, between the two, we will stick with recommending the Ecobank fund. Note that this doesn’t make the Ecobank fund the best fixed income fund

around. It’s simply, in my opinion, the better of the two funds presented here. Full disclosure, this is just a case study on choosing a fund. It’s not investment advice.

CHAPTER 8-APPENDIX I hope I have provided some needed insight on Fixed Income Investments in general. At this time, you should have not only a broad knowledge of fixed income investments but also a practical approach to evaluating a number of funds competing for your income. I understand that despite my best efforts to make this guide as basic as I possibly can, there are still some things, mainly jargons and terms, that are not clear. Here, I will provide the definitions of some of the finance jargon used in the text I have also included some other information that you may find useful

Unit Trust Don’t be spooked by the term unit trust. While not entirely like a mutual fund, thinking about a unit trust as one is probably the most accurate description. Functionally, it is no different and the differences are not material enough to matter to an individual investor such as you or I. Fidelity insurance cover: Occasionally you will have a number of employees who are dishonest and can defraud a company or cause huge losses to that company. Fidelity insurance covers an employer so that any instance of theft or fraud does not end up hurting the company. Cash Equivalents: These are short term securities with very high liquidity. Because they can be readily converted to cash, they are essentially cash equivalent. Most of these cash equivalents are deemed so because of their very short maturity periods (usually 90 days or less) and low risks. The most common cash equivalents are commercial paper and treasury bills Wash trades: Some dishonest investors or traders could try to increase the trading volume of a security. They can do so by selling a security into the market and buying it back immediately. The goal is to increase the securities trading volume. giving it an air of desirability. Some investors also perform wash trades to claim tax deductions on losses on the initial selling. Technical default: Before a company raises money through a loan or by issuing debt, its finances are looked over by potential investors. Leverage and debt ratios are considered before investors in the primary market decide to buy the bonds/notes. A company has technically defaulted on its debt if it fails to keep requirements, such as leverage ratios, above a certain level. s Associate Company: When company A owns a significant stake in company, usually more than 20%, then company B is an associate company of A Prospectus: A prospectus is a document that a company issues prior to issuing debt or stock. It will usually hold information on the issuer, its financials, how much it intends to raise, etc. Prospectuses are meant to guide investors, who can use it decide whether they want to buy up the shares/bonds. Investors can build valuation and buyout models off of the information provided

Spreads: The spread on a security is commonly defined as the difference between the bidding price and the asking price. In a transaction, one party wants to sell and sets an asking price. Another counterparty bids at a certain price. The difference between the two prices is the spread on that security Ghana Fixed Income Market Dealers: You can find the list of licensed dealers on the Ghana Fixed Income Market https://gse.com.gh/ghana-fixed-income-market-gfim/gfim-dealing-members/