Personal pension schemes in Ghana: Licensed trustees & fund managers

personal pension schemes _sikasem.org

Managing one’s [personal] finances cannot be complete without a suitable retirement or pension plan. The main aim of pension schemes is to provide financial support during old age or retirement. Certainly, there comes a time in a person’s life when he would not have the strength to continue working. Even if one has the strength to keep working, he may be limited by statutory age requirement. As a reference, the statutory retirement age in Ghana is 60 years. Thus, there may come a time when we no longer receive regular income from our jobs. During this time, a retirement plan remains one major source of income.

Unfortunately, the basic [government] retirement scheme may not be adequate to cater for the growing needs of most retirees. You may have witnessed a number of pensioners complaining about inadequacy of their pension benefits. Surely, the needs of contemporary retirees go beyond just food, clothing and shelter. Modern retirees desire to have access to good healthcare, reliable internet service, exciting recreational activities and many more. Some retirees would even like something to spare for charity and gifts. Yes! Being retired does not stop one from giving, especially in our African community. Besides, a number of pensioners may still be taking care of their kids during retirement.

Obviously, the basic needs of retirees appear to be increasing in modern times. Thus, having a backup pension such as a personal pension scheme would be beneficial. A few workers already have access to other backup pension funds which are mostly provided by their professional unions. A typical example is Teachers fund, which is a retirement supplement scheme for the Ghana National Association of Teachers (GNAT). Essentially, a supplementary or personal pension scheme may provide additional financial support for many individuals to cope with their continual retirement needs.

See also: The journey to financial independence: Understanding the basics

What is a personal pension scheme?

By definition, a personal pension scheme is a type of pension plan where individuals personally contribute towards their retirement. A personal pension scheme can be considered as a private investment plan to cater for one’s future. This can be useful to the majority informal-sector employees who do not normally have access to the mandatory primary pension schemes.

Unlike the traditional pension plan (Social Security) we know of, a personal pension plan is an agreement between the contributor and a pension provider of his choice. That is, individual pension contributors have the option to choose their preferred pension provider. In a way, personal pension schemes allow contributors to determine where their pension money must be invested.

Before the Ghana pension reform in 2008 (covered in the next section), pension contributions from employees were solely managed by the Social Security and National Insurance Trust. This, to some extent, put pension contributors at the mercy of any financial decision made by SSNIT, whether good or bad. With the introduction of the three-tier pension scheme, employees have the added advantage of a personal pension provided by private pension institutions, most often insurance companies.

Overview of 3-Tier pension scheme

In 2008, a new pension Act was passed in Ghana. The new Act mandated a three-tier pension scheme to replace the old pension. The minimum age at which one qualifies to contribute to the new pension scheme is 15 years.

Implementation of three-tier pension scheme began in 2010, with the National Pensions Regulatory Authority (NPRA) as the regulator. The main similarity between the three tiers is that they are all tax-exempt and defined-contributory. In a defined contribution plan, the final payment to the contributor is calculated based on his total pension contributions and the performance of the pension fund. The Ghana pension act also permits tax exemption on all pension contributions as long as the total contribution is not more than 35% of an employee’s salary. For example, an employee who earns a monthly basic salary of GH¢500 would be permitted to contribute a maximum of GH¢175 (tax free) to his pension account.

Differences between Tier 1, Tier 2 and Tier 3 pensions

Tier One is the primary social security scheme managed by the Social Security and National Insurance Trust. As usual, pension contributions for Tier 1 are mandatory for employees. The pension Act mandates that 13.5% of employees’ salaries be contributed to the scheme on their behalf. Pension benefits for Tier 1 scheme consist of monthly payments to qualified pensioners.

Tier Two, also a mandatory scheme, requires employees to contribute 5% of their salaries. Contributions are however managed privately by Trustees licensed by the NPRA. Benefits from Tier 2 pension are paid as lump-sum to employees upon retirement, which consist of all contributions and profits earned.

Tier Three is an optional pension scheme which comprises all other provident and pension funds besides Tier one and two. For individuals interested in personal pension schemes, Tier three offers the option to make additional tax-free pension contributions from their basic salaries. While this is voluntary, there is however a limit to how much workers can contribute. If you would recall, it was previously stated that not more than 35% of an employee’s salary can be contributed to a pension scheme. Now, since the contributions to Tier 1 and Tier 2 add up to 18.5% of workers’ salaries, they are therefore left with a balance of 16.5%. [That is, 35-18.5 = 16.5] Thus, Tier three pension limits pension contributions to a maximum of 16.5% of employees’ basic salaries. This is still good considering the tax exemption benefits that come along with it. For instance, an employee who earns a monthly income of GH¢1000 can additionally enjoy a tax exemption on GH¢165 if he fully utilise his Tier 3 pension privilege (That is, 16.5% of GH¢1000). This can obviously offer a relief from income tax.

Note that the income tax rate in Ghana ranges from 5% to 25% for anyone whose monthly pay exceeds GH¢216. Refer to the table below to get an overview of income tax rates in Ghana.

personal pension _income tax rates in ghana
Income tax rates in Ghana. Source: www.gra.gov.gh

Tier 3 pension is opened to both formal and informal sector workers. As contributions made to the scheme are tax-exempt, contributors are therefore required to stay in the scheme for a minimum period before any withdrawal. The current minimum period before withdrawals from Tier 3 pension schemes can be made is 10 years. Nevertheless, individuals who prefer to withdraw prematurely from the scheme (before the 10-year period) can do so with some charges. Premature withdrawals from Tier 3 pension are charged with a marginal tax rate of 15% on any amount withdrawn.

Withdrawing all contributions before the 10 years also depends on the policy of the pension provider.  For instance, Metropolitan personal pension scheme allows members to withdraw maximum of 50% of total contributions every three years. Enterprise personal pension scheme similarly limits partial withdrawal to 50% of total contributed fund.

Unfortunately, a few number of personal pension providers (for the Tier 3 scheme) set a limit on the minimum amount that can be contributed. For example, the minimum monthly contribution to Metropolitan personal pension scheme is GH¢50. Likewise, the minimum monthly contribution for Pentrust personal pension plan is GH¢200.

How the pension schemes are managed

To ensure transparency, management of the three pension schemes are delegated to three independent service providers. The NPRA still remains the overall top regulatory body. There are three types of service providers, which are:

  1. Pension Trustees
  2. Pension Fund managers
  3. Pension Custodians

Pension trustees have the administrative responsibility of both Tier 2 and Tier 3 pension schemes. Trustees ensure that investment objectives of pension contributors are followed. Trustees are mandated to appoint pension fund managers, custodians and other service providers to help manage the schemes. However, they do not have access to the contributors’ funds.

Pension fund managers are responsible for investment decisions mandated by the Trustee. The fund manager reports regularly to both the Trustee and NPRA but does not have direct access to the pension funds.

Pension custodians are responsible for safe possession of pension funds and assets. Unlike Trustees and fund managers, custodians have access to pension funds since they receive pension contributions from members. Just like pension fund managers, custodians report regularly to both Trustees and the NPRA.

List of licensed Trustees for personal pension schemes

There are currently about 34 Trustees licensed by the National Pensions Regulatory Authority. These are made up of insurance companies and other corporate service providers. The list of licenced Trustees includes:

The full list of licensed Trustees can be downloaded from the link below:

List of licensed Trustees for personal pension schemes

Approved fund managers for personal pension schemes

There are about 78 pension fund managers approved by the NPRA. Notable of them include:

  • Databank Asset Management Services Ltd.
  • EDC Investments Limited
  • SIC Financial Services Limited
  • SAS Investment Management Limited
  • New Generation Investment Services Limited
  • HFC Investments Services Limited
  • Gold Coast Fund Management Limited
  • FirstBanC Financial Services Limited

Full list of approved pension fund managers can be downloaded from the link below:

Approved fund managers for personal pension schemes

Ghana Stock Exchange YTD return crosses 50%

Ghana Stock Exchange YTD

The Ghana Stock Exchange YTD return crossed 50% at the close of today’s trading on 20th November, 2017. This figure represents the highest year-to-date return recorded in the year so far.

At the end of the trading session today, the GSE Composite Index increased by 26.25 points to close at 2,547.12, which represents a year-to-date return of 50.8%. Similarly, the GSE Financial Stocks Index was up by 35.4 points to close at 2,248.21, representing a year-to-date return of 45.48%.

Share price increase was led by Agricultural Development Bank (ADB) with 48 pesewas gain to close the day at GH¢5.28 per share. Access Bank Ghana (ACCESS) followed with 43 pesewas gain to close at GH¢4.00 per share. Furthermore, GCB Bank Ltd. marginally gained 2 pesewas to close at GH¢4.29 per share. There were no losses for the day’s trading.

In terms of YTD returns of individual stocks, Benso Oil Palm Plantation Limited (BOPP) currently lead with 190.87% followed by Ghana Oil Company Limited (GOIL) and Standard Chartered Bank Ltd. (SCB), with 136.36% and 108.85% respectively. HFC Bank (Ghana) Limited and Total Petroleum Ghana Limited follow with 85.33% and 75% respectively. Others include Fan Milk Limited (72.14%), Ecobank Transnational Incorporated (70.00%), Enterprise Group Limited (64.58%), Standard Chartered Bank Ltd. Preference shares (60.00%), Unilever Ghana Limited (48.77%), CAL Bank Limited (39.47%), Agricultural Development Bank (37.86%) and Trust Bank (Gambia) Limited (34.62%). The rest with gains are Sam Woode Limited (25.00%), Societe Generale Ghana Limited (19.35%), GCB Bank Limited (19.17%), Guinness Ghana Breweries Limited (17.79%), Ecobank Ghana Limited (16.15%) and Aluworks Limited (14.29%).

In contrast, stocks which have recorded negative returns in 2017 so far include Mechanical Lloyd Company Limited (-53.33%), Tullow Oil Plc (-35.71%), and Starwin Products Limited (-33.33%). Other stocks with losses so far are SIC Insurance Company Limited (-16.67%), Ayrton Drugs Manufacturing Co. Ltd. (16.67%), PZ Cussons Ghana Limited (-9.09%), Camelot Ghana Limited (-8.33%), AngloGold Ashanti Depository shares (7.69%), Golden Star Resources Limited (-2.56%) and Access Bank Ghana (-2.44%).

Finally, a number of stocks are yet to record any price change for the year so far. These include African Champion Industries Limited, AngloGold Ashanti Limited, Clydestone (Ghana) Limited, Cocoa Processing Company Limited and NewGold Issuer Limited. Others are Golden Web Limited, Produce Buying Company Limited, Pioneer Kitchenware Limited and Transol Solutions Ghana Limited.

Mutual funds vs. stocks: A revision of the pros and cons

mutual funds vs. stocks _sikasem.org

Mutual funds and stocks can be considered as long-term investment products as they both provide long-term returns. However, choosing between them can be difficult. This is especially the case if you are new to investment. As a beginner, you would like to understand the differences between mutual funds and stocks. You would equally want to know the advantages and disadvantages of mutual funds vs. stocks. Consequently, it becomes uncertain whether to invest in mutual funds or buy stocks directly.

Even though there are differences between mutual funds and stocks, they also share some similarities. A number of factors can be considered when it comes to the differences and similarities of mutual funds vs. stocks. Therefore, if you’re still wondering whether to invest your money in mutual funds instead of stocks or choose stocks over mutual funds, then the following review can serve as valuable information.

[Note: Mutual funds as used in this write-up refer to either equity or balanced funds]

 

Mutual funds vs. stocks: Mutual funds are generally managed by professionals

A major benefit of mutual funds over stocks is the professional manner by which they are managed. Mutual funds can be seen as passive investment whereby one invests his money, relax and put his faith in a fund manager to take care of the rest. As a result, investing in mutual funds may not need much dedication and time, thus fairly suitable for beginners. Even though it is useful to know how your funds are being managed, it may not be that necessary to study into detail, how each individual company in the mutual fund’s portfolio is performing. Obviously, you should have an idea of the mutual fund’s performance over the years.

On the other hand, one may require extra time and dedication to invest directly in equities (stocks). Time may be needed to go through financial reports of companies, observe trends of stocks performance, decides on best trading strategy and many more. Monitoring and picking of stocks can therefore be best handled by investors who have at least some basic knowledge in stocks as well as more time to spare. As you may agree, not everybody is well informed or knowledgeable to monitor and pick the right stocks.

 

Mutual funds vs. stocks: Stocks permit active participation unlike mutual funds

There are a few investors out there who prefer to be actively involved in the investment activities. Such group of people would like to have full control of their invested money instead of being handled by others. As explained in the previous point, mutual funds are managed by professional fund managers. Fund managers decide where and how to invest the money, which limit the active participation of investors. Stocks, on the other hand, allow investors to have control of their investment. As an investor in stocks, you know the exact companies you invest your money. By investing in stocks instead of mutual funds, you become actively involved.

Moreover, you have the right to vote during annual shareholders meetings of the companies you have invested in. Let’s assume two individuals who decided to invest portions of their income. One invested directly in GCB bank stocks whereby the other invested in Epack investment fund. The one who invested directly in GCB stocks is qualified to attend and vote during GCB annual shareholders meetings. On the other hand, the other investor does not qualify to attend GCB shareholders meeting even though Epack investment fund (where he invested his money) may hold substantial shares in GCB bank.

 

Mutual funds vs. stocks: Prices of mutual funds are more stable compared to stocks

Prices of stocks fluctuate many times during the day unlike mutual funds. For example, a stock would begin trading at GH 10.5 per share and the next moment drops to GH4.5 within the same trading day. Due to this, it is not unusual to buy shares of the same company at different prices on the same trading day. Prices of mutual funds, on the other hand, change once in a business day. The fund managers determine the unit price of the mutual funds only after stock market closes.

 

Mutual funds vs. stocks: Mutual funds and stocks involve fees and commissions

There are fees and commissions involved in both mutual funds and stocks. Nevertheless, the fee structure of stocks appears simpler to understand. Currently, the maximum total fees and commissions for buying stocks from the Ghana Stock Exchange is 2.5% of the purchased shares. This can be broken down into two parts:

  1. Statutory fees to the GSE and SEC (Security Exchange Commission)
  2. Commission to the stock broker

In contrast, fees and commissions for mutual funds consist of many details. These are either charged directly or indirectly on the funds. A typical fee structure of mutual funds is made up of the following:

  1. 1-3% back-end load for withdrawals made before 3 years
  2. 2% of fund’s net assets as management fees
  3. Directors’ emoluments
  4. Audit fees
  5. Registrar fees
  6. Bank charges
  7. Professional and consultancy fees
  8. Marketing/promotion/advertisement fees
  9. Operational and administrative expenses

[For details on investment fees and commissions, refer to this link.]

It must be noted here that the above fee components of mutual funds (except back-end loads) are charged annually on the fund. These numerous fee components are what investors sacrifice in exchange for professional management of the funds. While the fees and commissions may seem high, most mutual funds are known to outperform the GSE all-share index on many occasions.




Mutual funds vs. stocks: There is real feel of dividend payments when invested in stocks

Investing in stocks come with the benefit of earning regular income in the form of dividend payments. Whenever dividends are paid, investors who purchase stocks directly have easy access to the paid dividends. They have the option to either reinvest the dividends or cash them without the need to sell off some shares. On the other hand, dividends received by mutual fund companies are generally reinvested in the fund without distributing them to the investors. While this helps the fund to grow, it however restricts investors who may want to use their dividends as a regular income source. In a way, investors in the fund do not have the option of immediate access to their dividends. The only means for them to cash the dividends is to sell some units (shares) of their mutual fund investment.

Let’s assume that you invested GH¢500 in SAS Fortune fund on the 30th of December 2016. The offer price of SAS Fortune fund on 30th December 2016 was GH¢0.5329 per share. Thus, investing GH¢500 at the time would entitle you to 938.26 shares [Note that fractions of shares are permitted in mutual funds]. On the same day, you further purchased GH¢500 worth of shares in GCB Bank Limited (GCB). The closing price of GCB stocks on 30th December 2016 was GH¢3.56 per share. Hence, GH¢500 could buy about 140 shares of GCB (without considering fees and commissions). Now, in June 2017, GCB Bank paid shareholders a dividend of GH¢0.38/share. For owning 140 shares of GCB, you would be paid GH¢53.2. Since SAS Fortune fund also invest in GCB Bank, the fund would also receive dividends from the bank, which would be integrated in the fund’s earnings. For your shares in GCB, you have immediate access to the paid dividend of GH¢53.2 while your total shares of 140 stay intact. On the contrary, you are restricted from having immediate access to the dividend integrated in SAS Fortune fund. To some extent, you would need to sell off (liquidate) some of your 938.26 shares in the fund in order to do so.

 

Mutual funds vs. stocks: It takes much longer to purchase stocks on the GSE

Buying stocks from the Ghana Stock Exchange can take considerable time unlike mutual funds. Depending on the particular stock, it may even take several weeks plus additional settlement days to complete trading transaction. Settlement date, which is the actual date on which the purchased shares get completely transferred to the new shareholder, is three business days from the day the shares are bought. The delay in stocks transaction makes it difficult to quickly fulfil trading plans. For instance, imagine noticing a sharp decline in GCB shares from GH¢4 to GH¢2. At the same time, a media report indicating a successful come-back of GCB shares may be circulating. To take advantage of this, you order your stockbroker to purchase some of the fallen GCB shares. However, due to the associated delay in transaction, you would realise that even before the shares are purchased for you, the share price had bounced back to the initial GH¢4 or even more. In effect, you lose that chance of making gains from the fallen price.

On the other hand, the purchase of units from mutual funds gets completed within the same business day once money is deposited in the mutual fund account. Anytime you make a deposit in an equity [mutual] fund, your shares in the mutual fund are credited on the same business day as long as the deposit is made before closing hours of the day. Besides, unit or share price of mutual funds does not fluctuate on the same day. The only price change is reported after close of trading on the stock market. This could aid effective investment planning.

 

Mutual funds vs. stocks: Investing in stocks appear riskier than mutual funds

The lack of effective diversification can expose investments to high risks. Diversifying in stocks trading requires an investor to purchase shares from various industrial sectors. Unfortunately, not every investor can individually afford buying many varieties of stocks. This may result in poor investment diversification. On the other hand, mutual funds appear to offer auto diversification for investors. As stated earlier, a major advantage of mutual funds is the disciplined form of diversification. Typically, fund managers follow institutional rules regarding asset allocation of the mutual funds. For instance, a fund manager may be restricted to invest not more than 5% of the fund’s portfolio in a single company. Following these defined guidelines leads to sufficient diversification in different industrial sectors. The result is a well-diversified portfolio with minimised risk and volatility. It must also be noted that mutual funds are not really 100% equity investment. As you may be aware, most fund managers invest a certain percentage (usually 20%) of the mutual fund’s portfolio in fixed income products such as Treasury bill and fixed deposits. Although this is done to increase liquidity of the fund, it further reduces the risk posed by the stock market.

 

Mutual funds vs. stocks: Mutual funds can be easily converted to cash unlike stocks

As mentioned previously, mutual funds are not invested in 100% stocks. About 20% of mutual funds’ portfolio comprises of cash and fixed income products. These assets can be easily converted to cash, making mutual funds more liquid than stocks. Typically, it takes an average of one to three business days for an investor to withdraw from his mutual fund account. On the contrary, investors who wish to convert their stocks into cash may need to wait for a while until their stocks get purchased on the stock market.

 

Mutual funds vs. stocks: It requires less money to invest in mutual funds

Mutual fund institutions operate by pooling money from various investors and subsequently investing the collective fund. Each individual can invest according to his financial capability, which makes it more appropriate for starters. Novice investors with less investment capital can therefore choose mutual funds over stocks. For example, an investor with just GH¢50 can start investing in Epack whose minimum initial investment requirement is GH¢50.

In addition to the minimum initial investment, mutual fund investors benefit from the disciplined diversification offered by fund managers. In contrast, one may require enough starting capital in order to achieve an appreciable diversified stocks portfolio. Certainly, it may be very challenging, if not impossible, to properly diversify in stocks with just GH¢50.

GSE Composite Index: What it means to you as an investor

GSE composite index_sikasem.org

The GSE Composite index may be probably sounding like a noise in your ears very often. You hear about it on the radio, on the television set, in the prints, as well as on the web. However, have you actually spent some time to think about what it really is and how you can put it to good use? If you’re yet to do so, then this write-up can provide you with useful information on the Ghana Stock Exchange composite index and the benefits it can offer you as an investor. In this post, I also briefly cover other related stock indices for background understanding.

Brief background of stock market index

Stock market index is a figure used to measure the overall value of all stocks or selected number of stocks on a stock market. Usually referred to as stock index, it basically provides an overview of how the stock market or a section of it performs. For smaller stock markets with less number of listed companies, the stock index can be calculated for the entire listed stocks. However, stock indices for larger markets are mostly calculated for selected listed companies on the exchange. Generally, it would be difficult to continuously monitor the performance of every single stock listed on a stock exchange. It becomes much difficult as the number of listed companies keep increasing. To make this easier, a sample of the listed companies can be used to represent the entire stock market.

A stock index is calculated from the prices of stocks that the index seeks to measure. For example, an index that aims to measure the performance of all listed companies on an exchange would be calculated from the prices of all companies listed on the exchange. In the same manner, an index measuring the performance of only manufacturing stocks would be calculated from the prices of listed manufacturing stocks.

Globally, it is common to hear of different and variant forms of stock indexes. Some of the popular stock indices are NASDAQ 100 (on the NASDAQ Stock Market), S&P 500 (on the New York Stock Exchange [NYSE] and NASDAQ Stock Market), FTSE 100 (on the London Stock Exchange) and Dow Jones index (on the NYSE and NASDAQ).

Stock indices on the Ghana Stock Exchange

There are two (2) main stock indices currently used by the Ghana Stock Exchange. These are the GSE composite index (GSE-CI) and the GSE financial stock index (GSE-FSI). The two stock indices have been in place since 4th January 2011. Whereas the composite index measures the performance of all listed stocks, the financial stock index measures the performance of financial stocks (banking and insurance sector stocks) on the market.

Besides the above two indices by the GSE, a few corporate organisations in the financial sector have set additional [specialised] stock indices to track certain industrial sectors of the stock market. Strategic African Securities Ltd. (SAS), for instance, utilise their SAS manufacturing index (SAS-MI) to measure the performance of listed manufacturing companies. Similarly, FirstBanC Financial Services employ their FirstBanC index to track their preferred selected stocks.

The GSE Composite Index

The GSE composite index is a weighted index. What it means is that the contribution of each stock to the index is not equal but depends on the market capitalisation of the listed company. In other words, the contribution of a company to the GSE composite index depends on the value of all its stocks listed on the Ghana Stock Exchange. Companies with high market capitalisation contribute much to the index than those with less market capitalisation. Note that market capitalisation of a company is given by multiplying its stock price by the total number of its listed (outstanding) shares.

How GSE composite index is calculated

Calculation of the GSE Composite Index takes into account all listed stocks (ordinary shares) on the exchange with exception of stocks listed on other stock markets. AngloGold Ashanti (AGA) and Tullow oil are examples of companies that have some stocks listed on other stock markets apart from the GSE. As stated earlier, each stock contributes to the index according to the volume and value of its traded shares. The GSE Composite index is therefore based on the weighted average returns of all listed stocks.

Basically, all indexes must have a base or a foundation to be measured against. For this reason, the GSE fixed 31st December 2010 and 1000 points as the base date and base index respectively for the GSE composite index. The base index value was set arbitrarily as the starting value for the index. All later index values can then be compared against the base index to estimate the overall performance of the stock market. For example, the annual return of the Ghana Stock Exchange in 2011(exactly one year after the base index had been set at 1000) was -3.1%. To arrive at this percentage figure, the GSE composite index of 969.03 points recorded on 30/12/2011 was compared against that of 31/12/2010.

That is, GSE return in 2011 = [(969.03-1000)/1000] × 100

                                             = -3.1%

Historically, the highest points the GSE composite index has attained so far is 2458.11, recorded on 6th September 2017. On the other hand, it has so far recorded a lowest value of 940.04 on 16th December of 2011.

Usefulness of GSE composite index to investors

The GSE composite index, just like other stock indices, can be used to track the overall performance of the stock market. As it was mentioned earlier, it may be difficult to monitor the performance of all individual stocks on the market. To make it easier, the GSE composite index is used to provide an overview of the performance for the entire listed stocks, which can further guide investors in their decision making.

Using GSE composite index to replicate market performance




 

 

By utilising the GSE composite index, investors can attempt to replicate or imitate it in their investment portfolios so as to match market performance. ‘Attempt’ is used here because it is nearly impossible to replicate a stock index in one’s portfolio. To be able to imitate an index, it must be practical to purchase all its constituents in the exact proportions. In the instance of the GSE composite index, it must be practical to buy all listed companies in the exact weightings they contribute to the index. This must also be achieved without suffering from extra transaction costs or having some effects on the market. Unfortunately, such conditions are ideal to the extent that they may not be feasible to attain. Practically, not all stocks would be available for purchase in such a proportion to reflect the GSE composite index. If you have been buying shares from the GSE, you may have realised that availability of certain stocks are difficult to come by. I have actually experienced this on a number of occasions, even more recently. In fact, out of an order I placed with my investment broker in August this year, some shares are yet to be available for purchase.

Even though it is difficult to replicate the GSE composite index in an exact manner, knowing which companies contribute much to the index would serve as guidance to purchase the right mix of stocks. If you would recall, it was mentioned earlier that companies with high market capitalisation influence the index more than companies with less market capitalisation. To some extent, some stocks are more important than others in terms of their contribution to the GSE composite index. To determine the extent of impact a company can have on the GSE composite index, you divide the market capitalisation of the company by the overall market capitalisation of GSE. We call this market weight or index weight. The bigger the market weight of a stock, the more influence a change in its price can have on the GSE composite index.

For example, at the end of trading on 27th October 2017, the overall market capitalisation of the Ghana Stock Exchange was GH¢ 58,497.34 million. On the same day, the market capitalisations of Ecobank Transnational Incorporated (ETI) and Access Bank Ghana (ACCESS) were GH¢ 4,332.2 million and GH¢ 461.74 million respectively. By these figures, the market weight of ETI can be calculated as (4,332.2/58,497.34) × 100 = 7.41 %. Likewise, the market weight of ACCESS would be 0.79 %.

As depicted in the examples above, a change in the price of ETI would have a much greater impact on GSE returns than an equal price change in ACCESS bank. In fact, if the price of ETI were to rise by 20% while prices of all other stocks kept unchanged, the GSE composite index would increase by 1.48% (That is 7.41 % × 20%). On the other hand a 20% price change in ACCESS bank would increase the GSE composite index by just 0.16% (That is 0.79 % × 20%).

Obviously, for an investor to attempt to replicate the GSE composite index and for that matter the GSE returns, the composition of his stock portfolio must be more of ETI and other similar stocks with high market weights. To give you a clue, other listed companies with similar high market weights (besides ETI) are Standard Chartered Bank (SCB), Ecobank Ghana Ltd. (EGH), Fan Milk Limited (FML), GCB bank (GCB) and Ghana Oil Company Limited (GOIL). If you have read my post on foundational stocks, you would realise that all the major fund managers maintain and hold greater portions of their portfolios in the above companies (SCB, EGH, FML, GCB and GOIL).

Attempting to replicate the GSE composite index or returns is particularly useful for passive investors who prefer to buy and hold as opposed to active trading. It is equally beneficial to investors (especially beginners) who find it challenging in choosing which individual stocks to invest in. This practise of investing (known as indexing) offers investors the chance to perform well as the stock market. In a way, the investor increases his chances of making gains when the market records positive returns. Don’t forget that the investor can similarly lose when the stock exchange posts some losses. However, for the many investors who are not that professional, the possibility of making gains by trying to imitate the stock index can be higher than striving to beat the market.

Using GSE composite index as a benchmark

The GSE composite index can also be used as a benchmark to evaluate the performance of mutual funds in the country. It is important to know if your fund manager is performing better or at least is simulating the returns of the GSE. Most mutual funds in Ghana, which are usually actively managed, are claimed to offer returns higher than that of the GSE. That is, instead of attempting to replicate the GSE composite index, the fund managers tend to beat the market in terms of returns. Don’t forget that these fund managers charge various forms of fees and commissions too. Thus, comparing or benchmarking the performance of their actively managed funds against the GSE composite index would be necessary to determine whether it is worth to invest in the funds or not.

Using GSE composite index as a forecasting tool

The GSE composite index may further be used to study and forecast performance trends of the stock market. Just have a look at the ‘beauty’ of the figure below? This is a snapshot of performance of the GSE since inception.

GSE composite index _stocks returns

I know how difficult it may be to follow the pattern of the yearly returns. Nonetheless, one thing clear from the historical data is that apart from 1990 to 1992 (first three years of GSE operation), the stock exchange has never recorded a loss in three successive years. Moreover, since 1992, the stock market has never repeated a negative return except in 2015/2016. By using such observation, although not so significant, one may be able to predict a future direction of the GSE. This observation was similarly highlighted as part of three other factors when I wrote on the anticipation of hope for the equity market in 2017.




Workplace redundancy: Implications and awareness of the realities

redundancy implications

Finding a job after school remains one top priority for many young graduates. This should not be so surprising in our part of the world where educational programmes rarely incorporate entrepreneurial skills. I quite remember how I felt about a decade ago when I had the opportunity to be part of one of the most respectable companies in the country. It was like a dream come true. This was an organisation that purposely came to the tertiary institution to interview, select and train successful candidates to join their workforce. However good as it felt, hardly did I foresee that the company would be shutting down a few months afterwards. Hardly did I know that a redundancy process, and for that matter employees’ layoff was imminent.

Now, back in 2017. A simple search on google.com, with the key words ‘layoff Ghana’, would yield the following and numerous similar results:

  • Government will lay off public service workers”, published on 8th August 2017 Ghanaweb.com
  • Over 400 workers lose jobs in Tema… as steel factory closes”, published on 20th March 2017 Citibusinessnews.com
  • Job layoffs lurk over persistent power challenges- ICU”, published on 28th February 2017 (Citibusinessnews.com)
  • 190 Fidelity Bank staff sacked”, published on 1st September 2016 Ghanaweb.com
  • Massive layoffs hit Ghana’s oil & gas industry”, published on 2nd August 2016 Citifmonline.com
  • Massive layoffs to hit banks”, published on 21st April 2016 Myjoyonline.com

It appears that not a single year passes without a sign of employees’ layoff. Even as I’m writing this piece, there is an ongoing retrenchment process in my current organisation. I understand how difficult or uncomfortable it is to talk about job losses. Nevertheless, it may hurt to be aware, but prudent to be prepared.

 Reasons for workplace redundancy

Many reasons can be assigned to why workplace redundancy occurs. First and foremost, most companies, in particular, commercial organisations, embark on a retrenchment exercise to reduce cost and fit in the competitive market. I have, in many ways, maintained my stance that almost all commercial organisations have one common goal. That is, “to make money”. Even though this goal may not be explicitly shown to the public, it appears to be hidden in their various vision and mission statements. To some extent, there seems to be an invisible portion of most mission statements, which goes like: “…only if we make profit” or “…as long as we make profit”. Of course, no commercial organisation exists to make a loss. Thus, when you come across a fancy corporate mission statement such as “we value our people and uphold high standards of integrity to meet the needs of our customers”, consider it as incomplete. The ‘complete’ statement (together with the invisible portion) would read like:

“…we value our people and uphold high standards of integrity to meet the needs of our customers as long as we make profit”.

To reduce operational cost and increase profits, a company may undergo organisational restructuring. In certain cases, roles that were originally hired for may not be required anymore. In the manufacturing sector for instance, some job roles are only needed during the initial phases of organisational start-ups. As production and other operational activities stabilise, employees occupying these roles would be forced out if there are no alternate positions for them.

A company may also be forced to reduce its manpower when there is technology advancement. With the global increasing trend of computer technology, the same task that was done by five labourers can now be handled by three or even one employee.

Furthermore, employees can be laid off during a merge or a take-over by another company (owner). We have witnessed such circumstances over and over, a recent example being the ‘take-over’ of UT and Capital Banks by GCB Bank.

Finally, a redundancy exercise can occur as a result of either temporary or permanent shutdown. A company may result to shutting down its processes when there is no more market for its products or services. Heavy industries that depend much on electricity may similarly be forced to shut down during energy crisis. The Volta Aluminium Company Ltd. (VALCO), for example, is well known for numerous shut-downs during energy crisis.




The lucky ones (unaffected staff) are not that fortunate

All redundancy procedures end in a decrease in the number of staff. While employees unaffected by the redundancy exercise may be seen as lucky, that could be far from the truth. Most organisations, after a redundancy process, are ushered in a new working environment usually perceived by the remaining employees as unconducive.

Employees who are fortunate to avoid dismissal, may be exposed to increased responsibilities per role without corresponding pay rise. Typically, designations of some employees are also ‘forcefully’ downgraded to lower roles, with corresponding decrease in remunerations.

The job atmosphere could get saturated with tension. What used to be a stress-free job turns to be the opposite after a redundancy at the workplace. Trivial matters before the redundancy period would be now considered grave concerns. This is especially the case for companies that roll the redundancy process in stages over a period of time. In a nutshell, the remaining workforce may feel demoralised due to decreased motivation.

How prepared are you for workplace redundancy?

Staff retrenchment can affect anybody irrespective of his rank or role in the organisation. Likewise, your profession or industrial sector does not matter much. Hence, relying so much on the job security of your profession can end in disappointment. Things have changed now. Even the government sector which has long been perceived as a ‘safe place’ in terms of job security is transforming. We have witnessed, in one way or another, a number of policy changes affecting employees in the government sector. At least, I remember how frustrated my kid brother appeared when graduate teachers whose certificates were unrelated to the educational sector were given ultimatum to upgrade themselves.

In fact, workplace redundancy is inevitable. However, how prepared are you as an employee, to face the consequences? Don’t forget that your redundancy entitlements or benefits, if any, may not be sufficient to cushion you from the shocks of retrenchment exercises. At least, not for so long, considering how stressful and long it would take the ordinary Ghanaian to search for another job.

Essentially, being aware of the reality of redundancy can be a starting point to prepare towards any eventuality. Make financial literacy a core aspect of your lifestyle and begin to focus more on your needs while cutting back on luxurious expenses. Avoiding excessive loans beyond your financial capacity would also be in the right direction. By putting your finances in shape, you reduce the shock that may result from any possible job loss.

Every time you receive a pay check, just remember the phrase ‘redundancy is real’. Consider your job as something fragile no matter how secure it may seem. This would, at least, condition your mind to stay alert and focused. Finally, while you still have the means, update yourself with new skills through education and training. By doing this, you prepare yourself for new opportunities should you be affected by a workplace redundancy.