Could these listed companies be classified as foundational stocks?

If you have keenly been following the series on ‘get to know your mutual funds’, you would realise that in each post, the top 5 equity holdings of the fund’s portfolio are highlighted. Interestingly, of the few mutual funds covered so far, there appears to be much similarity in their various top 5 equity holdings. In other words, most of the mutual funds list similar companies as their top 5 equities. Out of curiosity, other mutual funds were also looked into to find out if the similarity trend would remain unchanged. To achieve this, some of the most recent annual reports (where available) of major mutual funds were examined. In all, 19 annual reports were studied, which covered 7 different mutual funds (both equity and balanced funds). The main purpose was to figure out if the topmost equities repeating more frequently in the various mutual funds could be considered as foundational stocks. In doing so, these stocks could become a sort of principal, key or foremost stock picks for investment portfolios. Many would agree, to some extent, that mutual funds are managed professionally by fund managers. Hence, following in the footsteps of these fund managers by replicating some of their top stock picks can be useful.

Why foundational stocks?

Investing in stocks is one of the most proven means to build wealth. However, picking the right stocks from the market can be challenging, especially for the novice investor. One requires a good portfolio mix comprising the right stocks in order to be successful. Just like building a house requires strong foundation to ensure its robustness, building wealth with stocks may equally require careful selection of stocks, in particular, starting with good foundational stocks. A poor foundation can cause your building to tremble or worse, topple down, so do poor foundational stocks can cause to your investment portfolio. Arguably, maintaining strong foundational stocks in your investment portfolio comes with some benefits such as good investment returns. Moreover, strong foundational stocks can somehow protect an investor from the impacts of market falls.

Summary procedure for selecting foundational stocks

As stated earlier, the top 5 equity holdings of seven (7) different mutual funds were compared. The mutual funds were Databank Epack, Databank Bfund, SAS Fortune Fund, HFC Equity trust, HFC Future Plan, CDH Balanced Fund and FirstBanc Heritage Fund. To ensure the use of up-to-date data for decision making, data covering the latest three years (2016, 2015 and 2014) were utilised. The topmost equities frequently appearing in the various mutual funds were preliminary grouped, followed by brief background study of their performances. The table below provides comparison between the top 5 equity holdings of the seven different mutual funds. For detailed (raw) data of the top equity holdings compilation, click on this link: Top five equity holdings of selected mutual funds.

 

Table 1: Comparison of top 5 equity holdings of selected mutual funds

 

Mutual fund

Top 5 Ghanaian equity holdings

2016

2015

2014

1 Databank Epack EGL, FML, GCB, SCB, MAC EGL, FML, GCB, SCB, TOTAL EGL, FML, GCB, SCB, SOGEGH
2 Databank Bfund EGL, FML, GCB, SCB, GOIL EGL, FML, GCB, SCB, GOIL EGL, EGH, GCB, SCB, TOTAL
3 SAS Fortune Fund EGL, FML, GCB, SCB, GOIL EGH, FML, GCB, SCB, GOIL EGH, FML, GCB, SCB, GOIL
4 HFC Equity Trust EGH, FML, GCB, TOTAL, GOIL EGH, ETI, GCB, TOTAL, GOIL EGH, HFC, GCB, EGL, TOTAL
5 HFC Future Plan EGL, FML, GCB, SCB, GOIL EGL, ETI, TOTAL, SCB, GOIL EGH, HFC, GCB, SCB, CAL
6 *CDH Balanced Fund CAL, FML, GCB CAL, FML, GCB Fund was not yet established
7 FirstBanC Heritage Fund Annual report not available EGL, EGH, GCB, SCB, SOGEGH EGL, SOGEGH, GCB, TOTAL, GOIL

*CDH invested in only three (3) stocks.

Observations and analysis

From the table above, GCB bank Ltd. (GCB) occurs 18 times out of the 19 studied annual reports. This is followed by Standard Chartered Bank (GH) Ltd. (SCB) which can be counted 13 times out of the 19 annual reports. The rest, in descending order, are Fan Milk Limited (FML), 12 times; Enterprise Group Limited (EGL), 12 times; Ghana Oil Company Limited (GOIL), 10 times; Ecobank Ghana Limited (EGH), 8 times; Total Petroleum Ghana Limited (TOTAL), 7 times; Societe Generale Ghana Limited (SOGEGH), 3 times. CAL Bank Limited (CAL), 3 times; Ecobank Transnational Incorporated (ETI), 2 times; HFC Bank (Ghana) Limited (HFC), 2 times; Mega African Capital Limited (MAC), once.

In total, 12 different stocks could be found in the top five equity holdings of the mutual funds. However, considering the comparatively low occurrences of SOGEGH, CAL, ETI, HFC and MAC, they were delisted, leaving the rest of the seven stocks as the preliminary group for further studies.

 

Table 2: Preliminary group of foundational stocks

Stock Number of occurrences in top 5 holdings
GCB 18
SCB 13
FML 12
EGL 12
GOIL 10
EGH 8
TOTAL 7

To study further on the above stocks, their historical performance trends were looked into. Simply, two main performance indices were examined- annual returns and dividend yields. It must be noted that stocks with fairly good returns can be indication of investors’ confidence in the companies. Furthermore, while dividend pay-outs provide regular income source, they also signal financial stability of companies. The latest 5-year annual returns and dividend yields of the stocks can be seen in the tables below.

Table 3: Latest 5-year performance results

Company Trading symbol Return, %
2012 2013 2014 2015 2016  Average
1 Enterprise Group Limited EGL 26.3 291.7 -6.9 37.1 0 69.6
2 Fan Milk Limited FML 50.4 86.5 -20.7 40 51.7 41.6
3 Ghana Oil Company Limited GOIL 93.8 43.5 19.1 33.3 -21.4 33.7
4 GCB Bank Limited GCB 13.5 131 13.4 -34.9 -6.1 23.4
5 Ecobank Ghana Limited EGH -6.3 87 35.5 7.6 -8.6 20
6 Standard Chartered Bank (GH) Ltd. SCB -74.7 29.9 36.2 -19.9 -25.2 -10.7
7 Total Petroleum Ghana Limited TOTAL 18.5 N/A 20.6 -16.4 -61.2 -9.6
GSE all-share-index 23.81 78.81 5.4 -11.77 -15.33 16.18

 

Table 4: Latest 5-year dividend yield

Company Trading symbol Dividend yield, %
2012 2013 2014 2015 2016 Average
1 Enterprise Group Limited EGL 3.33 0.00 1.43 1.04 2.1 1.58
2 Fan Milk Limited FML 1.13 0.00 1.71 0.00 1.4 0.85
3 Ghana Oil Company Limited GOIL 2.26 1.61 1.52 0.00 1.8 1.44
4 GCB Bank Limited GCB 3.33 2.94 3.96 8.44 8.7 5.47
5 Ecobank Ghana Limited EGH 8 5.18 5.66 11.27 12 8.42
6 Standard Chartered Bank (GH) Ltd. SCB 26.52 3.14 5.65 0.00 2.3 7.52
7 Total Petroleum Ghana Limited TOTAL 2.81 13.72 1.61 2.25 2.3 4.54

In terms of annual performance, with the exception of Standard Chartered Bank (SCB) and Total Petroleum Ghana Ltd. (TOTAL), the rest of the stocks show impressive positive results. Moreover, their average returns exceed that of the GSE (all-share index) in the same period. Enterprise group limited (EGL) beats the GSE index in 4 out of 5 years. Fan Milk and GCB similarly perform better than the market index in 4 out of 5 years while Ecobank and GOIL both exceed the index in 3 out of 5 years.

For dividend yields, Ecobank Ghana and Standard Chartered Bank lead with impressive average yields of 8.42% and 7.52% respectively.

It may also interest you that five of these stocks had even been commended in an earlier article recently. In the article by Kofi Busia Kyei (a financial analyst), EGL, EGH, FML, GOIL, and GCB were highlighted together with UNIL and BOPP as the few listed stocks that had offered great returns to investors in the past 10 years (Refer to the chart below).

foundational stocks _performance
Figure 1: 10-year return of selected stocks on the GSE Credit: Kofi Busia Kyei (a financial analyst)

Even though the performance trend of SCB doesn’t look so good, the high extent of its occurrence in the top five holdings of the various mutual funds may be due to positive future projections. The fund managers may have realised from their analysis, good earning or growth expectations of SCB, thus chasing its shares. Don’t forget that SCB is one of the few stocks that have recorded impressive returns in the current year so far. In fact, since the beginning of the year, its share price has appreciated by 115.52% as of 8th August 2017. Hence, considering it in our foundational stocks can be worth it. Unfortunately, because of the comparative low performance of TOTAL, in addition to its least number of occurrences in the top five holdings of the funds, delisting it from the group may be helpful for now. As a result, GCB, SCB, FML, EGL, GOIL and EGH can be finally listed as our proposed foundational stocks- six foundational stocks made up of three banking stocks, one insurance stock, one manufacturing stock and one petroleum stock (see Figure 2 below).

Foundational stocks
Figure 2: Proposed foundational stocks comprising six listed companies

Conclusion

The similarities between top 5 equity holdings of various mutual funds gave rise to this write-up. Through comparison and further background studies, six listed companies have been proposed as foundational stocks. These can be useful to investors in building their stock portfolios.

If you’re a new investor deciding on buying stocks from the exchange, you can think of starting with at least, one of these companies. Furthermore, investors who are already trading in stocks may also consider rebalancing their existing portfolio and perhaps buy more of these particular stocks.

Finally, if you’re yet to own shares of these stocks, my personal advice is to begin moderately with the ones that have already attained high appreciation in their share prices. For instance, the year-to-date returns of GOIL and SCB are currently 108.18% and 115.52% respectively, as of 8th August 2017. Even though they still have the potential to continue with their gains, the potential to fall is also inevitable due to the high prices already achieved.

 

Get to know your mutual funds: SAS Fortune fund

SAS fortune fund

Our first post on the ‘Get to know your mutual funds’ series started with Epack investment fund, where we highlighted aspects such as the nature, investment strategy and performance of the fund. To continue the series, let’s have a look at SAS Fortune fund. Continue reading “Get to know your mutual funds: SAS Fortune fund”

What is the BEST investment product in Ghana?

best investment product

After reviewing a few feedbacks from readers, I realise that majority of questions centres around ‘the most lucrative investment in Ghana’, ‘the best investment option in Ghana’, ‘the best mutual fund in Ghana’, and other similar phrases. In a nutshell, the majority would like a particular investment product to be recommended to them as the best to invest in. Frankly, I may be one of the very last people to recommend a particular option as the best investment product in Ghana. It is not the general perception of best investment product that I frown on. However, my issue has to do with the attribute that potential investors perceive as being the only characteristic of best investment products. Unfortunately, whenever the subject of best investment product crops up, the focus is solely on higher interest rates. This one-directional emphasis can lead investors into making wrong investment decisions that may subsequently ruin their finances. As Databank’s CEO, Mr. Kojo Addae-Mensah, stated in the latest edition of their “CEO’s MESSAGE” series,

It is the singular focus on rates that has cost so many people their life savings.”

We all recall what happened to the savings of clients who had been persuaded with high interest rates by some microfinance institutions in the country. Higher rates may be sweet but need to be followed with caution. There is an Akan proverb that goes like “Bͻnyono bata brɛboͻ ho”, which translates as “The liver is closer to the bile”. Indeed, juicy rates come alongside risks. I had stated in a post on this site before that:

“The risk that will take you to your grave is not worth it” Click To Tweet

Moreover, there is no one-fit-all investment product. What may be the best (and appropriate) for ‘investor A’ may not be the best for ‘investor B’. The financial needs and requirement differ from one investor to the other. Thus, the issue of finding the best investment product is subjective. Instead of focusing solely on rates (perceived to be the indicator of best investment products), there are equally other important factors to consider. These factors include, but not limited to, the company managing the investment product, their experience and how long they have been in operation, as well as the kind of businesses they invest the money in order to achieve those mouth-watering rates. Others include the age, risk tolerance and present financial circumstance of the investor. For instance, if you’re a parent with kids, you may be looking up for low-risk products than the one who is single and without dependants. If you have just begun your investment journey, you may wish to be conservative in your investment options, at least, for a while. This is unlike someone who already owns some investments and is willing to take further risks. Again, if you have ethical concerns, you may want to know where your money is being invested and thus select ethical investment products such as the Databank’s Arkfund.

 

Also, your investment goal (what you are investing the money for) depicts your options. Is it for retirement, to settle education bills, to buy a piece of land, to purchase a car or to send the family on a vacation? Definitely, the investment option for retirement (assuming you’re very young now) will be more of long-term investment products such as stocks and equity mutual funds. However, if you’re investing just for a family vacation, it would be better-off to incline your investment towards short-term products such as Treasury bills or even a savings account. It would be a mistake to invest most of your money that you don’t need for a very long time in short-term investment products, which pay low interests. On the other hand, you will not want to put your money in risky investments (even if the potential returns are high) if you’re saving for short-term goals. Imagine purchasing stocks with money intended for your next month’s rent to your landlord 🙂

 

As stated earlier, it is also necessary to look into the track record of managers of the investment products before finalising your decision. For instance, Databank has managed mutual funds for at least 20 years now, making them reputable among their peers. There are other fund managers who have been doing quite well even though they have not operated for that long. Firstbanc, for example, has consistently won awards with their Firstfund mutual fund (due to their high returns). However, they have not been in the system for that long in comparison with other peers. It is worth to be cautious when investing with unfamiliar financial institutions.

Finally, remember that it pays to diversify. In other words, don’t put all your hard-earned money in a single investment product. You can minimise your risk by choosing varying investment products. As a head start, you may refer to the link below for a simple guidance on choosing the right mix of investment products.

Investment guide for selecting right investment products

Performance comparison of mutual funds in Ghana

mutual funds performance

Why mutual funds?

Many reasons can be assigned to why people choose mutual funds over other investment instruments. First, most mutual funds are affordable in the sense that individual investors can start with fewer amounts. Second, mutual funds are generally managed by licensed professionals, making them one of the ideal choices for individuals with even limited investment knowledge. Investors can therefore sit back, trusting these professionals to deliver good results. In addition, mutual funds are more liquid (can be easily converted into cash) as compared to other investment products such as stocks. Note that it takes a relatively longer time to sell stocks on the Ghana Stock Exchange than to redeem your money from a mutual fund scheme.

Mutual funds selection

The growing interest in mutual funds of late has led to a rise in various fund schemes in the country. Currently, there are over 30 licensed mutual fund schemes in Ghana. While a few of them are as old as Methuselah, others are as new as new-born babies. Each fund has its own investment goal(s) and therefore diversify their assets to suit such goals. The varying forms of mutual funds therefore make it easier for different types of investors to choose their suitable preferences. Choosing or investing in more than one particular fund is also a good decision to reduce the risks posed by a fund’s failure.

Ideally, one needs to consider certain key factors before selecting from the numerous available funds to invest with. These factors include, but not limited to, fees and commissions (which is separately dealt here), track record of the fund managers as well as past performance of the fund.

See also: Performance of stocks on the Ghana Stock Exchange

Past performance of mutual funds

The past performance of a mutual fund can be used to assess how stable (or unstable) the fund has been over that period. This can then be used as guidance, although not always, in depicting how the fund would perform in the future (For current mutual funds’ rates, click here). Most mutual fund managers publish their annual returns to the public which can then be compared with the returns of their peers.

Assessing a fund’s performance in reference to that of its benchmark and peers is very useful. Almost all equity funds (including balanced funds) are benchmarked against the Ghana Stock Exchange returns (All Share Index) Money market funds also benchmark their returns against the average Bank of Ghana Treasury bill rate for the year, usually the 91-day term. In the table below, we compare the performance of past returns Continue reading “Performance comparison of mutual funds in Ghana”