The CMA recently published the Guidance for Collective Investment Schemes on Valuation, Investment Performance Measurement, Reporting and Other Related Matters (the Guidance), which will become effective on 1st January, 2021. The Guidance borrows from international best practice (including IOSCO and GIPS® valuation principles), and is aimed at addressing inconsistencies in the performance measurement and presentation in the industry. In this Legal Alert, we highlight some of the Guidance’s salient features in relation to money market funds:

What Should a Money Market Fund invest in?

The fund manager (FM) should only invest in interest-earning instruments with a maximum tenor of 13 months. These will include commercial papers, treasury bills, Government securities and call deposits.

Disclosure of Managed Funds

A FM shall publish on its website the fund’s documents approved by the CMA, a list of all the funds offered, a summary of the description of each fund and the current fee schedule (including all performance-based fees and expenses).

Valuation Policies and Procedures

A FM will need comprehensive investment policies and procedures (Valuation Policies) identifying valuation methodologies, indicating how performance shall be calculated, measured and presented. They shall be consistent across similar types of assets and all funds and provide for identification, documentation and mitigation of conflicts of interest.

The Valuation Policies and any material changes shall be disclosed in the performance measurement report, and shall be sufficient to detect, prevent and correct pricing errors. Investors shall be fully compensated for losses arising from pricing errors.

Funds Performance Reporting

The FM shall file a quarterly performance report with the CMA and its clients within 21 days after each quarter. The report shall include updated performance and related information, including correction of material errors. For each fund, a FM shall calculate and present time-weighted returns. It shall not link actual performance to historical theoretical performance.

Total returns shall be presented according to at least 1-, 3-, and 5-year annualized returns. The FM shall disclose its historical fees at least for the last 24 months.

In each performance report, a FM shall disclose the returns for each quarterly period; the return from the inception date, when the initial period is less than one year; the inception date; the total return for the benchmark for each quarterly period; and the total assets under management (AUM) for each quarterly period end.

The fund expense ratio should be reported. The proprietary assets should be presented as a percentage of the fund’s assets as of each quarter.

For funds investing in real estate, a FM shall present the benchmark component returns for all periods presented. It shall disclose all significant events, for a minimum of 1 year, for as long as is relevant to interpret the track record.

AUM

To determine total AUM, total assets of a fund shall:

❑ be the aggregate fair value of all assets (assets shall not be double counted);

❑ be actual assets managed, including both fee-paying and non-fee-paying portfolios; and

❑ include AUM of an outsourced FM.

Returns for periods of less than one year shall not be annualized. The returns shall be net of all fees charged and administrative cost (prorated per fund and per period).

If a benchmark for risk and return analysis is chosen, a FM should disclose in the performance report the description of the benchmark and the periodicity of the benchmark (if calculated less than monthly). The benchmark shall be of the same return type, in the same currency and for the same periods for which the returns are presented.

The FM shall present an appropriate risk measure. When calculating risk measures:

❑ periodicity of the fund returns and the benchmark returns shall be the same; and

❑ the risk measure calculation methodology and the benchmark shall be the same.

Fund Accounting

In preparation of financial statements of the fund, a FM shall:

❑ use total returns, including dividend income, interest income and capital gains;

❑ recognize assets and liabilities on the trade date (not the settlement date);

❑ for fixed-income securities and all other investments that earn interest income, use accrual accounting;

❑ include any accrued income in the opening and closing portfolio values;

❑ accrue management, performance-based and other fees; and

❑ recognize dividend income as of the ex-dividend date.

Calculating Returns

When using time-weighted method, all assets shall be valued daily and returns calculated at least monthly. The FM shall calculate sub-period returns at the time of all cash flows exceeding 10% of the AUM. Periodic and sub-period returns shall be geometrically linked. The FM shall consistently apply the calculation methodology used for an individual portfolio.

Valuation

A fund’s portfolios should be valued daily (fair value as defined in IFRS 13). If a FM uses the last available historical price or preliminary estimated value as fair value, the FM shall consider it to be the best approximation of the current fair value and assess the difference between the approximation and final value and the effect the fund’s assets, total firm assets, performance, and also make any adjustments when the final value is received.

For external valuations for real estate investments, the valuer must be an independent registered property valuer.

Minimum Contents of a Publication/Advertisement

A FM in publications/advertisements should at the minimum:

❑ include Asset Value (NAV) and the year-to-date, month-to-date and quarter-to-date Yield;

❑ maintain all supporting data and information to support all items included in a publication;

❑ disclose how to obtain a full performance report, where reported in a summary;

❑ identify the name and description of the fund (s) and the name of the benchmark used;

❑ disclose total returns according to at least 1-, 3-, and 5-year annualized returns;

❑ disclose the current expense ratio and the fees included in the ratio;

❑ report the risk measures or qualitative disclosures to prospective investors; and

❑ report the sales charges and loads, and how they are reflected in the fund’s returns.

Conclusion

The CMA in its Collective Investments Scheme Quarterly Report for the 1st Quarter, 2020 confirmed money market funds’ dominance in the collective investments schemes space in Kenya, with a market share of 88.2%. With investors’ appetite for the product on the rise (compared to other periods reported by the CMA), we endorse the Guidance’s intention to level out the playing field for all licensed FMs to front a statistics-backed advertisement campaign to potential investors.

This Legal Alert is for your information only. It should not be relied upon without legal advice on its contents. Should you require further information on any of the discussions above, please feel free to reach out to Johnson Kariuki.

JP Advocates LLP Download PDF

Email Johnson