Positive returns on Umoja Fund units

By Anagha Hunnurkar, Daily News
Thu, Apr 13, 2006

We are all now well aware that Umoja Fund - aims at giving an opportunity for the majority of Tanzanian citizens to invest, take a stake in privatisation, further participate in the capital markets and obtain a return on their investment.

The Government has supported the scheme by offering the seed capital as well as offering a huge discount of 30 per cent to the investing public – an ‘innovative’ feature which is home- grown and not found anywhere in the world in such products.’The scheme is to be open-ended after the lock –in period of one year, form August 1, this year.

Since, Umoja Fund has a lock-in period of one year, when the scheme becomes open ended, investors are free to repurchase their units and unlock value. At the same time there are others who would like to buy additional units. The fund has been performing well and satisfying investor expectations. Currently its Net Asset Value per unit stands at shillings 107.9453 (as on 6th April 2006). It indicates two things. It translates into a one time superlative return of 54.20 per cent on absolute basis after considering the fact that the investor had put in shillings 70 per unit that was topped up by a Government discount of Tzs 30 per unit which in itself is a return of 42.8 per cent. If we remove this discount as it is only a one time gain, then the annualized post tax return works out to 11.28 % on the face value of Tzs 100 per unit. A well managed fund can provide a better alternative to both small and high net worth investors - a well packaged product that provides safety, liquidity and return. Having thus addressed the concerns on risk and returns of the investor, every one is now keen to know what would happen when the scheme opens on 1st August 2006.

Now while considering the outcome one has to remember that the unprecedented response to the Umoja Fund offering was partly due to the fact that some banks had extended loans quite liberally for enabling their clients to avail of this important opportunity. Of course, taking loans is not happening for the first time. Initially it was difficult for investors and Banks to identify with and see the possibility of lending. The concept of lending to fund a capital market product took roots during the initial sale of TCC shares (2000). We experienced the same during Tanga Cement (2002) and DAHACO IPOs (2003) and perhaps it would continue for future IPOs as well.

And yet the jury seems to be divided on the issue of investors taking loans for the purpose of acquiring capital market products. A point has been raised that taking loans to acquire units in Umoja Fund is speculative and investment funded by bank borrowings will cause a need to be liquidated after one year. On the other hand there are conformists who justify that the willingness of banks to extend loans reaffirms that the product is ‘good quality’ as bank are known to evaluate all risks before deciding to lend’– an indirect credit rating by banks. Further clients who take loans are ‘informed investors’ who are well aware of their liability as well as the opportunity that Umoja Fund offered.

Currently if we consider these investors who have funded their units through loans, it is a foregone conclusion that they would redeem their units to pay off their loans. However one must also consider that there are other aspects as well. We will read more about it next week.

Anagha Hunnurkar is Technical advisor (Investment) at:
Unit Trust of Tanzania:
Email:aahunnurkar@utt-tz.org