The Power of a gang

Many Kenyans, seeking to aggressively grow their capital, are increasingly investing in groups. Staff writer JUSTUS ONDARI looks at the pitfalls and engages experts on how to avoid them Forced to embrace an age-old tradition of pooling resources to avoid saving slowly individually, Kenyans are suddenly holding millions of shillings raised through investments clubs. Already saddled with tight work schedules, most club members are facing a major challenge: choosing and managing their investments. With the stock market — which had become a darling to most capital owners — taking a beating from the recent post-election violence, the patience of these investors is being stretched to the limit. “If the objectives of the young investors are not met within a very short period, their patience runs out because they have a short horizon and high expectations,” says Mr Francis Lewah, an independent financial advisor with the ProFin Group, a local investment consultancy. A case in point is Right Thinking Group (RTG), an investment club comprising Samwel Ngotho, Muiruri Mburu, Simeon Okello and other five members. Determined to avoid the financial hardships graduates face after university as they look for jobs in a tight market, the former Moi University students set up the club in 2005. So fired-up were the then third-year students that when the Kenya Electricity Generating Company Limited (KenGen) initial public offering (IPO) came up in March 2006, they were among hundreds of Kenyan investors who joined the Nairobi Stock Exchange (NSE). Two years down the line, they have an investment portfolio of about Sh100,000 in cash and shares through their club. Although an upward review next month of their monthly contributions to Sh4,000 from less than Sh2,000 stands to benefit the club’s kitty, the eight friends are scratching their heads. “Given the latest developments at the stock market, please how can we invest our money to meet our objective of being millionaires by 2010?” The group asked in an e-mail sent to Money by Mr Okello, the secretary-general. Yet they are not alone. Another investment club of eight women in their late 20s and early 30s — six doctors, a lawyer and a pharmacist — has raised more than Sh1 million in cash and bought 30,000 shares at the NSE in less than two years. Ms A. Mumina, one of its officials, says despite their efforts come up with an investment plan that would ‘grow’ their money, they have not been successful in growing their capital. The situation is complicated by their individual hectic schedules, both at work and home, making it difficult to venture into a project that would need constant attention since they are not investment experts. “What opportunities can we explore to meet our investment objectives?” asks the group. Whereas the legal framework of the clubs may range from informal social groupings to more formal limited liability companies, their core objective remains the same—pooling assets to generate wealth. Operational structures Unfortunately, most groups do not have operational structures and rely on haphazard investment decisions many a time with no professional input. As a result, most end up with too much liquid cash held in bank accounts thus losing value to inflation or investments in shares at the NSE, whose underlying fundamentals they barely understand. Mr Fred Nyayieka, the general manager of Liaison Financial Services, says coming up with realistic objectives and understanding how to effectively meet them could make the difference between an investment group achieving or failing to fulfil the members’ aspirations. Investment clubs incepted in the 1960s, 70s and 80s are usually pointed out as success stories while the recently emerging groups are mostly failures. This is because one common feature of modern start-ups is the urgency to grow rich. As a result, and in the absence of an investment strategy, most groups speculate on any investment to generate returns only to end up losing money. Another feature is where groups contribute then start looking out for investment opportunities. One needs to know where to put the money long before getting it. This enables you to focus on the initial objective. The other feature is putting all the money in one asset. Most groups would buy only shares at the NSE and more so is a single counter. The risks are very high and should the asset class under-perform, the entire portfolio would be at risk. Mr Nyayieka says individuals investing together does not mean that they need to be experts in investments to succeed. Actually, an investment club does not need an investment expert within the it to achieve its goal of generating wealth. Even in cases where an individual has entrusted investments with experts, they have at times lost money as is common in equity-linked unit trusts, he says. One major weakness of most investment groups in Kenya is failure to formulate investment strategies. There is no way a group can achieve its objective of investing without a strategy. It is the lack of strategy that leads to haphazard investment decisions like buying into investments that sometimes do not match the core objective or even profiles of the individual members. For instance, for the eight former Moi University students to meet their objective of being millionaires, they must have at least Sh8 million – one apiece — by 2010. Assuming that they can only invest in formal investments ranging from equities and fixed income instruments to property and offshore, the low risks associated with such investments means the returns may not be as high as one would expect from high-risk business. In trying to project income if they contribute Sh4,000 per month to the end of 2010, they would raise Sh1,252,000. An assumed annual return of 30 per cent per annum for the next three years returns an absolute income of Sh811,200 representing 64.79 per cent in three years. The total fund thus works to Sh2,063,200. “It may not be possible for the eight to become millionaires in three years at the rate of Sh4,000 monthly contributions,” Mr Nyayieka observes. He also feels that going for a loan to bridge any funding gaps may not be a good idea because it is the net value of the investments that matters. That is, if the group ends up with assets worth Sh8 million and probably an equal amount of liability, then it could negate its main objective. “As a fairly young population, the members have a longer horizon to achieve their objective and there is no point in taking very high risks now that may jeopardise the security of their savings,” Mr Nyayieka warns. Mr Fred Mweni, the managing director of Tsavo Securities Limited, points out that in making an investment decision, club members must remember that the higher the return, the higher the risk. “If you want to make high returns and at a faster rate, then you must also be ready for high risks, including losing all your money at one go,” says Mr Mweni. Mr Maina Wanjigi, the former Cabinet minister and entrepreneur who has been involved in investment clubs in the last 15 years, says the culture of having a uniform contribution among club members is the key driver to reckless investment decisions. “Rather than turning the contributions into shares so that contribution is based on ability to pay, members try to maximise the returns of their low contributions by investing in risky and often wrong ventures,” says Mr Wanjigi. “Investment clubs have a social element and hence individual contribution should not be punitive.” He is the a member of two very successful clubs, Critical Mass Group with 33 members and General Mobilisation of Capital which has a membership of 40. However, in choosing an investment option, it is useful for club members to appreciate that there are two broad classes — direct and indirect investments. Direct investments involve starting or investing in a venture that you must oversee its management. For instance, whereas a group can invest in a manufacturing venture and employ managers, the liability still lies with the group members as much as they may not be involved in the day-to-day management. Indirect investment is where a group can invest in a broad range of assets whose management they have no relationship with, like investing in shares, fixed income instruments like Treasury Bills and Bonds, offshore markets, unit trusts and unit-linked life funds. Such investments are managed by independent entities. Indirect investment is ideal for majority of investment groups given the amount of time required, which makes it difficult for members. Such investments require professional input. Before settling for an investment, there are a number of considerations. A group, like a company, must have a vision. Secondly, the group must come up with a mission statement on how to achieve the vision? Formulating values would also guide relationship within the group and with other outside parties. The vision of the group lays the foundation for the investment strategy. If, for instance, a group’s vision were to be a leading investor in commercial or residential property in a city within, say, 10 years, it would formulate an investment strategy spanning a decade to be reviewed periodically. Then there is the short- and long-term strategy. To own a prime commercial or residential property in a city within 10 years does not mean that such a group starts investing in land from day one. Indeed such a group’s asset allocation may not include property for a long time even for the first nine years. Further, investment in property must not constitute the entire investments because of the risks of investing in one assets class. For example, in allocating their current contributions, Mr Nyayieka advises the eight former Moi University students to focus on key investment markets beginning with the NSE, unit trusts and later in property depending on the trends. This view is shared by Mr Wanjigi. “Investment clubs resources should not be put into high-risk ventures. If any member likes risky ventures, let him or her bet personal resources,” says Mr Wanjigi whose club has invested heavily in property. This has some element of truth given that the most successful groups in the country are land buying companies that sprung up after independence. But as these groups met their objective of buying land they become irrelevant and ultimately majority fold up.

The former minister also says clubs should not be seen to be competing with members in their investments. “A club should not, for instance, buy a few shares that an individual member can afford on his or her own as this would affect members’ interest,” Mr Wanjigi says.