Egypt's mutual fund market offers more products and accessibility

Although the country launched its first Egyptian Mutual Fund in 1994, the industry has evolved slowly since then. As of late 2018 there were nearly 100 funds operating under the supervision of the Financial Regulatory Authority (FRA), including specialised funds in a range of asset classes: 29 equity, 10 sharia-compliant, six fixed income, 27 money market, 11 balanced, three capital preservation, and US dollar- and euro-denominated money market funds. The FRA has always been on the forefront of evolving and modernising the industry, which has included the revamping of Law No. 95 of 1992, pertaining to the regulation of mutual funds, completely in 2007 and again in 2014.

Trends & Events

From the mid-1990s until mid-2013, money market funds were very attractive to large segments of investors since they offered high liquidity and attractive yields compared to traditional bank savings vehicles. Moreover, these funds have proven to be more attractive after the January 2011 Arab Spring, as investors were seeking safer alternatives to their investments during an era of instability.

In November 2016 the Central Bank of Egypt (CBE) took the long-awaited decision to float the Egyptian pound as the economy adapted to overcome various new challenges. This decision had an impact on the country’s capital markets as well. In parallel with the flotation, yields on Treasury bills (T-bills) and Treasury bonds across different tenors increased to combat high inflation. This affected investors as well, with around LE8bn ($449.6m) redeemed from money market funds and LE1.1bn ($61.8m) from fixed-income funds. The redemptions were caused by the funds’ inability to benefit from higher yields as new subscriptions were suspended due to a CBE decision linking fund sizes to the size of the issuer’s capital and local deposits, gradually reducing the cap of these investment instruments. As of early 2019 money market funds still form the majority of the market, with some 88% of managed assets invested in mutual funds, which provide a unique service to the public by offering them an easy way to participate in the Treasury market with daily liquidity under professional management. Only a handful of banks have not established money market funds, but we believe that if the CBE decides to remove their caps, mutual funds would be able to receive new subscriptions and attract new investors as T-bill yields are expected to remain attractive over the next few years. As a result of the outflows during the past couple of years, many fund sizes are now below the CBE cap, which has appealed to investors who have redirected their investments to these type of funds again, seeing them increase in total assets by 22%.

New Regulations

Since 1994, when the first mutual fund was introduced to the Egyptian market, regulatory authorities have restricted the sponsoring of funds to commercial banks, insurance firms and fund companies (a mutual fund taking a corporate form).

In 2018, as part of its efforts to open the market and increase competitiveness, the FRA issued a set of new regulations to support these efforts. Investment banks and microfinance companies were allowed to sponsor all types of mutual funds, except real estate funds. In another attempt by the authority to boost the mutual fund industry, officials allowed brokerage firms to receive fund subscriptions and redemption requests as well as handle the settlement process, which were previously only open to banks. This move should facilitate the subscription and redemption process for investors and lead to an increased inflows of capital. Another major field of development for this segment is the launch of real estate funds, which have proven successful in other MENA countries. In the past, investing in real estate has only been an option for wealthy individuals and specialised corporations. Real estate investment can open the door for many more, including retail investors, to participate in this lucrative market in Egypt and allow the fund management industry to play a much bigger role in the economy.