SEC Overhauls Valuation Rules for Nigerian Fixed Income Mutual Funds

A New Dawn for Transparency: SEC Overhauls Valuation Rules for Nigerian Fixed Income Mutual Funds

For years, investors and market observers in Nigeria have pointed to a significant issue in the mutual fund industry: the valuation of fixed income funds. By often relying on an accounting method that smoothed out returns and masked underlying volatility, the true performance and risk of these funds were difficult to gauge.

That is all set to change. In a landmark circular dated September 19, 2025 seen by Money Counsellors, the Securities and Exchange Commission (SEC) has laid out a clear path for fund managers to transition to a more transparent and globally accepted valuation standard. This move is poised to reshape the landscape for investors, fund managers, and the industry at large.

The Past Practice: The Problem with Amortized Cost

Historically, many Nigerian fixed income funds valued their underlying assets—like bonds and treasury bills—using the amortized cost method. In simple terms, this method records the initial purchase price of a security and gradually accounts for the interest it will earn over its lifetime.

The result? A fund's unit price showed a smooth, steady upward climb, rarely fluctuating. While comforting, this was not a reflection of reality. The market value of a bond changes daily due to shifts in interest rates and economic conditions. By not reflecting these changes, the amortized cost method concealed the true market risk and provided an artificial sense of stability. This lack of transparency made it difficult for investors and market watchers to accurately compare funds or understand the true real-time value of their holdings.

What Happens Now: The SEC's New Mandate

With the circular, the SEC has mandated a transition to the mark-to-market (MTM) valuation methodology, as stipulated in its 2019 rules. Mark-to-market means valuing assets at their current market price—what they could be sold for today.

To ease the shift, the SEC has approved a carefully structured transition plan. Here are the key details:

• A Two-Year Transition Period: Fund managers have been granted a two-year period, effective September 22, 2025, to fully implement the mark-to-market methodology.
• A Hybrid Approach: During this transition, managers are to use a hybrid model, valuing some securities at mark-to-market and others at amortized cost.
• New Securities Must Be MTM: Critically, all new fixed income securities purchased by funds must be valued at mark-to-market immediately. The portion of assets valued at MTM is expected to "be increased gradually and steadily" until full compliance is achieved.
• Implementation Plan Required: Every affected fund manager must submit a detailed implementation plan to the SEC by October 2, 2025, outlining their path to full compliance.
• Temporary Asset Allocation Forbearance: To give fund managers flexibility during this period, the SEC has granted a temporary adjustment on asset allocation thresholds for Fixed Income Funds, moving them from a 70%:30% ratio to a 50%:50% range.
• Investor Education: The SEC, in partnership with FMAN, will roll out an intensive investor education campaign to help the public understand the changes and their implications.

Going Forward: What to Expect

For investors, the most immediate change will be in the daily unit price of their fixed income funds. Expect to see price fluctuations. When interest rates rise, the market value of existing bonds falls, and your fund's price will reflect that. Conversely, when rates fall, the price will rise. This is not a cause for alarm; it is a sign of a healthier, more transparent system. Your fund's reported value will now be a true representation of its underlying worth, allowing you to make more informed investment decisions.

The Benefits for Everyone

This regulatory shift brings substantial benefits across the board:

1. For Investors: The primary benefit is transparency. You get a true picture of your investment's performance and risk profile. It enables a more accurate comparison between different funds, fostering healthier competition based on actual fund management skill.
2. For Fund Managers: While operationally challenging in the short term, MTM enforces greater discipline. It compels managers to actively manage interest rate risk, as the impact of their decisions will be immediately visible in the fund's daily price.
3. For the Industry and Observers: Adopting global best practices enhances the credibility of the Nigerian capital market. It makes the industry more attractive to sophisticated and international investors who demand this level of transparency. For analysts and regulators, it provides a clearer, more accurate view of the financial health of the fund management sector.

In conclusion, the SEC's directive is a watershed moment for Nigeria's mutual fund industry. While the transition may introduce some short-term volatility to fund prices, the long-term gains in transparency, risk management, and investor confidence are immeasurable. It is a bold step towards a more mature and trustworthy investment environment for all.