New Telegraph

Coronation Research tasks investors on superior RoE

Following some investors’ inability to take accurate and profitable decisions in the course investing in equities, analysts at Coronation Research have identified the best way to go for superior return in this regard.


In a report, ‘Equities for a Superior Return,’ put together by Guy Czartoryski and Adebayo Adebanjo, and released at the weekend, the analysts challenged the widely-held opinions about Nigerian investments, in particular views about the equity market.


In his contribution, the MD/CEO, Coronation Asset Management, Aigbovbioise Aig-Imoukhuede, said: “Nigerian listed equities, if properly selected, can deliver an adequate return to investors over the long term.”


On the superiority of equities over other form of investments, the analysts posited that investment in equities remained the best in beating inflation over a long term, especially now that Nigerian investors face a third successive year of T-bill rates well below the rate of inflation.


The report further noted that Coronation Research realised that having studied equity returns during the period from January 1, 2016 until now, while the performance of the NGX All-Share Index was not strong, the performance of a selection of the most profitable NGX-listed companies provided superior and inflation-beating return.


According to the analysts, “so, the return of the NGX All-Share Index from January 1, 2016 to 30 September 30, 2021 was 40.50 per cent or a compound annual growth rate (CAGR) of 6.15 per cent. “With gross dividends reinvested, that rose to a CAGR of 12.44 pet cent.


But neither return would have beaten inflation over the same period, which averaged 14.26 per cent per annum. “However, a basket of 10 NGX-listed companies, each with a long-term and sustainable Return on Equity (RoE) of 20.5 per cent or more, would have delivered an investment return with a CAGR of 16.36 per cent from January 1, 2016 to September 30, 2021.


“With dividends reinvested, this would have risen to a compound annual growth rate of 24.71 per cent.


“The basket would have easily beaten inflation of 14.26 per cent, giving a compound annual growth rate, in inflation-adjusted terms, of 8.29 per cent. And in US dollar-equivalent terms, the compound annual growth rate would have been 9.71 per cent.


“In our report, we imagine a prosperous Nigerian household that, in January 2016, had N1 million in savings to invest.


Then, we follow what would have happened to their money if they had invested in either equities or Nigerian Treasury Bills (T-bills).” In the report, which can be downloaded in full from visit www. coronationam. com, the analysts highlighted the big difference between the performance of the NGX All-Share Index and the same return calculated when dividends are reinvested, the Total Return.


“Only with Total Returns can investors begin to make meaningful long-term gains. “For a truly superior return, investors need to identify listed companies whose internal Return on Equity (RoE) is high – we stipulate a minimum of 20.5 per cent per annum. “Furthermore, this return on equity needs to be sustainable.


We found 10 NGX-listed stocks with these characteristics and created a hypothetical portfolio with these stocks in equal weight. Then we measured their total returns from January 1, 2016 onwards and came up with the surprising results given above,” the report highlighted.

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