Nigerians Are Gamblers By Nature, That’s Why They Fall For Ponzi Schemes – Patrick Ilodianya, CEO SFS Capital

The Chief Executive Officer of SFS Capital Limited, a leading investment management firm in Nigeria, Mr. Patrick Ilodianya, in this exclusive interview with Nairametrics speaks about the investment climate in Nigeria and why many Nigerians are prone to investing in Ponzi schemes.

He also shares insights on why fixed income is one of the best investment options for Nigerians this time. Excerpts:

Having been serving high net worth investors for years, you recently opened your business to retail investors, what has been the response from the retail market?

Usually, when there’s a lot of uncertainty, it is the best time to reduce the risk to your portfolio. Because if your portfolio is exposed to the vagaries of the economic environment, monetary policy, and all that, and there’s so much uncertainty it is always better to move towards investments that have a limited reaction to uncertainty. So, for instance, if you’re tracking what’s happening, equities globally have been dropping even cryptocurrencies have been losing value. And that’s because of the uncertainty globally.

And so far, so good, there’s nothing that says that the uncertainty, globally and locally is going to reduce. The Russia-Ukraine issue is still there. The China-Taiwan issue is coming up gradually. The Iran issue is still there and those are major headwinds. So, there is nothing that says that uncertainty is going to reduce.

In fact, on the other side, inflation is increasing aggressively. The UK recently released its inflation, which was over 10%. And usually, what happens when inflation increases is that people start increasing interest rates. I’m sure in the last three years, almost all central banks including Ghana, UK, US have increased their interest rates. So, interest rates is becoming a more secure play because they’re fighting inflation. If interest rates are now more attractive, then you’re probably better off allocating a larger portion of your portfolio to something less risky because we’re not sure of what will happen next. For instance, in cryptocurrencies, Nigerians are probably the largest players in that industry. And there’s a lot of uncertainty in Nigeria also with regards to the elections and the insecurity.

So, right now, until Nigeria crosses over to 2023, and everything becomes clear, it is better to err on the side of caution and just make investments in more predictable areas, like fixed income for now.

I’ve been speaking to a lot of people, equities are not going to do well, and cryptocurrencies, from what we’ve seen, actually react to cash flow, which is reducing every day. The fear of inflation is there, so a bulk of your portfolio right now should be in fixed income because it is better to be safe than sorry.

You have been in this business for some years now, what would you consider the most difficult challenges that are you facing in this business considering the environment you are operating in?

Yeah, so I’ve been in business for some decades actually. So, I have decades and years. One of the biggest problems is trust because there are so many quacks and the truth is that because there are so many quacks, the cost of doing business is so high. I mean, for instance, Ponzi schemes will come and take like 200 billion from the industry. And so when they are promising unrealistic returns, expectations change, and people will be like why don’t you be like them? So, quacks are also a challenge because when people get in there and are slaughtered, trust is lost.

So, people group the good and the bad together, that is one. Two, they now form unrealistic expectations because the Ponzi schemes will come and tell you exactly what you want to hear; 1 million% returns with no risk, which is a lie. So, when somebody comes and tells you what is realistic, it just sounds boring. So, the quacks are one of our biggest challenges.

And the next one is basically the changes in the policy environment. The truth is, nobody can actually control that but that is the reality of investment. Changes in government policy can scatter your entire investment portfolio. For instance, if CBN has been reducing rates for a long time and all of a sudden it just increased rates, that’s a problem for your portfolio. If CBN had been allowing you to buy FX with a particular transaction, like Eurobond, and all of a sudden, they just stopped and say you cannot, it becomes a big problem. So, changes in policy is a big issue, but sometimes, the CBN is just reacting to a lot of factors that it also cannot control.

Now, talking about quacks and Ponzi schemes, you mentioned MMM, and a lot of schemes like that have come and gone. Why do you think Nigerians keep falling for these fraudulent schemes?

The truth is that is not only Nigerians, actually, a lot of people usually fall for Ponzi schemes. I think it’s just general human nature. And the truth is that even I have been asking myself that question, why do people fall for the Ponzi schemes? I think for a lot of human beings, Nigerians especially and younger ones especially, there is this thing in them that they do not mind gambling.

So, there is always a particular portion of people’s portfolio that every human being is okay to gamble with. So, most of the time when the Ponzi schemes come, people just go and in their mind they just put a tiny amount that they’re willing to lose. So many times, most people, even responsible feel okay to allocate 1 or 2 or 3% of their money to gambling. I mean, gambling is one of the most successful businesses; three of the richest people in Nigeria are actually into gambling and sports betting.

So the issue is that by the time you see gambling as investing, people start to get greedy. They did it the first time, it worked; they did it the second time it worked, and they forget that when you are gambling, you should use only a fraction of 1% of your portfolio and they will now allocate 30% of their portfolio then it becomes a problem.

So, yes to all humans generally if you give them a return that is potentially high enough, they will gamble because human being like gambling. So, to answer your question, it is simply because human beings like to gamble. And you cannot stop human beings from trying to gamble. The problem is that a lot of people are not very disciplined, they don’t know when to stop. Some can even gamble with their children’s school fees. Notwithstanding, participating in any Ponzi scheme is wrong and reckless.

Tell us about the SFS Fund and how the business has faired in the past years

SFS Fund is the digital version of the multiple award-winning and AA+ Rated “SFS Fixed Income Fund”. The business has been very successful since inception in 2014 and constantly outperformed its benchmark and most of its peers.

The Fund skillfully invests in majorly AAA+ rated FGN Bonds (70%) while the balance of 30% is invested in a combination of CBN Treasury Bills and other money market instruments with a minimum rating of A+.

SFS Fixed Income Fund is registered and regulated by the Securities & Exchange Commission as a Mutual Fund/Collective Investment Scheme. The Fund has a dual listing on the FMDQ and NGX. The Structure and Investment Committee of the Fund includes a Global Custodian which holds every dime that comes into the fund and the also holds and protects all subsequent investments made by the Fund Manager. In addition, the Fund has a regulated Trustee which is a joint signatory to all the accounts and ensures all the investment decisions are consistent with the Trust Deed. The Fund won the Best performing Fixed Income Fund three times in a row by BusinessDay NewPapers Awards. The Fund manager of SFS Fixed Income Fund is SFS Capital Nigeria Limited.

In 2014 the reason for the introduction of the Fund was that SFS felt that there was a gap in the investments available in the market at the time. At SFS we believe in moving boundaries. In 2008 we launched the very first Real Estate Investment Trust – SFS REIT because we felt there was a gap in the market. In 2014, we noticed another gap and launched the SFS Fixed Income Fund. Our target was to introduce a product that would give High Yields by skillfully combining Fixed Income and Money Market securities while providing 24 hour liquidity and seamless investment journey.

We are glad to say that we were very successful and achieved our aim. The next step was to digitize the SFS Fixed Income Fund by introducing a Web app and Mobile app using the latest ‘tested’ technology available.

You recently launched the SFS Fund App, what do you intend to achieve with this innovation?

At SFS Capital we believe very deeply in keeping track of the latest changes in technology to enable us to make better investment decisions and improve the ease of Investing. In our drive to engage actively with technology we decided to launch a web app then a mobile app called sfsfund.com and sfsfund respectively.

We hope to continue pushing the boundaries of what is available in the Nigerian regulated investment space. Before now most of the Fintech revolutionary ideas have existed outside the highly regulated mutual fund industry, but we want to change that.

With SFS Fund we have achieved a paperless and seamless investment and redemption process; digitally enabled KYC process; 24-hour withdrawal process instant investment as easy as doing a bank transfer and receiving instant value and constant interaction with our subscribers and many more exciting features

We are also planning to make many more innovative features as technology evolves and is tested extensively. We intend to always be ahead.

Having been serving high net worth investors for years, you recently opened your business to retail investors, what has been the response from the retail market?

It has been very, very good. Surprisingly good. I think for two reasons. One is that a lot of people have been burned. Two, before, a lot of retail investors somehow will prefer if you promise them returns of 10% monthly, but I think a lot of retail investors are getting wiser and smarter. So, so far so good, the reception is encouraging.

Having been serving high net worth investors for years, you recently opened your business to retail investors, what has been the response from the retail market?

Thanks for that question. The interview wouldn’t be complete without addressing the crypto question. At SFS we only sell what we have tested extensively and proven consistent. At SFS we do not actively sell or recommend many Nigerian equities simply because we do not think many people can manage such risks.

Cryptocurrencies are new and volatile. Depending on your ability to take risk we usually recommend a very low exposure to risky assets where your principal is not guaranteed. We strongly recommend that the bulk of your investments should be in fully secured and regulated investment instruments. We discourage gambling. If you must gamble do so with a very small percentage of your wealth which you can afford to lose without any impact on your standard of living.

It’s difficult to be All Things to All Men. At SFS we want to be fund managers of your Strategic Investment Reserves. Those funds you hope to pass on to your great-grandkids for school fees. We want the new generation to keep that percentage of their investments with SFS. We also recommend that this percentage should be the highest in your portfolio.

 

 

 

Nairametrics