Julius Masaba

10^th September, 2020

There are over eight thousand (8,000) investment clubs in Uganda, according to information by the Investment Clubs Association of Uganda (ICAU). The ICAU was registered and launched in 2012 (about 8 years ago) to bring together investment cubs in the country.

By definition, an investment club is a group of persons or individuals usually not more than a hundred (100), who come together to pool resources and save in a periodic fashion, which resources are going to be invested/used to create wealth for themselves.

In the past one to two decades, the rate at which investment clubs have been formed is so high especially in Central Uganda – mostly Kampala. In fact, a year cannot go by without word about a new investment club formed or to be formed by either your high school or campus alumni, workmates, workmates or friends in the same career path or background.

This is absolutely a good thing or practice since it has a lot of benefits. Being part of an investment club helps you to pool resources easily. The Baganda say “kamu kamu gwe’muganda” that is one by one makes a bundle.

For example, if your wealth creation interests have always been in real estate but you have always failed to save and buy that UGX5,000,000 plot of land, pooling or saving resources by being part of an investment club or group will make it easier for you  to access funds. There is power in numbers.

Investment clubs also give you the opportunity to create wealth faster in a shared manner. If you save UGX12,000,000 in one year and it’s invested with others, before the end of the second year, you will have earned at least a good return on your savings, depending on the investments made.

As you save and create wealth together, there is a social bond created overtime. Such bonds are created at meetings, parties or even interacting or visiting families and friends of club or group members. Social capital is key in wealth creation and personal development. They say “your network is your net worth”; show me one of your friends and I will tell who you are.

At a microeconomic level, investment clubs are a good financing option for micro, small and medium sized enterprises in Uganda. This could be through affordable credit lines, LPO financing or even equity (cheapest source of finance). With equity, you can allow an investment club to take stakes or a piece of your enterprise for some million Shillings.

However, equity investments by investment clubs are still very few or low in Uganda. Many of them invest in listed stocks on the Uganda Securities Exchange (USE), NSE, RSE, and DSE (if cross border), in treasury bills and government bonds. I wrote about them here, real estate (buy and sell), a few manufacturing or capital projects, etc.

Most investment clubs save a minimum of UGX10,000, UGX20,000, UGX50,000 and a maximum of UGX100,000 monthly not to hurt people’s pockets, for someone earning between UGX800,000 and UGX1,500,000 salary a month; but the amount can also grow. Many of the clubs start off well with little.

However, along the way, the failure rate becomes so high due to a number of causes or reasons. From a few chats I have had with colleagues who are or have been in an investment club or group that failed, you will discover that mistrust/dishonesty or lack of transparency in the leaders is one reason.

The same leaders will be blamed for not calling or holding regular and consistent meetings (for members to meet and discuss especially in the early years of the club or group). When this happens, members will start being inconsistent in saving since the motivation or push factor by the leaders is non-existent. It thus cripples the whole club or group. This is all about governance.

That aside, there is also a sub-element of investment clubs’ governance which is the investment policy statement (IPS), whose non-existence most times also leads to failure to invest and realize returns and eventual collapse of a club or group. Very common especially if the club or group has accumulated funds but cannot move the monies.

Most times it’s due to fear of the unknown or unseen, or making an investment whose return you don’t know or whose risk you have not weighed or you had highly undermined. This was the case with one of my client’s investment club. He belongs to one and has been a member from inception. He has also been saving with the club since 2014 where he’s Chairman too.

Trouble is, the club accumulated funds and put them in a mutual fund, an idea that was his. Monies kept on increasing but no tangible investments were being made hence no returns being seen by the members. Meetings have not been regular, imagine meeting once in three (3) months for a club that is close to seven (7) years old with nine (9) members and with over eighty (80) million Shillings in savings.

A few months back he had wanted the club to invest in his agro-processing company, either pure equity or debt convertible to equity. The club welcomed the idea but went on to ask for the share price of the company. He took is time and did it. The club wanted to raise about UGX170 million.

In fact he had convinced the members that investing in the company would give them a very good return, which was true – for a company with potential of raking in more than UGX130 million in annual profits. A few months down the road, he disclosed to me that members had started disagreeing and being agitated wondering whether their money is as it’s supposed to be.

In fact, the club’s accountant’s honesty was being questioned. There were rumours that he might have colluded with some of the executive members to misuse some of the club’s money and could be the reason why the meetings are not being held and the self-evident non-existent returns on the funds invested. Thus, my client’s attempts to get financing from the club have been frustrated terribly. He plans to exit the club.

From his story, I was able to conclude that there no investment policy statement (IPS) to guide them in investing. In my view, an experienced leader of a small wealth creation minded group of people with good business and investment management knowledge or exposure wouldn’t have failed to cause a positive return on members’ little savings.

But if a club with such a number and that amount in savings fails to invest wisely and widely to have even short-term returns, then there is a problem – there was lack of an investment rule book for the club, apart from having or not consensus.

The IPS is a document in which the investment plan and guidance on such decisions for consistence are provided; for informed decision making. It ought to be a central component in all investment relationships, road map and as a barrier to bad investor behaviour that can divert even the best laid plans.

But you will realize most times that about three out of five investment clubs, groups or companies lack an IPS. One reason could be that they don’t know about it. Secondly, those who know about it and its purpose may see it in bad light. The most common objection to an IPS is the idea that it is a compliance burden.

The contention here is that if you are hired or placed in a position of a club or group chairman or the investment manager/officer, and that if you create an IPS and don’t abide by its terms, you are setting yourself up to be sued. But it is a simple problem to avoid. An IPS should only contain those provisions you intend to be following anyway. It’s strongly advisable to adhere to it.

If questions ever arise as to whether or not you did your job as an investment manager or chairman of an investment club, group or company, the answers won’t come from the investment results themselves, but what decisions you made and how you made them. You will be asked to demonstrate that there was a decision making process in place and that it was consistently followed.

Demonstrating this minus a documented plan is hard, in fact impossible. The investment club or group members are human so they will continue to exhibit the human traits of being reactionary and wanting to take action (fire, sack, sue you, etc.) if things don’t go their way.

For starters, an IPS should be able to outline for you the basics like;

1. A brief background of the investment club, group or company
2. Purpose of the IPS (goals, objectives)
3. The investment function and strategic plan
4. Investment objectives (risk tolerance, returns, source of funds, use of proceeds, etc.)
5. Investment guidelines (general investment principles like; safety & preservation of principal, liquidity, optimization of yield on portfolios, aim of the investment, geographical location, public trust from prudent investment activities, separation of roles, how to measure portfolio performance e.g. basing on total return, dividend and interest income, and on a risk adjusted basis using measures like Active Return, Tracking Error, Treynor Measure, Sharpe Ratio and Information Ratio)
6. If each investment action shall recommended supported by a cost-benefit analysis clearly put in writing prior to execution, and many others.
7. Policy asset mix (assets class, long-term policy weights, rebalancing ranges, benchmark)
8. Prohibited or forbidden areas (if any)
9. Investment guidelines for outsourced funds (service provider structure, benchmark selection, performance evaluation, investment policy review, etc.)

Considering the time and effort it takes to formulate a sound investment strategy for an business entity, it’s simply negligent to fail to commit that plan to writing. So, the time required to prepare an IPS is minimal, especially when technology can be leveraged to do so effectively and efficiently.

If you are able to do it, for the club, group or company yourself, it will save you time and money. Otherwise, you will need the services of an experienced financial management consultant, investment manager, fund manager, etc., sit down with him or her to understand your club’s, group’s or company’s investment activities, short and long term plans, decision making structures, risk aspects, etc., before embarking on preparing the IPS.

You want to make money, but again you wouldn’t want to be blamed for making bad, uninformed investment decisions, would you?

Thank you.

NB: This article also appeared on Medium by the same author. Click here.

About the Writer

Julius Masaba is a private investment researcher and business consultant; a WordPress writer/blogger on startups, entrepreneurship, business and finance. He’s also the Business Development Lead at Ablestate, https://www.theablestate.com/. He loves tech. Visit: https://consultmasaba.com/