GHANA TECHNOLOGY UNIVERSITY COLLEGE

COVENTRY UNIVERSITY

SUBMITTED BY;
DESMOND ISAAC NII KPAKPO ADDO-05AG0517107
desmondisaacs01@gmail.com
1.0 THE LIQUIDITY THEORY OF ASSET PRICES
Liquidity can simply be stated as the ease with which a security can be traded.

The liquidity theory of assets refers to the movement of cash into stocks and stocks into cash with

the hope of making improved returns on portfolios by investors. These investors may either sell

stocks for cash due to the need for cash or in anticipation that stock prices will fall and they may

be at a loss. In the same vein investors may choose to move cash into stock due to the availability

of money or due to speculation that stock prices will rise and they stand to gain from that rise.

Institutional investors refer to organizations which are mostly financial service providers such as

banks and pension funds who engage in the commitment of resources with the expectation of

making future benefits. Their presence causes both upward and downward movement of stock

indices due to the relation between demand and supply as an offshoot of the liquidity theory of

assets. In any sophisticated market there are many investment professionals who scrutinize stock

prices continuously to find stocks that are cheap and ones that are dear. (Pepper and Oliver, 2006)

Case Study

Take for example Mrs Lumor an individual Ghanaian who earns GHC 7,000 a month as salary as

an accountant and decides to invest GHC 2,000 every three months in different stocks on the Ghana

Stock Exchange.

Take also for example the same Mrs Lumor contributing GHC 945 to a pension scheme in Ghana,

specifically the Social Security and National Insurance Trust (SSNIT) who in turn invest this

amount, in addition to other contributors’ money, in stock on the Ghana Stock Exchange.

The purchase of stock by the Institutional Investor (SSNIT) has greater effect on the upward and

downward movement in stock indices than that of the individual investor (Mrs Lumor)
This investment by the institutional investor leads to the increase in value of the shares of those

companies thereby creating a demand for those shares. When there is high demand prices rise,

with low demand prices fall. In the face of high demand and high prices per share, individuals are

inclined to sell of their shares to make some returns on their shares. This acquired returns is then

transferred through different mediums based on individual preference. Some choose to spend on

stock which will also lead to further movements, others on more direct forms of trade such as

produce buying which also does lead to movement in prices. This process can be seen through

different rounds and at each round prices change, either to an upward movement or a downward

movement.

In conclusion, the more money available for stock and the purchase of stock inspires the upward

movement of stock prices. The demand and supply of stock is in a nut shell fuelled by the

availability of cash for trading. Liquidity of asset prices is thus controlled by the availability of

money and institutional investors play a huge role in this liquidity thanks to their large pool of

resources and finance.

2.0 THE EFFECTS OF FUND CHARGES TO AN INVESTOR

For most investments, investors want to earn high returns on their portfolios and incur less cost.

However the nature and operations of investments with regards to mutual funds incur some cost

in the form of management fees, administrative fees et cetera. These fees have an impact on

investments and in order for us to appreciate this impact let us take a look at this example. (Solin

Daniel, 2009)
Case Study

Vandal Mutual Fund; an index tracker fund in Ghana which charges no front end load but has an

annual expense ratio of 0.13%

Kontinental Mutual Fund; an actively managed fund in Ghana that has an annual expense ratio of

0.57% and a 5.73% sales load.

Casford Mutual Fund; an actively managed fund in Ghana has an expense ratio of 2.01% and no

front end load.

This means that Vandal has no load and low costs as well, Kontinental has a front end load and a

fairly low annual costs and Casford has relatively higher annual costs but no front end load.

Assuming that over the next 10 years the fund earns an annual rate of return of 7% and also both

actively managed funds (Kontinental and Casford) have their market returns equals the pre-

expense returns. Given that each invest an amount of GHC 10,000 in their respective choices.

Now let’s see how the investment will look like at the end of its lifetime;
 RETURNS AFTER ONE(1) YEAR
10800

10600

10400

10200

10000

9800

9600
VANDAL KONTINENTAL CASFORD

VANDAL GHC 10,687 KONTINENTAL GHC 10,033.1561 CASFORD GHC 10,499

At the end of the first year Kontinental is the lowest due to its front end load, however the gap

between the net investments is not huge.

RETURNS AFTER FIVE(5) YEARS

14200
14000
13800
13600
13400
13200
13000
12800
12600
12400
12200
12000
VANDAL KONTINENTAL CASFORD

VANDAL GHC 13,940.0522 KONTINENTAL GHC 12,873.4164 CASFORD GHC 12,756.73926

At the end of the fifth (5) year, Vandal is starting to widen the gap between the net investments

and Kontinental has overtaken Casford even with its front end load.

RETURNS AFTER TEN(10) YEARS

20000
19500
19000
18500
18000
17500
17000
16500
16000
15500
15000
14500
VANDAL KONTINENTAL CASFORD

VANDAL GHC 19,433.816 KONTINENTAL GHC 17579.8080 CASFORD GHC 16,273.4396

At the end of the tenth (10) years, results is almost the same. Vandals’ lead keeps rising whiles

Casford are falling behind and Kontinental managing in the middle of the returns made on their

respective investments.

Now assuming this investment is carried on until the next twenty (20) years an investor in Vandals

will make at least 20% more on his investment than an investor in Casford. The longer the

investments continue into the future the more the returns between them gets widened. The gap

between Vandal and Kontinental will widen, the gap between Kontinental and Casford will widen

and off course needless to say that the gap between Vandal and Casford as well will widen.

From the above case study it is evident that varying expenses have varying effects on the returns

of investments. Just as front end loads do not help returns on investment since they reduce the

amount invested which has a ripple effect on interest accrued, annual expenses have an even
greater effect and even a very small annual expense has the ability to reduce returns by a great

margin in the long-term.

In conclusion fund charges have a reducing effect on expected returns on an investment, the lower

the charges the higher returns and vice versa. Enough knowledge on funds associated fees is

therefore required before investment decisions are finally taken. (David Ning, 2009)

3.0 THE RATE OF GROWTH OF PENSION FUNDS IN GENERAL, AND GHANA

PARTICULARLY

Pension fund refers to funds from which contributions from employers and employees or both are

collected and accumulated for investment purposes to be repaid in future after retirement. In simple

terms individuals save money, and they receive those monies in the future as premiums.

The world’s six largest pension saving systems – the US, UK, Japan, Netherlands, Canada and

Australia – are expected to reach a $224 trillion gap by 2050, a new study by the World Economic

Forum shows. That same research indicates, there is a growing concern about gap in pension funds.

This gap is created by the difference in pension contributions made and pension payouts yearly.

The gap widens as savings reduce against longer life spans of pension beneficiaries and it is

estimated that this gap will reach a figure of $224 trillion by 2050. If the countries with the world’s

largest population namely China and India are added this gap will increase to $400 trillion by 2050.

This shows that pension funds are not growing proportionately and spells doom for the near future.

(World Economic Forum, 2017). This ununiformed growth is shown in the graph below;
 Source; World Economic Forum

In Ghana, research indicates a rise in pension funds which means there is a rise in savings. It is

however unclear if there is a gap in growth as it is seen worldwide. This can be as a result of none

existent research in relation to the gap in growth of pension funds or none existent gap in pension

fund growth. To further clarify the growth in Ghana the National Pensions Regulatory Authority

conducted a research which expatiated the growth in figures below.

 Growth of Private Pension Funds

No Year Assets Under Temporary Pension Funds Total %

Management by Account (TPFA) of
Trustees (AUM) GDP
1 2012 48,237,965.49 756,873,159.69 805,111,125.18 1
2 2013 429,110,869.05 914,132,017.00 1,343,242,886.05 1.4
3 2014 1,116,492,197.00 1,465,015,857.00 2,581,508,054.00 2.2
4 2015 2,358,555,107.12 2,313,553,357.00 4,672,108,464.12 3.3
5 2016 4,122,492,021.68 2,670,454,240.00 6,792,946,261.68 *4.5
*Based on 2016 provisional GDP estimates (source: Ministry of Finance)

4.0 ANNUITY, WHEN USED AS PENSION

Annuities are forms of investment that gives an investor the right to be paid a sum of money on a

yearly basis. They are investment contracts that give guarantee of payment for a specified period

and mostly till death.

Pension refers to periodic contributions or payments made in order to generate income for the

unforeseen future.

Annuity involves three parties, the owner who normally is the one that incurs the cost that

purchases the annuity. The annuitant is usually the person on whom the calculation of benefits is

dependent on based on his age and life expectancy. The beneficiary who receives the payment

upon the death of the annuitant. It is important to note that in most cases the annuitant and the

owner is the same person.

Due to the similarity between pensions and annuities, annuities are sometimes called personal

pension plans. They pay guaranteed income to annuitants when they retire, however the question

is how do they work?

How Annuities operate

The modus operandi of annuities is quite simple. Individual must invest money for a specific period

of time in order to qualify for future payments of income as the annuitant. Just like other forms of

investments like fixed term deposits and some kinds of mutual funds early withdrawal of funds

comes with penalties. These penalties can be in the form of some percentage of surrender charge

placed on the investment, say 10% surrender charge. It is worth noting that most annuities allow

for 10% of investment to be withdrawn for emergency purposes.

In order to start receiving payments the annuitant has to contact his annuity company and his or

her monthly income will be calculated and paid. The calculation is normally based on the age of

the annuitant, when the annuity starts, the term of the annuity, the amount available, the life

expectancy of the annuitant, interest rates/ investment returns. Annuities give room for extra

requirements sometimes known as optional riders which serve a good purpose but have a reducing

effect on the income expected by the annuitant. An example of such requirements is an annuitant

stating that his or her spouse should be paid after his or death. (The Annuity Buyers Guide, 2011).

Types of Annuities

There are several types of annuities however in order to differentiate the various types it is

important to take into consideration the two phases namely the accumulation and payout phases.

The accumulation phase refers to the time within which funds are gathered and mostly invested in

order to benefit from future returns. The payout phase refers to the period in which the returns

from the accumulation period are used to as income stream to the benefit of the annuitant.

At the accumulation phase annuities can be broken into two types, immediate and deferred

annuities. With immediate annuities, individuals begin to receive payments right after their initial
investment has been made. Whereas with deferred annuities, the money is invested for a specified

period of time after which the returns will be paid to the individual.

At the payout phase annuities can be broken into fixed annuity, variable annuity and index annuity.

In relation to studies conducted by Brown R. J, Mitchell O.S,Poterba,J.M(1986), fixed annuities

are types of annuities where the beneficiary receives definite amounts at regular intervals for a

specified time period. Variable annuities pay variable interest rates on deposited funds and index

annuities are annuities that pay interest rates based on the performance of a known index like S&P

100. (Blake D, 1999)

Concluding Case Study

Annuity as pension brings great benefit as can be seen in the example below.

Assuming Mrs Lumor has GHC 100,000 as investment amount in annuities. The rate of return is

5.5% and Mrs Lumor wants to purchase an annuity at her current age of 65.

Using immediate annuity, Mrs Lumor will begin to receive payments right after her investment

amount of GHC 100,000 has been made whereas the deferred annuity will see to it that returns on

Mrs Lumors investment is earned after the specified date in the annuity contract.

The rate of return will bring a fixed interest of GHC 5,500. A variable annuity will not have a fixed

rate of return of 5.5% but will have other variable rates to be used to calculate returns to be earned

on the investment. Assuming the contract states that the fund will track the S&P 100 Index which

has a rate of return of 5.7%. Mrs Lumor will earn an interest of GHC 5,700 under index annuities.
5.0 REFERENCES

Blake,D ,(1999) ‘Annuity Markets; Problems and Solutions’. Issues in Risk management and

Insurance,Vol 24,No.3,pp 358-375.

Brown, J.R, Mitchelle, O.S,Poterba,J.M,Warshawsky,M.J,(1968) ‘The role of Annuity Markets in

Financing Retirement’. Massachusetts: The MIT Press

Bogle,C.J (1999) Common Sense on Mutual funds: New Imperatives for the Intelligent Investor,

2nd edition. John C.Wiley & Sons.

Ning, D. (2009) The Impact of Costs on Mutual Funds Returns (ONLINE) Available at:

http://moneying.com/investing/the-impact-of-costs-on-a-mutual-fund-returns (Accessed 4 July

2017).

Pepper, T.G and Oliver,M.J (1934) ,“The Liquidity Theory of Asset Pricing”.

Redhead (2008), Personal Finance and Investments: A Behavioural Finance Perspective. London:
Routledge

Solin,D.(2009) ‘The Smartest Investment Book you will ever read’