New pension guidelines spur stock market rally

Nigerian stocks are reacting positively to new guidelines from the National Pension Commission (PenCom) that could see billions of naira flow into equities from Pension Funds.

In a new circular titled ‘Amended Regulation on Investment of Pension Fund Assets’, PenCom introduced a multi-fund structure for Pension Fund Administrators (PFA) and Retirement Savings Account (RSA) funds.

“The multi-fund structure shall comprise of Fund I, Fund II, Fund III and Fund IV and will differ according to their risk profile and overall exposures to variable income instruments, such as Equities, Real Estate Investment Trusts (REITs) and Private Equity funds,” PenCom said in the circular.

“There shall be a transition period of 6 months, effective from the commencement date of the Multi –Fund Structure for all PFAs to restructure their respective portfolios.”

Fund I of the new structure has the most risk tolerance, and allows maximum exposure to variable income instruments of up to 75 percent of portfolio value.

PenCom defines variable income instruments as the sum of a PFA’s investments in Ordinary Shares and participation units of Open Close – ended and Hybrid Funds; Real Estate Investment Trust; Infrastructure Funds; and Private Equity Funds.

The new Multi – Fund structure specifically allows a maximum of 30 percent exposure to equities for Fund I, up from a 25 percent cap under the old structure.

BusinessDay estimates that an additional N230 billion could flow into equities over time if 40 percent of PFA Assets under Management (Aum), move to fund I.

“We highlight that the amendments to the investment guidelines demand more allocation to equity and other variable income instruments. Consequently, we foresee increased investor interest in the above mentioned investment vehicles,” Vetiva Capital management analysts, said in a recent note to investors.

Nigerian stocks have gained five percent this year, following a spectacular 10-day rally.

Week-On-Week, the market gained 1,956.83 absolute points, representing a growth of 6.72 percent with Market Capitalisation rising by N676.44 billion.

Year to date gains by large cap banking names like Guaranty Trust Bank (+21.46 %), UBA (+47.78%), Access (+ 22.83%), and Zenith Bank (22.9%) led the NSE – Banking index to outperform the wider benchmark (NSE-ASI) rising by 7.5 percent as at the week ending March 05, according to data from the bourse.

According to PenCom, membership of Fund I shall strictly be by formal request by a contributor, while active contributors who are 49 years and below as at their last birthdays, shall be assigned to Fund II.

Active contributors who are 50 years and above as at their last birthdays shall be assigned to Fund III and Fund IV shall strictly be for RSA retirees only.

Nigerian Pension Funds had gross assets of N6.15 trillion as at December, 2016, with only 8.13 percent of assets allocated to equities.

In 2007, when equity prices were rising rapidly, 30 percent of pension fund assets were in equities.

The fall in equity markets in late 2008 and into 2009 caused a rotation from stocks to bonds as PFAs became extremely risk averse.

That might be changing however, as domestic investors step up their transactions on the NSE.

Transactions by domestic institutional investors increased by 428.8 percent to N128.77 billion in March 2017 from N24.35 billion recorded in February 2017.

The low free float of most listed Nigerian stocks suggests that a modest movement by PFAs towards increased equities allocation would have an outsized impact on stock prices.

Actual free float of stocks available to invest in on the Nigerian Stock Exchange (NSE) is closer to the N3 trillion mark, than the markets total capitalisation of N9.75 trillion.

Dangote Cement, the nation’s largest listed firm, with a market capitalisation of N2.8 trillion and shares outstanding of 17.04 billion has a free float of only 1.51 billion shares, or about 6 percent.

PenCom also moved to make PFAs more transparent, regarding their performances.

According to PenCom, the annual Rates of Return on all RSA Funds shall be publicly disclosed by the PFAs on their websites.

“The annual Rates of Return shall be based on the audited financial statements of the Funds; and on a 3-year Compound Annual Growth Rate (CAGR) of the Fund,” PenCom said.

 PATRICK ATUANYA