…as fixed income dominate PFAs investment
Pension industry assets managed by Pension Fund Administrators (PFAs) over a 10-year period sustained an annual average growth of 15 percent.
The National Pension Commission (PenCom) data analysed by rufybaba @rufyb on twitter shows that the assets under management grew from N4.06 trillion in December 2013 to N14.99 trillion at the end of December 2022, and rising to N17.07 trillion in July 2023.
Further analysis of the data shows that from an average growth of 23.97 percent in 2013, the PFAs recorded 13.63 percent, 15.00 percent, 16.14 percent, 22.02 percent for 2014, 2015, 2016 and 2017 respectively.
It dropped again to 14.93 in 2018, to 18.30 in 2019; 20.44 in 2020; to 9.09 in 2021 and 11.68 in 2022.
Breakdown of where PFAs invested their funds shows that fixed-income instruments dominate 86 percent of the overall pension industry portfolio, which Rufybaba argued that in a nation filled with young individuals, stashing all our pension funds in fixed-income instruments may not be ideal.
“It becomes even more concerning when we notice that a significant portion of this investment is in FGN securities.”
He noted a sharp increase in the allocation to FGN bonds in 2020, due to policy adjustments made in the Treasury-bills and OMO market in 2019
“It’s not like this is news, it is not, because that had been the trend from day one. However, we need to change this mentality.”
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“It would have even been better if the PFAs were funding government deficits, and if those deficits were induced by large-scale investment in productive activities. Unfortunately, the drivers of government debt are debt service and recurrent expenditure.”
“And yeah, I understand that in emerging markets, the sovereign bond instruments typically dominate the debt market. Nonetheless, I urge the PFAs to have some change of mentality, the
He however applauded allocation to corporate bonds, which grew markedly from 2 percent in 2013 to 11 percent in 2023; although the biggest move happened in 2022 when large issuances by Dangote Cement (I think) and some other big corporates were done. Therefore, there might be some skewed results there, it noted.
Commenting on allocation to equities, Rufy noted that this asset class dropped from 13 percent in 2013 (the highest in a decade) to 8 percent in 2023 – and even the most recent figure was due to the recent rally in the market.
“The PFAs dumped equities so much that in 2019, the allocation tanked to 5 percent from 13 percent in 2013.
To be fair again, the economy was disastrous over the past ten years, and the equities market was in tatters, and of course, the funds will gravitate to assets with the most promising returns.
“Moreover, when you look at the list of companies on the NGX, about 160 of them, you would only find less than 10 active names that account for nearly two-thirds of the entire market.
“When you also reason the shambolic corporate governance in many of these companies, you’d wonder why any portfolio manager should bother to sweat on Nigerian equities.”
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However, I firmly believe that our PFAs, through shareholder activism, can be instrumental in driving positive changes in the equities market. While this may come at a cost, the potential benefits could be worth the investment.”
Looking beyond traditional investments, many endowment and pension funds worldwide are significantly increasing their portfolio allocations to alternative investments. Unfortunately, it seems that alternative investments are still not a priority in Nigeria.”
With a mere 1 percent allocation to real estate and less than 1 percent to private equity, it’s evident that we need to reconsider our approach.
“I acknowledge concerns regarding the poor historical returns of local venture capital and private equity funds, but our PFAs possess the leverage to bring about transformative change within this segment, but our PFAs possess the leverage to drive transformative change.”
“The implication of our current asset allocation is that our returns fall significantly below the inflation rate – a concerning prospect for young Nigerians who save diligently for years, only to find their pension proceeds insufficient to purchase items of value during retirement”.
“Fixed-income instruments may have their place in a short-term investment strategy to mitigate volatility. However, for long-horizon return objectives, alternative assets and equities are the more effective choices.”
Another twitter commentator EYAL-OFER said the NSE and other asset classes have not performed optimally. Given the double recessions, boom and bust oil effect and devaluing naira over the past decade, it makes sense that the fund managers favoured fixed income in Bonds, which are the safest investment around at a fair investment returns.
