Pension funds warming up to equities

…as stake grows 47% in seven months

Pension funds are warming up to equities, with their holdings growing by 47.5 percent in seven months to N1.3 trillion.

Industry data show that the total assets under management (AUM) stood at N17.1 trillion as of the end of July.

“It has taken a long time, and almost four successive years of positive equity returns from the Nigerian Exchange Limited (NGX), but it appears that Nigeria’s enormous pension funds are warming to equities again,” analysts at Coronation said in its Nigeria Daily Weekly Update.

They said that in contrast with industry data from 2022, the evidence this year suggests that pension funds are enthusiastic buyers of equities.

“From the beginning of 2023 to the end of July, the total AUM of Nigeria’s pension funds rose by 13.8 percent to N17.1 trillion ($21.1 billion at the NAFEM rate last Friday),” they said.

The value of their equity holdings rose by 47.5 percent to N1.3 trillion over the same period. The 25.5 percent rise in the NGX All-Share Index over that period does not account for that increase, according to them.

“So, either Nigerian pension funds are very good stock pickers, or they were net purchasers of equities. The big rise in their equity position was likely a combination of net purchases of up to N200.0 billion, we think – and reasonable stock selection.”

This took the proportion of equities in the AUM of pension funds from 6.1 percent to 7.8 percent.

“If we look at the four months from the end of March to the end of July, the total equity holdings of pension funds rose from N1.04 trillion to N1.34 trillion, a rise of 28.4 percent compared with a rise in the total AUM of pension funds of 9.5 percent,” the analysts said.

The NGX All-Share Index only rose by 17.3 percent over the same period, so again pension funds were in all probability net buyers of equities, they added.

The analysts said: “Which equities have they been buying? It is difficult to pinpoint the answer with any accuracy. The National Pension Commission (PenCom) gives data on equity holdings but does not break down the data (which is hardly surprisingly given the complexity that would involve).”

“We need to use some assumptions. Given the enormous aggregate size of pension funds, at N17.1 trillion, we imagine that pension funds are active in the most liquid stocks.

“And, for the most part, this means bank stocks. Though not the largest stocks by index weight, banks are the most liquid, tending to have high free floats relative to their total equity. And banks tend to be generous dividend payers, something pension funds likely warm to.”

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In 2022, the total assets of pension funds rose by 11.7 percent but their equity holdings actually fell by 0.8 percent over the year.

The analysts said: “Given that the NGX All-Share Index rose by 19.98 percent last year this either means that pension funds were net sellers of equities or poor stock pickers (NB the sub-index of banks only rose by 2.81 percent last year), or a combination of the two. At any rate, the data from PenCom points to a change in attitude towards equities, in our view.

“Pension funds may well have observed that the return from the NGX All-Share Index was 50.03 percent in 2020; 6.07 percent in 2021 and 19.98 percent in 2022, cumulatively beating inflation by a decent margin and bond returns by a large margin. The comparison between bond and equity returns so far this year suggests that 2023 will be no different.”