Nigeria’s biggest institutional investors, the Pension Fund Administrators (PFAs) are increasing their exposure in the bond space while also cutting down investments in short-term treasury bills.
Data published by pension regulator, Pencom, shows that PFAs investment in Federal Government bonds at end of November 2020 stood at N7.38 trillion.
That’s an increase of 51.8 percent or N2.52 trillion from what they invested in the long-dated instrument in the same period in 2019.
On the other hand, pension fund managers reduced exposure massively in treasury bills, with investments in the shortterm instrument, falling 69.7 percent to N642 billion at the end of November 2020 from N2.1 trillion invested in 2019.
The increased investment by PFAS in FGN bonds was essential to take advantage of the relatively high yields in the bond markets, according to Johnson Chukwu, managing director/ceo, Cowry Asset Management Limited.
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“As a result, we saw the demand pressure for T-bills spill over to the bond market as the CBN kept a focus on expansionary monetary policy aimed at stimulating economic growth,” Chukwu said in a note.
From bonds to treasury bills, yields on nearly all asset classes are trading at lower rates after a raft of policy by the Central Bank, last year, aimed at driving credits to the real sector of the economy to boost growth in a frail economy, and restricted non-bank foreign investors, including PFAS, from buying OMO bills. The directive pushed excess liquidity that could have been invested in OMO, into other debt instruments, crashing yields.
Fund managers who were existing bondholders, had a field day last year, enjoying the bond rally, staying at the longer end of the curve, trading a part of their already invested long-dated bonds, thereby using capital gains from these bonds to reward clients with interest above inflation.
Bonds across various tenors returned on the average 39 percent last year, far more than the two percent average return investors got from investing in short-term money market instruments.
Major winners from the low-interest rate regime has been the government, benefiting by raising cheap debt from the local market
Nigerian equities have also benefited with the market returning 50 percent last year, courtesy of PFAS quest in search of real return, increasing exposure to fundamentally strong stocks.
PFAS investments in stocks stood at N790.85 billion as at November 2020, up by 47.56 percent, from N535.94 billion in 2019.
Pension funds invest in a variety of assets, but most, including defined benefit plans, use low-risk assets such as government bonds as the benchmark discount rate.
Total assets under management of PFAS in one year rose to N12.29 trillion from N9.9 trillion, with over nine million Nigerians currently enrolled in the scheme.
While the low-interest-rate environment has made fund managers profit from bond and fixed-income rally, falling yields have also driven up future liabilities — in turn threatening their ability to meet oncoming obligations.
They also face what is called “reinvestment risk” when making new bond purchases, as that would mean coming into the market at a much higher price.
Although analysts say they expect interest to continue on a downward trend, yet existing bondholders bet would be for a reversal of the low yield not to happen, as that would crash the price of bonds.
“In 2021, we do not envisage dramatic upside in bond yield but a marginal lift from the current position, as the need for the CBN to stabilize FX and rising inflation may have become pressing,” Chukwu said.
