Corporate bonds’ high returns attract N729bn in pension fund

High investment returns in the corporate bond market attracted N729.51 billion pension funds in one year to May 2024, BusinessDay has learnt.

With high inflation and interest rates, several investors have exited their stock market portfolios for more attractive new bonds and treasury bills in order to earn high returns. Pension fund administrators were no exception within the period.

“Pension Fund Administrators (PFAs) significantly increased their holdings of Available-for-Sale (AFS) corporate bonds between May 2023 and May 2024. The trend is primarily attributed to the rising interest rate environment,” analysts at Pension Fund Operators Association of Nigeria (PenOp) said.

Oguche Agudah, chief executive officer, PenOp, said in an effort to make higher returns and take advantage of higher coupons, pension funds offered more corporate bonds for trading to invest in newer higher yielding bonds which are held to maturity (HTM).

“The data reflects this trend, with AFS corporate bond holdings increasing from N270.34 billion in May 2023 to N729.51 billion by May 2024,” Agudah said.

The Central Bank of Nigeria (CBN) has raised the monetary policy rate (MPR), which is the benchmark interest rate, from 18 percent in March 2023 to 26.75 percent in July 2024. This has raised yields on new fixed income securities, as investors target higher returns to hedge against inflation.

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Data from the National Pension Commission (PenCom) shows that the pension funds figure moved from N395.67 billion in September 2023 to N471.89 billion in December and N871.38 billion in February 2024, before it closed at N729.51 billion in May this year.

Agudah said this strategic rebalancing of bonds between the HTM bucket and the AFS bucket are all part of a portfolio managers’ strategy in generating higher returns for contributors.

Joseph Osuagwu, who works in a stock broking firm in Lagos, said pension fund administrators, which manage trillions of naira in assets, have traditionally invested in government bonds, which offer relatively low returns.

However, with the current interest rate environment, they are increasing in alternative investments that can generate higher yields.

“Corporate bonds, which offer higher yields than government bonds, have become an attractive option for pension funds. The report highlights that the demand for corporate bonds has increased significantly, with pension funds allocating a large portion of their portfolios to this asset class,” Osuagwu said.

The rise in pension fund investment in corporate bonds is also driven by the need to meet growing liabilities. As the population ages and life expectancy increases, pension funds are facing significant liabilities, which can only be funded by generating higher returns on their investments, Osuagwu noted.

Analysis of the investment in corporate debt securities for May 2024 showed that HTM corporate bonds stood at N1.446.50 trillion, representing 10.83 percent of total assets under management by the PFAs. Available for Sale (AFS) Corporate Bonds stood at N729.51 billion; Corporate Infrastructure Bonds recorded N15.349 billion to account for 0.08 percent of the corporate debt securities, while Corporate Green Bonds (CGBs) closed at N266.41 billion.

David Adonri, vice executive chairman, Highcap Securities Limited, had said the greater investment in corporate debt securities is attributed to the rising MPR.

“The rise in PFA investment in corporate debt securities could also be attributed to safety in fixed income. Attention of institutional investors also shifted to debt where FGN is also active. Perhaps also, PFAs were reducing their exposure to equities, following a rate hike by the CBN. With the recent rate hike by CBN, the possibility is high that financial assets will generally migrate to the safety of debt and high return.”

Mallam Garba, chief executive officer, APT Securities & Funds Limited, had said: “PFAs increasing their investment in bonds is as a result of the continuous hike in MPR. The rise in MPR to 24.75 percent could further attract many of the investment to fixed income instruments.”