By Ebere Nwoji
In their earnest search for investment portfolios that will yield maximum returns and ensure security of their investments, pension fund managers have penciled down domestic stocks and state government bonds as two dreadful investment portfolios that will henceforth not receive much of their consideration. They have instead retained high confidence in federal government bond which they described as cornerstone of pension funds investing.
Against this backdrop, pension funds Managers and custodians, have in recent times continued to reduce investments in stocks, turning their eyes away from state government bonds while increasingly searching for other investible asset classes that will provide them with safety, security, liquidity, competitive returns and acceptable exit route.
Rather than investing in stocks, the managers said they prefer investment in infrastructural projects that qualified for pension investments in the areas of transport, power and urban regeneration among others.
Both erstwhile Managing Director PAL pensions, David Uduanu and Managing Director, Future Unity Glanvils Ltd, Usman Suileman, told THISDAY in separate interviews that rather than investing in stocks, they prefer encouraging project managers, fund sponsors, investment promoters and other stakeholders to come up with vehicles that will qualify for pension funds investments.
“We are anxiously looking for such vehicles. I’m glad to say that there are some of the fund managers, private equity funds, project managers, and promoters who, in recent times, have been working very hard both locally and in partnership with other foreign interested parties trying to come up with various infrastructure projects that will qualify for pension funds.
These are in the areas of transport, power, and urban regeneration and so on. Projects such as the Oshodi Interchange Centre, trailer park on the Snake Island, east-West railway line, the fourth mainland bridge, and various captive power plants are good candidates if well packaged,” said Suileman.
On his part, Uduanu explained that the reason for their preference of government bond investing is because the government is the largest issuer in any market.
“Government bonds are used to finance the budget and in economies that are well structured, you find that these budgets are used to finance capital expenditure. So indirectly, government bonds investment is an indirect way of pension funds putting money in infrastructure.
“However, the problem in Nigeria is that the budget in Nigeria is skewed towards recurrent expenditure. The bonds are profitable. Two years ago, we had government bonds as high as 16 per cent. That is perhaps one of the highest investments you can make here,” he explained.
Speaking on their reasons for reducing investments in stock market, Uduanu said the stock market over the last eight years since the financial crisis has not really done very well.
According to him, its performance has been that of “three years of good performance and five years of bad performance.”
“So government bond investment has been profitable and it does add value to people’s life because this investment is used for the budget and government is still the largest employer of labour in Nigeria and some proportion of that goes into infrastructure. In fact, on the state government bonds, what Lagos state issued can appropriately be called infrastructure bonds because the bonds that were issued were used to fund all the road projects that you see in Lagos state which includes the Badagry Expressway or the rail line Lagos state is building. So it does really add value to people’s life,” he explained.
On pension fund investment in infrastructure, Uduanu said pension fund managers are being selective adding that as far as state government bonds are concerned, “If you take Lagos state and some of the oil producing states, you would find that a great proportion of these state governments rely on federal allocation to finance the budget.”
He said with the drop in oil prices in recent times, there is a bit more risk in investing in state bonds because the monies that they get from the federal government has reduced by as much as 50 per cent and a lot of them have very low internally Generated Revenues (IGRs).
With this, he said: “I don’t expect to see a lot of investments in state bonds. However, about seven per cent of the funds are already invested in the state bonds. So there is selective appraisal of state bonds and each Pension Fund Administrator (PFA), makes his own decision based on his judgement on the credit rating of the state and the ability to repay these bonds. So we don’t expect to see a lot of state bonds”, he concluded.
Recent analysis conducted by Quantitative Financial Analytics of Mutual fund Nigeria, on pension funds investments in domestic stocks indicates that allocation to domestic ordinary shares has been suffering some reductions month after month since 2013.
According to the analysis, as at December 2013, 14.58 percent of pension funds’ assets were invested in domestic ordinary shares, by the same period in 2014, investment in domestic ordinary shares had fallen to 11.79percent .
By December 2015, pension fund managers reduced their exposure to the stock market by a further 2 percent, allocating only 9.76 percent to domestic stock market. The downward spiral continued in December 2016 when just 8.13 of pension fund assets were allocated to domestic ordinary shares, further reduction was made in January 2017 to stand at 7.79 percent.
The analysis shows that as at February 28th, 2017, only 7.45 percent of pension fund assets was in domestic ordinary shares showing that over the last five years, pension fund managers have reduced their exposure to the domestic stock market by 7.13 percent