Uduanu: Stock Market Now Only Game in Town

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The Chief Executive Officer, Sigma Pensions, Dave Uduanu in this interview on AriseTV spoke about how pension fund administrators have been maneuvering the low interest environment in order to maintain positive return for customers. He also talked about other industry related issues. Nume Ekeghe presents excerpts:

How would you compare fiscal year 2019 to fiscal year 2020 for PFAs and at Sigma Pensions?

The Covid-19 induced lockdown, the impact on global economies is similar across the world including Nigeria and that has resulted in reduction in aggregate demand. The response of central banks globally has been to loosen monetary policies and that have seen interest rate reduce to zero per cent in more developed markets. In Nigeria, the situation is similar, the central bank has moved to ultra-low monetary policy and also, in a way, in the absence of fiscal authorities stimulating the economy through direct credit and subsidies to the real sector, the central bank has driven interest rates as low as below one per cent in most instances, relative to 14 per cent last year.

The PFAs have had to navigate this and as you know, we manage diversified investment portfolios and what is clear and what is important is that the investment portfolio is not concentrated in only one asset class. So, moving from last year where there was higher allocation to fixed income securities, I think PFAs are now moving to more variable income securities. Having said that, what a lot of people do not realise is that fixed income securities that are held on a mark-to-market (MTM) basis in the books of PFAs actually do better when interest rates are lower. As interest rates are reducing, income securities like government bonds are increasing in market price. So, that has sort of provided an anchor to the pension funds and some of the fixed income securities are held to maturity basis anchored on very high interest rate. So, if you combine that with the fact that the stock market has experienced a rally year-to-date (YTD) which is about 10 per cent; and as the bond markets interest rates reduce, two things happen – cost of credit becomes lower for businesses and that translates to increased return as far as profits are concerned and this leads to rating of companies and increased valuation on the stock market. Secondly, the huge liquidity that then moves from fixed income portfolios that are been sort of liquidated or matured into the stock market means that there is actually one game in town – which is the stock market and that stock market has provided an anchor for pension funds. I think overall, what we are seeing is that returns are still healthy and the biggest challenge is still inflation which is around 14 per cent and the question is how to deliver real rate of return and that is a challenge. From a macro-overhang, I think that there is nothing really you can do about it because pension funds are only invested in domestic securities because by regulations we are not allowed to invest in offshore securities. So, what we have done is a rotation of asset from fixed income into equities and into other alternatives. So, for commodities like gold, there is a listed Gold Exchange Traded Fund (ETF), that has done very well on the back of the increase in gold which is a defensive asset because it holds its value. So that is what we have done, but unfortunately, we have not been able to go beyond the listed space into the alternative because that market is very small and there are not a lot of securities to choose from. So, the portfolios have done well and I think some PFAs have done better this year than last year unlike what a lot of people think and that is how we have been able to navigate it. It has been challenging and it calls for real investment skills in managing diversified asset portfolios.

Have you engaged PenCom to give more room to go offshore investment to get higher returns oversees because it is almost as though PFAs are boxed in and do not have much room?

This is precisely what we are doing, there is a regulation and law that prohibits pension funds from investing in offshore markets. That law was revised in 2014 and there is a bit of a wiggle room for us to play with, but it needs Presidential assent and it also needs assess to foreign exchange (FX) and you know FX is the hottest commodity today in Nigeria. So, we are speaking and we are going to continue to speak to our regulators to allow us in small allocation or maybe 10 per cent to offshore markets because it is really the question of the purchasing power of the pensionable workers in Nigeria. It is a national debate and while some might look at it as why do we want to deplete the low FX reserve we have, but if you think about it clearly and carefully, if pension funds invest in offshore markets, two things would happen: One, the returns on these investments would be in dollars and more importantly, if you make very good investments and have upsides like we have seen the rallies of the American stock market with companies like Zoom, Apple and Amazon which have done more than 100 per cent return this year, this monies would ultimately come back to Nigeria and would potentially increase the stock of FX we have in the country. Secondly, by investing in offshore assets it could be private equities or privately held companies, it can be used to form some kind of partnership with Nigerian companies and one of the things we are looking at is how we can find companies that focus on the export market that we can invest in either directly or through a fund that would then increase the stock of FX we have in Nigeria. So, those are the discussions we are having internally as Pension Fund Operators Association of Nigeria (PenOp), the industry association and we would also engage PenCom and hopefully, the right authorities either in finance, the Presidency and the Central Bank, to make the case that it is time to allow pension funds to invest in offshore markets, because being boxed in a country restricts your ability. And I think the bigger point is that even though there is a lot of demand and need for credit in Nigeria, the banks are doing quite a bit, but businesses are struggling. So, aggregate demand in Nigeria is low. So even if you give all the monies to companies, who are they going to sell to because the purchasing power is low? You can see what is happening, the saving base of the country is low and so what we need to do is to find ways of increasing aggregate demand and I think this is where the fiscal authorities would come in.

The last discussion I think is around infrastructure, I think that the attention and the focus on government is on how to invest in both fiscal and social infrastructure such as roads, power and social infrastructure such as health and education because that is what would impact the population than the economy directly but unfortunately, this is outside the remit of the central bank, it is the fiscal authorities that would have to address this.