Pension assets investment in equities in steady decline

By Rosemary Onuoha

PENSION fund managers in Nigeria have increasingly been reducing their exposure to the stock market by allocating less of their assets to domestic equities and more to Federal Government of Nigeria (FGN) bonds and other fixed income securities.

The development is part of moves to bolster their performance, strengthen their risk management strategies as well as part of their strategic response to the lacklustre performance of the Nigerian stock market in the past three years.

Analysis of available information put together by Quantitative Financial Analytics, QFA, a financial research firm, indicates that assets allocation to equities by the pension companies have declined consistently on monthly basis since 2013.

As at December 2013, 14.58 per cent of pension funds’ assets were invested in equities. As at the same period in 2014, the investment had fallen to 11.79 per cent, 9.76 per cent in December 2015, and 8.13 per cent in December 2016.

The trend continued in 2017 as 7.79 per cent was recorded in January 2017 and 7.45 per cent in February 2017, showing that over the last five years, pension funds have reduced their exposure to the domestic stock market by 7.13 per cent.

Meanwhile, as at December 2013, FGN Bonds and Treasury Bills accounted for 58.75 per cent of pension fund assets, but by February 2017, allocation to FGN Bonds and Treasury bills had increased to 72.36 per cent, an uptick of 13.61 per cent.

According to QFA, although pension funds have been recording positive returns month after month, their asset allocation as indicated above does not reflect a diversified portfolio, a core investment principle of such funds. This structure, according to QFA, may be sub-optimal. Optimal asset allocation is built on the premise that different asset classes offer returns that are not perfectly correlated and diversifying portfolios across such asset classes helps to optimize risk-adjusted returns.

It does appear, however, that Nigerian pension fund managers’ ability or willingness to diversify is being forestalled or fettered by regulatory impediments which specify, among other things, the required maximum allocation to a given asset class. The research firm stated that “it is hoped that in the near future and subject to the availability of asset classes and within limits of regulatory entanglements, Nigerian pension fund managers will diversify their portfolios optimally.”

The post Pension assets investment in equities in steady decline appeared first on Vanguard News.