Inspite of the turbulent market amidst continuous “devaluation” of the Naira, unstable crude oil prices and ever-increasing inflation rate, Nigerian Pension Fund have continued to garner performance gains month after month, howbeit small.
With only three out of the ten market indices in Nigeria showing signs of YTD gains (as at July 3, 2016), every Nigerian Pension Fund has recorded positive YTD gains so far this year.
Among the Retirement Savings Account (RSA) category, AX Mansard RSA topped with a YTD of 7.36% while Trustfund Pension Retirement Savings Account took the rear with 4.92%. First Guarantee Pension Retiree Account recorded the best performance among the Retiree fund category with 7.72% YTD while AIICO Retiree Fund stood at the rear end with 5.83%
Though inflation has been aiming at the roof, so much such that it is becoming increasingly difficult to beat with pension fund investments, the resilience of Nigerian pension fund is noteworthy. What really could be the reason for the not too good but steady performance. The answer may not be farfetched and may be linked to the asset allocation policies of pension funds. An important determinant of portfolio performance has been known to be asset allocation policy. Looking at the recently released “SUMMARY OF PENSION FUND ASSETS AS AT 31 JULY 2016” by the Pension Commission of Nigeria, PenCom, it becomes a little clearer why pension funds have performed this way.
As contained in the said schedule, 68.42% of pension fund assets is invested in Federal Government of Nigeria (FGN) securities, notably 58.69% is invested in FGN Bonds while 9.74% is invested in treasury bills. 7.6% of the assets is also in other forms of debt instruments like State government bonds, Corporate debt securities as well as Supra National debt instruments. An additional 7.93% is invested in money market securities. This implies that about 84% of pension fund assets are invested in fixed income securities. Only 11% of the assets is invested in equities.
By their nature, FGN Bond investments are for risk averse investors of which pension funds are one. Until recently, yield on FGN Bonds and treasury bills have been low, so it is no surprise that the low yield gets transferred to the pension funds’ performance. The asset allocation of pension funds is understandably skewed in favour of government and other fixed income securities because of their risk characteristics and regulatory requirements but in a period where inflation is so high, it is a little worrisome if the current asset allocation structure will yield the required retirement benefits when the need arises.
One implication of the current asset allocation of pension funds is that it lacks broad diversification and therefore does not reap the benefits thereof. It has been known and proven by research and analysis that stocks have the potential to return more than bonds, and having more stocks in a pension fund portfolio could juice asset values but stocks are also riskier, and that may have underscored pension fund managers’ preference for bonds as a way to avoid the risks inherent in stock investments. Be that as it may, a properly diversified pension fund should be able to reap the benefits of stock performance while managing downside risk.
Aside the regulatory fetters, there seems to be a massive lack of financial products to invest in Nigeria. While there is need to develop more investible products, there may also be need for pension fund managers to engage in cross bother investments which, within limits of regulatory permissions, will enable them benefit from investment performance as well as transaction/ translation gains given the current situation with the local currency.
There are talks on allowing pension funds invest in infrastructure as a way to boost performance, this could be a step in the right direction as long as the liquidity needs of pension funds are factored into the equation.
In summary, while pension fund have remained resilient in the face of market upheavals, it is time for managers to become creative with their investment strategies and product development.