Fixed income securities remain predominant in PFA asset allocation

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Tuesday, February 01, 2022 / 09:05 / by FBNQuest Research / Header Image Credit: Search FBNQuest

We see from PenCom’s latest monthly report for October 21 that the assets under management (AUM) of the regulated pension sector increased by 9.0% year-on-year to NGN 13.2 billion (NGN 31.7 billion). dollars) at the end of October 21 and 1.0% m/m. FGN debt securities accounted for 63.2% of the total. When we include corporate and state government issues, we find fixed income exposure equivalent to 71.2% of the sector’s assets under management. The asset allocation of Nigerian pension funds has generally favored public debt. This is due to the scarcity of good investment securities available to them.

FGN bonds accounted for more than 60% of PFA asset allocation.

By comparison, in its June 21 report, the Kenyan Retirement Benefit Authority noted that government securities accounted for 44.1% of the pension sector’s KES 1.48 billion ($12.97 billion) assets under management. in Kenya.

The value of domestic equities in PFA portfolios increased by around 29% over the 12-month period, bringing the share of equities in the portfolio to around 6.9% from around 5.8% a year earlier.

On equities, Nigerian PFAs have taken a cautious approach, after suffering losses during the stock market crash of 2008 to 2009.

Another noteworthy point is that despite the Nigerian stock market’s market capitalization of over $60 billion, the selection of high-quality liquid stocks that meet the investment criteria for PFAs is extremely limited.

We also find that over the course of a year, PFAs reduced their holdings of Nigerian Treasury Bills (NTBs) from c.NGN653bn to c.NGN280bn. Depressed (low single digit) NTB yields are the main reason for this. By comparison, FGN bond yields fell well over 500 basis points on the curve between Q4”20 and Q3’21.

Looking ahead, the DMO has an onerous domestic borrowing target of c.NGN2.57trn this year. This target does not take into account the additional budget to cover NGN3trn for grant disbursements by NNPC. As such, we see yields rising again this year due to the increased supply of DMO paper.

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