Culled—Proshare
March 5, 2020
By FBNQuest Research
We note from Pencom’s latest monthly report that the assets under management (AUM) of the regulated pension industry in Nigeria increased by 18.3% y/y in December to N10.22trn (US$27.9bn), and by 2.3% m/m. The share of equities in AUM peaked at 16% in 2007, ie before the blowout on the NSE. It then slumped because investors were assured of double-digit returns on fixed-income assets. Those returns have recently halved in many cases (see below), which should have added to the case for equities. Investors have been slow to move, however.
The PFAs’ holdings of FGN paper amounted to 71.8% of AUM in December, compared with 70.8% the previous month. There was, however, a clear shift to FGN bonds, the share of which picked up from 48.6% to 52.4%. This was matched by a decline in holdings of NTBs from 21.2% to 18.4% of the total.
The shift was caused by the crashing of yields on NTBs following the CBN circulars of late October that barred domestic non-bank players (notably the PFAs) from its open market operations (OMO). As their bills issued within OMO mature, fund managers obviously have to make alternative investments.
Initially they favoured the NTBs: those yields buckled and many PFAs turned their attention to the FGN bonds. The monthly auction in January saw a record total bid of N625bn including N372bn for the long bonds popular with the PFAs for matching purposes. In turn, the bond yields have narrowed, to +/-10% in mid-curve.
AUM of PFAs, Dec 2019 (% shares)
Sources: National Pension Commission (Pencom); FBNQuest Capital Research
The investment landscape is now changing rapidly after a long period of somnolence. PFAs have several outlets for their maturing OMO bills, including: FGN bonds despite the sharp yield compression; equities despite the unexciting narrative on growth and market-friendly reforms; and the FGN’s mooted N2trn infrastructure fund. There are weaknesses in each argument.