June 30, 2023/Hill+Knowlton Strategies
Nigeria is the third largest investment management zone in sub-Saharan Africa, after South Africa and Morocco. Agusto & Co. estimates that Nigeria had ₦3.5 trillion1 ($7.8 billion)2 in assets under management (AuM) as at the end of 2022, representing a 25% increase from the prior year. This growth was driven in part by increased investor confidence following the gradual rise in the yields offered on naira-denominated investments during the latter half of the year and growth in dollar-denominated portfolios as discerning Nigerians hedge against the persistent devaluation of the naira.
Nonetheless, despite Nigeria’s sub population of 220 million people and the high foreign exchange remittance inflows from Nigerians living in the diaspora ($20.9 billion or ₦9.3 trillion in 2022), the asset management industry continues to underachieve. The Industry’s growth remains constrained by a large informal sector (estimated at 65% of GDP), a high poverty rate of 40% and limited investment opportunities offered by the Nigerian capital market.
The challenging operating environment in Nigeria has led to an erosion of real incomes and purchasing power, prompting a surge in investors’ inclination towards dollar-denominated assets. The escalation of the year-over-year inflation rate from 15.6% in January 2022 to 21.37% in December 20224 is indicative of an unfavourable macroeconomic climate.
In addition, the parallel market exchange rate stood at ₦750/$ as at 31 December 2022, indicating a 63% arbitrage from the official market rate and a 32% depreciation from ₦570/$ recorded in the corresponding period of the prior year. Naira-denominated investments have lost their lustre in light of current market conditions, and investors are instead looking to high-yield alternatives and FCY-denominated investments.
In 2022, segregated portfolios accounted for more than half of total managed assets (52%), which amounted to ₦1.76 trillion as at December 31, 20225 – 40.2% higher than in 2021 –marking a noteworthy shift in the Industry as segregated portfolios overtook collective investment schemes (CISs) in terms of AuM share for the first time in three years. Segregated portfolios, which include privately managed discretionary and non-discretionary client funds as well as other private collective investment schemes, provide investment options that are tailored to the unique risk profiles and investment objectives of individual clients.
Unlike collective investment schemes, segregated portfolios provide more flexibility and autonomy as they are not directly subject to the scrutiny and monitoring of the Securities & Exchange Commission.
Agusto & Co. estimates that CISs, accounted for 42% (₦1.37 trillion) of AuM in 2022, while alternative assets – comprising publicly-listed private equity and infrastructure funds – accounted for the remaining 6% (₦345billion) of the asset management industry’s managed assets as at the same date. Investors have shown a growing inclination towards privately managed portfolios rather than the often more restrictive and conservative collective investment schemes, as they seek to gain relatively higher yields from investments. In addition, many asset managers have focused more on fostering the growth of segregated portfolios through their investment advisory services, while also improving product distribution and enhancing customer experience.
Furthermore, segregated portfolios have continued to account for a large portion of the Industry’s AuM due to the large volume of funds invested by high-net-worth individuals (HNIs) and corporations seeking exposure to specific investment vehicles (in many cases regional Eurobond issuances). These specific investment options typically offer relatively higher returns and provide a currency hedge, which may not be widely accessible with collective investment schemes.
Going forward, Agusto & Co. anticipates a moderate increase in the size of the asset management industry, with an estimated average growth rate of 15.9% over the next three years. This will result in total AuM reaching the ₦4 trillion mark by 20246. Growth is expected to be driven by various factors including increased investments from pension fund administrators and institutional clients.
The unification of exchange rates is anticipated to result in the repatriation of funds formerly invested in international money markets and reignite foreign interest in naira-denominated assets. Furthermore, the anticipated growth trajectory is likely to be fuelled by an increase in the size of segregated portfolios, infrastructure funds and REITs7, amongst others. The prolonged deterioration of macroeconomic fundamentals, which might severely reduce discretionary income and the marginal inclination to save, remains a risk to the growth forecast.
