Nigerian PFAs Conundrum; Robust Liquidity, Limited Asset Classes

Thursday, July02, 2020 / 02:07 PM / by FSDH Research / Header ImageCredit: Daily Graphic

Pension Fund Administration (PFAs) and NigerianInstitutional Investors have had to combat sustained pressure on generatingabove inflation returns, on their clients' RSAs, in the face of growingliquidity and reducing investment opportunities. According to data from CBN,over the next 6 months, N7.6tn (US$20.1bn) worth of T-Bills and OMO instrumentswould be maturing. The analysis of data from the National Pension Commission(PENCOM) estimates PFAs share of this sum at c.15.0%, which implies an absolutevalue of N1.1tn, of which c. N867.1bn of the sum are OMO instruments. When theorganic growth of pension contributions and possible half-year dividendpayments from major banks are factored in, PFAs would be awash with robustliquidity in Q3 and Q4.

However, recent regulations have limited theinvestment vehicles available for Nigerian PFAs. As at April 2020, dataavailable from PENCOM, Nigerian PFAs hold 66.25% of their assets in FGNsecurities with FGN bonds getting 54.55% and Treasury Bills (including OMO)getting 10.67%. This huge exposure has left pension managers in a tight space,given the CBN has banned non-banking local corporates from accessing the OMOmarket of which holds over 8% (c. N1.0tn) of their total assets. This impliesthese funds must be rotated to different asset classes.

Most PFAs are already significantly exposed to FGNsecurities, particularly bonds. Thus, similar less risky instruments forconsideration, are corporate debt and money market instruments. Nigerian PFAscurrently have a 1.44% and 6.53% exposure to commercial papers and corporatebonds respectively, which leaves some room to increase exposure. However, whileseveral corporates have taken advantage of the low interest rate environment,the amounts raised by these corporates have been inadequate to absorb therobust liquidity with PFAs.

As a result, we believe with less risky fixed incomeinstruments in short supply and interest rates continuing to dip on robustliquidity, PFAs would need to take on more risk to generate superiorinflation-adjusted return on their client's RSAs. According to PENCOM, PFAsexposure to the domestic equities market stood at 4.62% (or N488.5bn inabsolute terms) at the end of April 2020. This is only 3.8% of total NSE equitymarket capitalization. With valuations still at multi-year lows, we believevalue remains to be mined from the equity market. Thus, increasing exposure todomestic equities remains a viable endeavor.

Furthermore, the contribution of PFAs to growth of theventure capital and private equity ecosystem remains quite abysmal. PFAsexposure to PE funds stood at 0.31% of total pension assets. The space has beenleft for foreign investors to dominate and reap the successes. Considering theincreasing success stories being recorded and the technology age of theNigerian economy, supporting PE firms with a focus on using technology toredefine and disrupt processes, would be very viable. Examples of recentsuccess stories include; Interswitch, Iroko TV, Flutterwave, Paga, Hotels.ng, Paystack,Farmcrowdy, Thrive Agric etc. While these ventures are riskier and do requirelong term patience, we believe PFAs whose asset base typically consist oflong-term funds are well poised to tap into the impressive inflation-adjustedreturns in the PE and Venture capital space.