With pension fund investments in Open Market Operations (OMO) bills now matured, the Pension Fund Administrators (PFAs) have diverted over ₦900 billion from the proceed of the matured bills into the equities market in 2020.
The Central Bank of Nigeria (CBN) had, in 2019, banned individual investors, including PFAs from trading, henceforth in the OMO Bills, which was giving good returns on Investment then.
The pension industry, had, before the directive, invested over ₦2.3 trillion in the OMO market, but, however, had to redeem these investments as they matured and channel them to a new investment outlet.
While the official amount invested by pension fund operators into the capital market last year cannot be ascertained as at the time of writing this report, simply because figures are just being collated, an insider source put a rough estimation of the investment at about ₦900 billion.
Investigation revealed that increased investment by PFAs in the equities market was as a result of the crash in treasury bills rates, which was chiefly due to the several expansionary monetary policies aimed at stimulating economic growth.
Last year was bullish for investors in the equities market as Nigerian stock market attracted over ₦8 trillion investments, of which the PFAs invested over ₦1 trillion in the market. The money invested were an accumulation of matured OMO bills and treasury bills as yield in bond market went flat last year, hence, pension operators were discouraged of making fresh investment in bonds, hence, had to divert such money into the stock market that was showing the much promises, far ahead of other competing investment outlets.
If the positive trends continue in the capital market in 2021, there are strong indications that the market could further attract additional ₦1 trillion from pension funds, especially, as some bonds already invested in, by pension operators, begin to mature.
Investment returns, amounting to over ₦2.5 trillion of the ₦11.57 trillion pension fund assets, were largely driven by investments in bonds market, with 70 per cent of the assets invested in bonds. But a drastic fall in yields last year, made PFAs think twice before reinvesting their matured Funds in the bonds, hence, found investment haven in the capital market.
Speaking in an exclusive interview, the president, Pension Fund Operators Association of Nigeria (PenOp), Mr Wale Odutola, confirmed the investment preference of most PFAs in the equities market, as operators continue to look for more investment outlets that can give good returns.
Odutola, who is also the managing director/CEO, ARM Pensions, attributed the increased investment in the capital market last year to the fact that some of investments in OMO Bills and bonds matured and operators were looking for where to divest the fund into.
Although, he said, care must be taken when investing into the equities market, he added that, the market performance last year shows better prospects for this year and that operators will continue to invest in this investment outlet as long as it’s giving great returns.
According to him, “pension fund operators have always invest in the equities market, even though, one needs to be careful. Capital market is a volatile environment with price fluctuation. Just as you can make huge profit, so also, you can make huge loss if care is not taken. So, each PFA has different investment strategies and they always invest in investment outlets according to what suits their investment strategies. So, capital market is an investment outlet that we are looking at, so also is fixed income, government securities, money market instruments and so on.”
He said, though, the safety of the pension fund assets is germane to operators, they are also concerned about investment returns to pension contributors, adding that, the growth of the pension assets in recent years was attributable to investment returns rather than contributions.
This, he said, shows that operators are investing wisely, by adhering to the pension industry investment guidelines as stipulated in the Pension Reforms Act (PRA) 2014, stating that, PFAs will continue to play active role in the capital market transactions in the current year.
Meanwhile, the Managing Director/CEO, Highcap Securities, Mr David Adonri said 2020 rally was mostly led by increased system liquidity resulting from an easing policy stance and a low yield environment. Notably, Treasury yields had crashed and reached all-time lows at the first Primary Market Auction of the month. At the second auction and most recent PMA last year, rates were further depressed with the one-year paper stop rate closing at 0.15 per cent.
“The low yield environment in the short-term treasury reflected in the bond space, as average yields declined by 20bps to 3.08 per cent as at November 2020. Investor’s appetite remained for long term Nigerian government instruments,” he said.
He added that with the reduction in yields, the PFAs took advantage of the low stock prices and invest more in equities, given the high dividend returns in some selected stocks and the potential capital appreciation they also offer as stock prices have dropped way below their net book values amid COVID-19 pandemic.
Chief Executive Officer of Sofunix Investment and Communications Limited, Mr Sola Oni, said the market operated under a tough economic climate in 2019 as evident in incessant bearish trend until the policy of the Central Bank of Nigeria on Open Market Operations (OMO) crashed yields on fixed income securities.
“Expectedly, investors took flight for safety and reverted to purchase of equities with multiplier effects on the rise in many performance indicators. The NSE remains an investment destination,” he said. “This is expected to enhance price discovery and usher investors on the exchange to modern risk management whereby they can hedge against volatility. We expect introduction of more innovative products to accompany derivative trading.“
Barring unforeseen circumstances, the exchange is likely to commence demutualisation and this will change the structure of the market as the current owners, the dealing member firms shall become shareholders and thus bring a new era of corporate governance on the NSE.
“With the crash of yields on fixed income securities, pension funds may opt for high-yielding stocks in the securities market and this is expected to boost market activities,” he added.
The Chief Operating Officer of InvestData Limited, Ambrose Omordion, said regulatory initiatives and policies such as the CBN Treasury Bills (TBs) and OMO restrictions encouraged local and institutional investors’ sentiment to the equity market.Analysts in EFG Hermes said the equities rally might also have been driven by seasonal hunt for yields by investors as blue chips usually won’t pay final dividends until March/April.
Chief Research Analyst, EFG Hermes, Simon Kitchen, explained that the surge in the equities market towards year end coincided with the seasonal rally in Nigerian stocks ahead of the dividend season, and it is expected that the market will continue to consolidate as dividends are paid in March-April this year.
“We have looked at the performance of high-yielding stocks in the run-up to final dividend distributions over the past 10 years. Expectedly, we see a sustained rally in the three months before dividends are paid, though with periods of profit-taking; more surprisingly, stocks continue to perform in the weeks after the ex-dividend date, perhaps as dividends are reinvested,” Kitchen said