Pension Funds offshore investments rise, as domestics decline

Pension Funds investment in domestic equities fell to N873.49 billion in the nine months ended September 30, 2021 on the back of rising interest rate in the fixed income market and uncertainty over the upcoming general election.

This represents 5.04 percent Year-to-Date (Y-t-D) decline compared to N919.85 billion invested at the beginning of the year and accounted for 6.7 percent of the total Pension Fund Administrators (PFAs) investment during the period.

Data on PFAs commitment in the domestic equities market for the nine month period showed that total PFAs assets stood at N13.001 trillion.

However, the PFAs shored up their stake in foreign equities within the same period.

Specifically, the Pension Funds’ commitment in foreign ordinary shares rose by 18.3 percent to N105.2 billion from N88.9 billion in January. On a Y-o-Y basis, the figure rose by 37.6 percent from N76.46 billion in the corresponding period in 2020.

Investment experts attributed the decline in PFAs exposure in local equities to political risk, and rise in interest rate in fixed income among others.

Mallam Garba Kurfi, Managing Director/CEO, APT Securities and Funds, said: “The decline in PFAs’ investment in equities is due to rising interest in the fixed income bonds. Interest rate on FGN sukuk IV is 12.80%, while it is 11.20% for FGN sukuk 111.

“The decline in the prices of some of the domestic stocks led to a decrease in their investment. For instance, Lafarge Africa was trading for as high N31.00 per share in January compared to N24.00 as at now, same with GTCO, PZ Cusson, and Unilever among others.

On the other hand, the PFAs increased their investment in foreign shares to hedge against naira devaluation as returns are made in the USA dollar.”

Also commenting, Olubi Rotimi Omotayo, Managing Director/CEO, Morgan Capital Securities, attributed the decline in PFAs exposure to local equities to uncertainty over the upcoming election, general lull in the market as well as uncertainty over possible future devaluation of the naira.

“The five percent decline could be as a result of decline in the value of equities over the nine month period. The market has been going down; so that has also led to a decline in the valuation of their investment in local equities. So, in that sense, you cannot say that they decreased their allocation to the equities market. It can be as a result of decline in equity prices in the last nine months.

“That gap can also be reduced through portfolio re-balancing but one of the things that is holding PFAs from re-balancing is the political risk from the upcoming general election in 2022. Equities may likely go down a bit more as a result of the election. So, instead of staking more money to shore up their position, the PFAs may decide to hold on until after the election,” he said.

On increase in PFAs’ exposure to foreign securities, Omotayo explained that the PFAs invested in foreign securities to hedge against downside risk in the naira. “The naira has been devalued for two consecutive times in recent times. So, the PFAs invest in foreign securities due to consistent depletion and devaluation of the naira in a bid to earn return in foreign currency.