FSDH Advises PFAs to Adjust Risk Appetites, Rally Return on RSAs
FSDH Merchant Bank Limited has advised Pension Fund Administrators (PFAs) about the need to take on more risk to generate superior inflation-adjusted return on their clients’ retirement savings accounts (RSAs).
Analysts at FSDH explained that PFAs and Nigerian institutional investors have had to combat sustained pressure on generating above inflation returns.
In the recent time, headline inflation has been climbing steadily, reaching 12.40% in May while yield on government instrument drops.
Analysts said that this has been the case in the face of growing liquidity and reducing investment opportunities.
According to data from CBN, over the next 6 months, ₦7.6 trillion or US$20.1 billion worth of T-Bills and OMO instruments would be maturing.
Meanwhile, analysis of data from the National Pension Commission (PENCOM) estimates PFAs share of this sum at about 15%.
This implies an absolute value of ₦1.1 trillion, of which about ₦867.1 billion of the sum are OMO instruments.
“When the organic growth of pension contributions and possible half-year dividend payments from major banks are factored in, PFAs would be awash with robust liquidity in Q3 and Q4”, it added.
However, FSDH stated that the recent regulations have limited the investment vehicles available for Nigerian PFAs.
As at April 2020, data available from PENCOM, Nigerian PFAs hold 66.25% of their assets in FGN securities 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 OMO market of which holds over 8%, which is ₦1 trillion of their total assets”, FSDH remarked.
It said this implies these funds must be rotated to different asset classes.
According to the firm, most PFAs are already significantly exposed to FGN securities, particularly bonds.
Thus, similar less risky instruments for consideration, are corporate debt and money market instruments.
FSDH revealed that Nigerian PFAs currently have a 1.44% and 6.53% exposure to commercial papers and corporate bonds respectively, which leaves some room to increase exposure.
“However, while several corporates have taken advantage of the low interest rate environment, the amounts raised have been inadequate to absorb the robust liquidity with PFAs.
“As a result, we believe with less risky fixed income instruments in short supply and interest rates continuing to dip on robust liquidity, PFAs would need to take on more risk to generate superior inflation-adjusted return on their client’s RSAs”, FSDH stated.
According to PENCOM, PFAs exposure to the domestic equities market stood at 4.62% or ₦488.5 billion in absolute terms at the end of April 2020.
This is only 3.8% of total NSE equity market capitalization.
“With valuations still at multi-year lows, we believe value remains to be mined from the equity market”, FDSH said.
FSDH believes that increasing exposure to domestic equities remains a viable endeavor.
It said the contribution of PFAs to growth of the venture capital and private equity ecosystem remains quite abysmal.
Explaining further, FSDH stated that PFAs exposure to PE funds stood at 0.31% of total pension assets.
Analysts reckoned that the space has been left for foreign investors to dominate and reap the successes.
Considering the increasing success stories being recorded and the technology age of the Nigerian economy, supporting PE firms with a focus on using technology to redefine and disrupt processes, would be very viable.
FSDH cited examples of recent success stories to include Interswitch, Iroko TV, Flutterwave, Paga, Hotels.ng, Paystack, Farmcrowdy, Thrive Agric etc.
“While these ventures are riskier and do require long term patience, we believe PFAs whose asset base typically consist of long-term funds are well poised to tap into the impressive inflation-adjusted returns in the PE and Venture capital space”, FSDH said.