The Nigerian Stock Exchange released its 2017 first half review of its major indices on Tuesday. Of particular interest to us was the NSE Pension Index, which comprises of stocks typically purchased by Pension Funds. Let’s explain why this is of interest to us.
The Pension Index comprises of 40 companies which are included in the portfolio of Pension Funds. Pension Funds in Nigeria are currently the single largest local investors in the N9 trillion market cap Nigerian stock exchange. As such, stocks that make it to their portfolio is a signal to the market of their liquidity, appreciable fundamentals and track record of paying dividends.
These are three of the most important ingredients of the good stock, at least from the perspective of pension funds. Another reason why this index is closely followed by Pension Funds is because since they are not allowed to buy every stock on the exchange so it makes sense for each PFA to benchmark themselves against a special index rather than against the wider All Share Index.
What is in it for stocks.
In its latest review, the Nigerian Stock Exchange yanked off Beta Glass Co. Plc, International Breweries Plc, Skye Bank Plc and replaced them with United Capital Plc, Ecobank Transnational Inc, Dangote Flour Plc. The implication is that the three stocks newly added will likely attract significant interest from Pension Funds.
Of the three, we take particular interest to United Capital Plc. The company has just come off a remarkable 2016 where it was among the top 5 performers for the year. The company also reported impressive profitability growth and has been a consistent dividend paying stock with impressive yields. We see the share price gaining another 15-20% before it gets marked down again for dividends. Dangote Flour Mills is also a surprise for us. Since the retake of the company by Alhaji Aliko Dangote’s DIL, the stock has outperformed all stocks in the index. It gained a whopping 286% in 2016 alone.
What is in it for retail investors
For retail investors, the Pension Index provides them with an index they can decide to mirror in their portfolio. Since Pension Fund Managers are rated on their ability to outperform this index and the wider All Share Index, the stocks in this index are carefully handpicked and have more chances of providing positive returns.
But it hasn’t been all rosy for the Pension Index. Last year, the index returned -0.3% compared to -6.17% return of the All Share Index. The Pension Index returned -18.96% in 2015 compared to -17.36% return of the All Share Index.
As a retail investor, you still need to do your home work very well and pick stocks that suit your investment style. If you are a buy to hold investor then avoid stocks with huge volatility and liquidity. That, is stocks that get traded on high volumes. However, make sure that they have sound fundamentals. If you are a short-term investors who buys to sell then make sure you buy stocks with good liquidity but with sound technicals.