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Investment Tips

This is why retirement pension savers should be worried in 2020

Nigeria’s pension fund investors and pension savers should be afraid and worried in 2020.

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Pension Funds Performance

Nigeria’s pension fund investors and pension savers should be afraid and worried in 2020. On the average, the RSA pension fund category netted about 13% return in 2019, so did the Retiree Savings Account category of pension funds.

While that is a commendable performance in a year where the Nigeria Allshare index lost about 16% of its value, that same feat may not be repeated in 2020. Did I hear you ask why?

Nigerian Pension funds

Falling Interest Rate

One thing that characterized the Nigerian Economy and the Nigerian capital market in 2019 was the fast decline in yield or interest rates towards the end of the year. The Nigerian 10-year Bond Yield, which opened the year 2019 at 15%, is poised to close the year at around 11% or less and other tenors are currently trending at single-digit interest rates.

Nigerian Treasury bills and Commercial Papers are even worse. According to the latest FMDQ Daily Quotation List, a Commercial Paper with 191 days to maturity traded at 6.19% while one with 282 days to maturity traded at 5%. A case of inverted yield.

An analysis of the most recent Pension Assets Report released by the Nigeria Pension Commission shows that 46.66% of total pension asset is invested in FGN Bonds, while 22.82% is invested in Treasury Bills, instruments that are directly impacted by trends in interest rate.

[READ MORE: Nigeria’s Pension Asset increased by N228 billion in October)

Lower interest rates mean lower returns from such investment types. Though the coupon rates on the FGN bonds that the pension funds are already invested in will not change, (unless the bond issuers decide to refinance such bonds), they, the pension funds, will be adversely affected if majority of the bonds mature in 2020.

In that case, the pension funds will have to face the reinvestment risk of finding bonds with similar coupons. A tall order indeed. Unfortunately, the inverse relationship between bond prices and interest rate will mean that at the point of reinvestment, such bonds will cost more to buy. With Treasury Bills and Commercial Papers being short-dated instruments, the effect of the falling interest will be felt more in those types of instruments as they are prone to mature within the year under the current low-interest-rate regime.

Rising Inflation

[READ ALSO: Pension funds are in trouble as inflation erodes asset values by 100%)

One statistic that means a lot to retirees and pension plan savers is real rate of return. Real rate of return is the nominal rate of return less inflation. In a layman’s language, it is the rate of return that shows what your investment return can purchase, given current price level.

With inflation inching upwards in Nigeria, and interest rate going the opposite way, pension plan savers may be subjected to double “punishment” or double jeopardy. According to economists, falling interest rates are prone to causing inflation, if that happens, pension plan savers may be in for the worse.

What to Do to Remain within Plan

In a situation like this, those saving for retirement should think of what to do to remain within their planned retirement objectives. There are two broad sources of pension plan asset: contribution and income. Those two combine to lead to increase in pension assets. When one falls, the other has to increase, otherwise, pension assets will decrease. Therefore, to maintain your retirement savings objective in light of the potential for a decrease in income or return, you have to increase your monthly contribution.

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I did a piece, not too long ago, on the need for additional voluntary contribution; now is the time to embark on that if you do not want to be caught “pants down” with some deficit in your retirement savings account balance in 2020 and beyond. To double your money in 10 years, for example, you need about an average annual return of 7%. As the rate of return decreases, so does the number of years required to double your money increase, if you do not increase the contribution.

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This is why you should make voluntary contributions to your pension fund

Eurobond Mutual Funds to the Rescue

Pension Plan Managers should go to work, by looking for alternative sources that can help them increase return for their clients and investors, as long as it is within the regulatory permission granted them by the Pension Reform Act of 2004, or the like.

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One of such investments is Eurobond or Dollar denominated mutual funds. Though return on those mutual funds is driven by interest rate, they have the potential to insulate the effects of falling interest with changes in exchange rate. With the Naira slightly depreciating against the dollar continuously, investing in Eurobond mutual funds may be a way to stay afloat.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

9 Comments

9 Comments

  1. Esosa Bob Osaze

    January 1, 2020 at 2:23 pm

    Which is a better option, the PFA- driven program withdrawal or the insurance company driven annuity for retirees?

    • Julius Oguntulu

      January 1, 2020 at 11:37 pm

      I think annuity is better. The initial percentage increase over programmed withdrawal is high and this value is earned for life. What happens to your fund is longer your business. Your business is how to manage the pension being paid to you.
      In the case of programmed withdrawal, the value may increase or decrease and this value also depends on the amount in pension account. As withdrawal is made, the total amount also reduces. So what happens if there is nothing to withdraw? There is likelihood that there may not be increase in amount of pension to be paid under program withdrawal in 10yrs.

      • Anonymous

        January 2, 2020 at 12:40 am

        And if the individual dies after the 10 year guarantee, what now happens to his next of kings?

        • Anonymous

          January 3, 2020 at 8:25 am

          In the case of annuity, after 10 years guarantee. The next of kin get nothing from the insurance company. Disappointment will be staring at him on his face.

      • Passer By

        January 2, 2020 at 3:50 pm

        I beg to differ. It is a question of choice and goals, peculiar to each situation.

        The initial percentage increase you refer to is only an apparent increase. One can also see such a spike in the programmed withdrawal structure by refusing to receive a lump sum but merging that with the monthly contributions.

        Also, while the annuity product is marketed to be earned for life, there is a guarantee period for receiving that value. After that period, which is 10 years, if the individual should pass on, there would be absolutely nothing left for the beneficiaries of the individual.

        Your supposition that value in the pension account decreases with each payment is quite right but is also one-sided. Pension funds do not sit idle, they bring in income on a regular basis and this is added to the contributions. Furthermore, there is a minimum pension guarantee to be put in place for those whose contributions run out before they pass on.

        So it depends on choice. The key thing is to strive to reach a point where either option provides only benefits to you. Contribute more. That can not be overstated. There was a post about Additional Voluntary Contributions. Read it and apply it to your life. Demand a better service from your PFA. Call them and demand to speak to someone knowledgeable. Discuss with that person and get clarification. They are obliged by every business metric to provide it to you. If they don’t, go to another PFA. Transfers should be possible soon enough.

        There is really no better option from an objective standpoint. They are both products that depend on what you have done. So do your part well and both products, whichever you choose, will serve you well.

      • Anonymous

        January 2, 2020 at 9:56 pm

        The programmed withdrawal option is far the better option because there is death benefit for next of kin after 10 years unlike Annuity where the insurance company takes everything after 10 years, also Programmed withdrawal has higher rate of returns on investment and safety of funds

  2. Blessing Adakole

    January 1, 2020 at 9:02 pm

    Intrested

  3. Damilola Ogunlaja

    January 2, 2020 at 6:21 pm

    The option of program withdrawal is flexible and transparent as you will still be in the know as to what balance you have per time I. e statement of account . After giving you a lump sum at retirement, the rest of the funds will be Reinvested and little by little your balance is topped up. The next of kin could also have access to the funds when the account owner passes on.

    Annuity gives a guarantee of 10years which means when the account owner passes on before 10 years, the next of kin will have access to the balance within the years. If after 10 years the account owner passes, then the rest of the funds will be for the insurance firm and not the next of kin. Annuity is a pull of funds where your money is being invested. Access to the account details is not given at anytime but you are likely to get about 5-20% higher pay on monthly basis than the program withdrawal.

  4. Valentine Aputazie

    January 2, 2020 at 6:46 pm

    Those in programmed withdrawal risk their God given life.Valentine Aputazie,Leadway Assurance.

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Investment Tips

Retail franchise investment next gold mine for Nigerian investors- CIG

Retail franchise investment curbs unemployment  and create buffer for people looking for side hustle

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The Choice International Group (CIG) has tasked both unemployed and employed Nigerians to embrace retail franchise investment, as the initiative would curb unemployment in the nation  and create buffer for people looking for side hustle.

In line with a recent FBDS Study, there are over 450,000 Nigerian career professionals with minimum investible funds of N1 million, looking out for investment opportunities.

In the majority, these funds are looking for franchise type opportunities for ease of venturing and minimal failure risk.

As far as CIG chairperson, Diana Chen, is concerned, such investor should look no further but consider the group’s retail franchise investment opportunity, which offers Nigerian community mouth-watering offer of owning Gree & Lontor retail stores.

According to him, Gree is the world’s residential air-conditioner manufacturer, while Lontor provides high-quality, energy-saving and convenient rechargeable home appliances and lighting products for global consumers.

He said, “Both brands have been built by the CIG into a world-class electronic retail chain in Nigeria opening no less than 20 brand shops in Lagos and Oyo over the last 18 months.

“The sales performance of its existing stores in the country makes Gree & Lontor one of the most profitable businesses in Nigeria with yields of an average return on investment of 50% and above per annum.

“CIG is offering investors the opportunity to own any of six regional logistics centres, or any number of Gree & Lontor brand shops in viable locations across Nigeria.

“It is the decision of the company to open up these opportunities to the investing public through a Franchise Retail partnership.”

 

He added that the company has mapped out two investment models it says are simple, transparent, and hassle-free.

“The first model involves only six regional logistics centres located across the geopolitical zones in Nigeria.

“Whoever invests in this will require a capital outlay of $1 million, and become a mega distributor partner of the Gree & Lontor brand, and service a network of brand shops.

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“The second investment model involves the Gree & Lontor brand shops – retail franchise stores that require an initial capital outlay of N20 million.

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“The investor will secure a store size of 120-150sqm at any choice location, shopping mall, plazas, high streets and even residential neighbourhoods.”

What they are saying

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Nigeria is a growth market for franchising and franchise development services.

Gbenga Ajayi, an Entrepreneurship analyst, said, “The retail industry comes second to the food industry among sectors with best franchising opportunities.

“As with other emerging markets, one of the challenges of franchising in Nigeria remains the strengthening of intellectual-property regimes so that franchise companies can transmit knowledge and franchise system concepts with the confidence that such know-how will be protected.

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Investment Tips

Where to invest N500,000 right now

Nairametrics interviewed financial experts on what assets they would invest in if they had N500, 000

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Since a full economic recovery this year is off the table, Nairametrics interviewed some investment experts, entrepreneurs, and corporate heads, on the assets they would invest N500,000 in. The responses varied from buying gold to investing in mutual funds or starting a business.

The world economy is projected to fall by 4.4% in 2020, an upward guide from an earlier predicted rate of -4.9% made in June. The IMF projected that social distancing due to the COVID-19 pandemic will linger till 2021, but the transmission of the virus will plunge globally by the end of 2022.

Get Stock Trading Guidance Via the Nairametrics SSN Newsletter

READ: BUA Cement shows resilience to marginally improve bottom line

Temitope Busari, CFA

With fixed income yields at the current levels, my N500k in today’s market will go into a dividend-paying stock or alternative investments.

  • Depending on whether or not I can afford to risk some capital and barring timing constraints, I would buy a stock that offers periodic cashflow in form of dividends.
  • For alternative investments, I would explore high-yielding fixed deposits in the on-lending space.

READ: Thrive Agric: “Where is my money?”

Michael Nwakalor, Macroeconomist at CardinalStone Research

  • The yields in the fixed income markets are currently on the low and producing negative real returns, the equities market provides a viable alternative to earn a total return above inflation.

READ MORE: Trading and Investment for beginners: How to prepare for the stock market

  • I like stocks in the banking sector, as a number of them remain undervalued by fundamental metrics. Several names are on the course to post near double-digit dividend returns by the year-end. A portfolio that includes the following counters – GUARANTY, STANBIC, ETI, FBNH, and ZENITH, should provide adequate exposure to the sector as well.

READ: Onyema, Oniha highlight opportunities for investors in fixed income market

Adaobi Okonkwo, Currency Trader of a leading Tier 1 Bank

  • With a few things to invest in, the most reliable investment that comes to mind is a mutual fund. The fixed income and money markets are currently experiencing a downturn; hence, investing in them could reduce my income spread.
  • However, with a mutual fund, my portfolio of investment in the capital markets is determined by the fund managers with a decent return on investments certainly above the risk-free rate. Gold is a commodity that would yield a good ROI within a specified time frame if I wanted to invest by myself.

READ: FG to inject over N198 billion on capital projects in power sector in 2021

Silas OZOYA, President/CEO, SUBA Capital

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Though quite a small capital, it might not do much if you want to play the long-term investment game. However, it can set the ball rolling.

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  • I would invest it in a high yield investment platform that pays at least 5% returns monthly to cover running costs.
  • Put the money in a fixed deposit and leverage it as collateral to take a debt fund, with a 6 – 12 months moratorium from a commercial bank for a possible expansion of a profitable business. This way, you gain on the debt and still have your N500,000 intact.

(READ MORE:Nigeria’s Macro-economic dashboard for Q3 2020 – Comercio Partners)

Ugonna Thelma Ohiri-Anyanwu, CFA

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With a gift of N500,000, my risk appetite and drive for higher returns,

  • I would invest 50% of the funds (N250,000) on dollar and Eurobonds. This is mainly because of my future needs for FX and also as the need to hedge my currency risk.
  • I would invest 25% of the balance (N125,000) in Ethereum, which would give me a steady cash flow with medium risk.
  • The balance of N125,000 would be invested in Value company shares with low P/E and also stable dividend payments.

READ: CBN reveals framework for the N75 billion Youth Investment Fund

The overall investment portfolio allows for diversification, stable cash flow in both local and FX currency, and currency hedge. These would provide a solid mix between ownership of materially underpriced assets and high dividend-yielding assets.

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READ: Cryptos: Nigerian financial experts talk risks associated with trading digital assets

Bottom line

Amid the rising COVID-19 caseloads prevailing globally, the financial experts interviewed above showed significant diversity on the assets they would invest in, coupled with their different appetite for taking risk reflected on their preferred choices made amid a blurry global economy era.

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