In what looked like sayings from Nostradamus (the man who saw tomorrow), various media houses all over the world predicted that pension funds would be hit hard by COVID-19.
On April 1st 2020, Bloomberg news prophesied that pension funds would be hit. In like manner, the CBC News, Canada, noted on Mar 18, that public pensions take a hit from COVID-19 concerns.
UK’s Guardian news wrote on February 29th 2020, “British pensions set to take a hit from market tumble” and the Telegraph caped it up with a caption that read,” Pensions hit by “double whammy” of bank rate cuts and falling markets”.
The same predictions were made by many other news outlets.
From the look of things, and going by the March 2019 edition of the Summary of Pension Fund Assets released by the National Pension Commission (PenCom), Nigeria, those predictions seem to have come true for the Nigerian pension fund industry.
According to the March 31st Summary of Pension Fund Assets, the total value of pension assets stood at N10.327 trillion, a reduction of N180 million or 1.71% when compared with the February 29th total value of N10.507 trillion.
The reduction came from sell-offs of pension fund investments in domestic ordinary shares and Treasury bills.
In the month of March actually, pension funds saw N200.4 million flowing out of the industry with only N20.28 million flowing in. Of the fund types, RSA fund (fund 2) was the hardest hit as it suffered most of the reductions in net asset value.
April Fool: The industry, however, made a quick recovery in April when the asset value increased by 2.42%, according to Summary of Pension Fund Assets of April 30th 2020.
With that increase, the total pension fund assets bounced back to N10.578 trillion, having increased by N250 million in net inflows. (N445m inflows and N195m outflows).
Almost all the outflows came from sell-off of Treasury bills, making treasury bill investment by pension fund managers decrease by 14.35%.
You will recall that in my last article, I pointed out that PFA’s fell out of love with Treasury bills in February 2020, that trend has continued unabated and has even intensified.
As with the March trend, most of the increase in fund assets was noticeable in the RSA fund (fund 2) which attracted much of the inflow in April.
Fund 3 is increasing in popularity as it keeps gathering positive contributions month after month. It is now the second largest pension fund subcategory accounting for 25.8% of total pension fund assets.
Asset Allocation: It is not unusual in situations of extraordinarily low yield for pension fund managers to venture into more risky investments in search of yields. This, when it happens, could prove dangerous for the fund managers and the retirees whose risk tolerance may not match such asset classes.
A look at the composition of pension funds asset allocation, however, does not indicate that Nigerian pension fund managers are shifting into more risky assets as at yet.
As at April 30th 2020, 54.5% of pension assets are invested in FGN Bonds, while 14.3% is in Bank placements, and 10.7% is in Treasury Bills. Those are all low-risk assets that fall in line with the provisions of the Pension Act of 2014.
Conclusion: The speed with which the Nigerian pension fund asset value bounced back from the reduction in value it suffered in March is indicative of the fact that the industry may not take as much hit as predicted.
Besides, there is no indication that Nigerian pension managers are involved in asset reallocation to risky assets in an attempt to improve their return performance but there is need to watch out for any style shift that may increase the risk attributes of pension fund portfolio structure. We are watching.
Best Mutual Funds in Nigeria
These are the best mutual funds in Nigeria to invest in based on performance.
Mutual Funds are a great form of investing especially if you are a passive investor. According to data from the Security and Exchange Commission, Nigeria has about 107 Mutual Funds cut across several Fund Types. Here is a breakdown of the Fund Types available for investors according to SEC.
|EQUITY BASED FUNDS||13|
|EXCHANGE TRADED FUNDS||10|
|FIXED INCOME FUNDS||21|
|MONEY MARKET FUNDS||23|
|REAL ESTATE FUNDS||3|
To determine the best performing Funds, we looked at the Fund Prices as of the last business day in December 2019 and compared to the fund prices as of the last trading day of June 2020. These are the top 5. We also included profiles of the funds as described in their websites.
New Gold ETF
Vetiva’s The NewGold Exchange Traded Fund (NewGold) is an Exchange Traded Fund that was listed on The Nigerian Stock Exchange (NSE) in December 2011. It tracks the price of gold and offers institutional and retail investors the opportunity to invest in a listed instrument (structured as a debenture) that is fully backed by gold bullion. Each NewGold security is equivalent to approximately 1/100 ounces of real gold bullion held in a secured stockpile of gold bullion. All gold is kept in the form of London Gold Delivery Bars and Good Delivery Standards are prescribed by LBMA.
Fund Price – N5,220
Fund Price – N8,000
Return – 53.3%
Ranking – First
Commentary: Gold prices have been on the up since the Covid-19 pandemic took hold of the global economy. Investors are uncertain and as history shows gold prices are always up during market uncertainty. If you are looking for protective investment in times of uncertainty then this is the best performing fund so far.
FBN Nigeria Smart Beta Equity Fund
FBNH owned The FBN Nigeria Smart Beta Equity Fund is a pure equity fund that invests money predominantly in a portfolio of Nigerian companies, using a rigorous, research-based and tested evaluation system.
The fund provides long-term capital preservation by investing at least 75% of the fund’s assets (excluding cash and cash equivalents) in a diversified portfolio of high-quality companies listed on the Nigerian Stock Exchange. In order to manage liquidity, the fund may also invest up to 25% in short-term money market instruments and deposits with financial institutions.
Fund Price – N129.17
Fund Price – N197.29
Return – 52.7%
Ranking – Second
Commentary: For a fund that is predominantly focused on equities, this a pretty much impressive performance by all standards. For example, the NSE All-Share Index is down 9.8% year to date. If you are worried about investing in stocks and don’t have the heart for it and you are looking for a mutual fund, then this is the best performing fund out there.
Vantage Balanced Fund
Investment One’s Vantage Balance Fund (launched in 2002) is a fund focused on long term capital appreciation, which is achieved by maintaining a flexible diversified portfolio of equities, fixed income, money market, and real estate investments. Assets are high-quality equity instruments quoted on The NSE while the bond issuers have an investment-grade rating from a credit rating agency registered by SEC.
Fund Price – N2.21
Fund Price – N2.87
Return – 29.9%
Ranking – Third
Commentary: This is a Mixed fund as it invests in a diverse pool of assets. Interesting to note that the managers of this fund also have an Equity-Based Fund, a Dollar Fund, and a Fixed Income Fund. But none of them come close to the Balanced Fund. If you are looking for a portfolio with a good mix of investment assets then this is the best performing as of June 2020.
Legacy USD Bond Fund
FCMB Asset Management Owned Legacy USD Bond Fund (launched in 2018) is a SEC-registered US Dollar-denominated Collective Investment Scheme, structured as a high-yield mutual fund. The Fund seeks to generate stable income over the long-term. Legacy USD Bond Fund invests in credit-rated US Dollar-denominated fixed income securities issued by the Nigerian Government, Supranational bodies, and Corporate entities.
Fund Price – N306.5
Fund Price – N360.5
Return – 24.4%
Ranking – Fourth
Commentary: The Legacy Bond Fund is the best performing mutual fund if you are looking for dollar-denominated fixed-income debt securities like Eurobonds. At 24.4% they seem to be holding bonds with good yields and market values respectively. Apart from the Bond Fund, managers of the Legacy Bond Fund also manage a Fixed Income Fund, a Money Market Fund and an Equity Fund. If you are looking to invest in Eurobonds then this mutual fund is the best performing.
Vantage Dollar Fund
Investment One’s Vantage Dollar Fund (launched in 2018) is a SEC registered open-ended Unit Trust Scheme in Nigeria. The Fund seeks to provide investors with a bias for Dollar-denominated securities access to such securities, which ordinarily would be inaccessible to them by virtue of the minimum amount typically required to make such investments. It will invest primarily in Corporate and Sovereign Eurobonds.
Fund Price – N401.02
Fund Price – N469.2
Return – 17.0%
Ranking – Fifth
Commentary: This is the second dollar mutual fund on the list and the second from Investment One to make the list of best 5. It appears they have a hang on fund management. Dollar Mutual funds are a great source of investments and it is great to see another in the top 5. Thus, if you want another option, then this is one you can also go for.
Bubbling Under: The following funds make up the rest of the top 5 on our list and in descending order.
6. AIICO Balanced Fund
7. VI ETF
8. Coronation Fixed Income Fund
9. CEAT Fixed Income Fund
10. United Capital Euro Bond Fund
Why the NSE Pensions Index should be replaced
To what extent is the NSE Pension Index an appropriate benchmark?
The Nigeria Stock Exchange recently announced that the Index Governance Committee of the Exchange “has reviewed the eligibility criteria for the NSE Pension Index (“The Index”) in line with changes in the regulatory and market requirements”.
According to the chairman of the committee, Mr. Abimbola Abdulazeez Babalola, “The review of the Index was made imperative by the need to ensure that it continues to represent the appropriate benchmark for evaluating the Pension Fund Assets equity portfolios and remain suitable for all market stakeholders. The review further takes into consideration the changes in guidelines as specified in the Pension Reform Act 2014 and Amended Regulation on Investment of Pension Fund Assets as advised by the National Pension Commission (PENCOM) as well as market requirements in the amendments”
About NSE Pension Index
According to the Nigeria Stock Exchange, “The Nigerian Stock Exchange in order to deepen the market introduced the Pension Index and exposed to the investing public in 2015. The creation of the NSE Pension Index has provided benchmarks tracking mechanisms for Pension Fund Administrators and other Users that follow the PENCOM guidelines. The NSE pension tracks the top 40 companies in terms of market capitalization and liquidity. It is a total return index and is weighted by adjusted market capitalization, a capping factor, and a free-float factor”
Appropriateness of the NSE Pension Index
As noted already and as avowed by the chairman of the Index Governance Committee, “The review of the Index was made imperative by the need to ensure that it continues to represent the appropriate benchmark for evaluating the Pension Fund Assets equity portfolios”, however, the question that comes to mind is to what extent is the NSE Pension Index, as constituted, an appropriate benchmark for evaluating pension fund portfolios? To answer this question, I will be looking at what an appropriate benchmark should be and take a look into the constituents of the NSE Pension Index in comparison to the asset allocation of pension funds in Nigeria.
What is a good Benchmark?
According to the CFA Institute, for a benchmark to be a valid and effective tool for measuring manager performance it has to be unambiguous, investible, measurable, appropriate, reflective of current opinions, and specified in advance. Without delving into the meaning and implications of all the qualities of a good benchmark noted above, I will be dwelling on the appropriateness of a benchmark. For a benchmark to be appropriate, it has to be in line with and account for the investment style or style characteristics of the fund or manager whose performance is to be evaluated by the benchmark. What that means is that, if a fund or manager invests in small-cap growth stocks, then the benchmark should be made up of small-cap growth funds. A benchmark that does not take into consideration the investment style of the manager or fund, will remain ambiguous when it comes to whether the fund or manager out or underperforms the index or benchmark.
How to test a Benchmark for appropriateness
The taste of the pudding is in the eating, the saying goes, in the same way, a good benchmark can be tested by performing a correlation analysis of the bench mark’s return versus the return of the fund or manager’s return. The higher the correlation, the better the benchmark. Analysts at Quantitative Financial Analytics carried out a correlation analysis of Nigerian pension funds and the NSE Pensions Index using beta, as a measure of correlation and the result is startling. The result indicates that there is very low correlation between pension funds and the NSE Pensions Index. The three pension funds with over 10% correlation coefficient happen to be those with the highest exposure to equities in their portfolio asset allocation.
The NSE Pension Index is made up of the top 40 companies and these companies full into the asset class of equities. However, 100% of the pension fund in Nigeria allocate less than 10% of their asset to equities and 90% to treasury bills and other fixed-income securities, therefore, using an index that is 100% equity-based to evaluate funds with less than 10% exposure to equities, is in my opinion inappropriate. It is akin to comparing apples and oranges. The NSE should come up with a customized index or Benchmark that lines up with the asset allocation or investment style of pension fund managers, otherwise, those fund managers will be charging pension funds for outperforming an index (especially during bad times for the stock market).
How fund managers can help in period of low yield
With inflation holding steady, the low yields end up translating to negative returns.
It is often said that he who must find gold, must dig deeper because such is not found on the surface. With the current trends in interest rate, yield has become like gold, and those that must find it, should dig deeper than they have done before. It is no longer news that yield in traditional asset classes is approaching historically low levels. Indeed, yields are so low that yielder hunters are literally stuck. In one of my last pieces, I noted that the low yield had driven pension funds to the point of abandoning treasury bills as an asset class. The picture gets scarier and disheartening when viewed in real terms. With inflation holding steady, the low yields end up translating to negative returns when discounted for inflation.
Now that Treasury bills seem to be out of the question due to sub-zero yields, what can investors turn to? Here are a few things that investors could think of doing;
Invest in Money Market Funds: Money market funds have been the darling asset class for most Nigerians, due to their conservative nature and the fact that money market funds seem to be much easier to understand. The present low yield in the World market is also affecting money market funds but they still remain much higher than what is obtainable from Treasury Bills. Unfortunately, a great majority of fund managers do not have the yield of their money market funds on display when I visited their websites, below is a list of the prevailing money market yields in Nigeria for those that could be gleaned from the various website:
It may pay to shop around for yield as different funds present with different yields, as can be seen from the table above.
Fund Managers to the Rescue: One of the implications, if not the major implication of the ultra-low interest rate is that investors in yield driven asset classes, like money market funds, will either make minimal returns or no returns at all, especially when inflation is factored in. Unfortunately, most of these money market funds pay fees to the fund managers. To help the situation, it is time for fund managers to reduce or waive some of the fixed fees they charge investors like management fees. Investors should, therefore, ask fund managers for a renegotiation of the fee structure in such a way that the burden of low-interest rate is shared between the fund managers and the investors. Fund managers in places like the US are already doing this.
Loss Carryforward Provisions: Another way that investors can manage this situation is for them to ask fund managers to insert loss carry-forward provisions into the mutual fund agreement or prospectus. A loss carryforward provision is one which states that the fund manager does not get paid any incentive fee unless and until the fund attains its last known highest asset value. By having loss carryforward provisions, investors are afforded the time to recoup on losses before being charged further incentive fees.
Look for High Dividend Yield Stocks: Though stock investment remains riskier than money market funds and fixed income fund investments, in a low yield environment, it may pay to look for and invest in high dividend stocks that have a history of regular and consistent dividend payments.
Warning: Nothing in this article should be taken as investment advice and the author should not be held liable for using it as such.