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).
PFAs investment in FGN securities rises by 3.7% in November 2020
RSA registration marginally increased by 0.17% to 9,188,475 as at November 2020.
The Pension Fund Administrators (PFAs) have increased their investments in Federal Government of Nigeria securities by 3.7% to N8.14 trillion in November 2020.
This is according to recent data from the National Pension Commission (PenCom), which revealed that the amount invested by PFAs on FGN securities including; Bonds, Treasury Bills, etc., increased from N7.85 trillion as of October 2020 to N8.14 trillion by the end of November 2020.
The breakdown of the amount invested on various FGN securities within the period under review are:
- FGN Bonds got the lion’s share of N7.38 trillion as of November 2020, accounting for 90.7% of the total amount invested in FGN securities for the aforementioned month. This indicates a growth of 4.3% Month-on-Month.
- Investment in Sukuk bond increased to N100.07 billion in November 2020, up by +6.9% Month-on-Month.
- Investment in Treasury Bills declined to N642.03 billion, down by -1.7% Month-on-Month.
- Investment in Agency bonds also declined to N6.03 billion, down by 50.9% Month-on-Month.
- Investment in green bonds declined to N11.8 billion, down by 10.6% Month-on-Month.
- Investment in state government securities stood at N150.59 billion, down by 2.5% Month-on-Month.
Upshots: The increased investment in FGN securities by PFAs within the aforementioned period might be attributable to an earlier order by CBN which prohibited PFAs from OMO Auctions. The order redirected the investment focus of most PFAs, with many opting for other low-risk FGN securities, possibly explaining why the increase occurred.
What you should know: Nairametrics had earlier reported that CBN had restricted OMO auctions to banks and foreign investors.
- The Net asset value of all PFAs in the country as of November 2020 stood at N12.3 trillion, marginally up by +1.98% Month-on-Month.
- Total RSA registration for the aforementioned period also increased by 0.17% to 9,188,475.
Nigeria’s pension funds continue to divest from treasury bills
Since the beginning of 2020, pension fund managers have moved out about N1.112 trillion of treasury bills investments into mostly FGN Bonds.
As the low-interest regime that characterized most of 2020 continues with no immediate sign of an increase, pension fund managers have also continued to rid their portfolios of treasury bill investments.
Analysis of the recently released September 2020 edition of Pension Fund assets, by the Pension Commission of Nigeria, PenCom, shows that pension fund managers reallocated their assets away from treasury bills to FGN Bonds.
In the month of September 2020, according to the latest report, pension fund managers closed out of treasury bill positions worth N0.224 trillion while loading up on FGN bonds worth N0.254 trillion. Since the beginning of 2020, pension fund managers have moved out about N1.112 trillion of treasury bills investments into mostly FGN Bonds.
At the beginning of 2020, total pension fund assets invested in treasury bills stood at N1.88 trillion, but that has fallen to N0.78 trillion as at the end of September 2020. Put in another way, as at the end of 2019, 18.4% of pension fund assets were invested in treasury bills but as at September 30, 2020, pension funds’ treasury bill investment stood at 6.7%
Implications for domestic borrowing and monetary policy
Treasury bills serve a whole lot of purposes for the government. They are used as a means for the government to borrow to cover short term budgetary deficits as well as a means for the Central Bank to manage the supply of money and its inflationary effects.
With the increasing and seeming lack of interest by pension fund managers, who, usually are big players in the treasury bill market, the government may find it a bit problematic raising the much-needed domestic borrowing from them.
In like vein, the Central Bank’s ability to implement monetary policies through treasury bills and others, open market operation, may also suffer. May be, fiscal policy may become a more potent instrument of economic management, if that happens.
Nigeria’s Mutual Fund asset value grew by 50% in 2020
2020 appears to be the year with the highest growth in the value of mutual fund assets in Nigeria.
While the year 2020 will go down in the annals of history as one of the worst years in the history of mankind, it was not so bad for the Nigerian mutual fund industry.
Interestingly, 2020 appears to be the year with the highest growth in the value of mutual fund assets in Nigeria.
According to data from the Security and Exchange Commission, SEC, the total value of mutual funds in Nigeria stood at N1.042 trillion as at the end of 2019. The same data source now shows that as at the end of 2020, the net asset value, NAV of Nigerian mutual fund had risen to N1.572 trillion, representing an increase of 50.79%.
A deeper analysis of the industry reveals that in 2020, mutual fund contributions amounted to about N0.903 trillion while redemptions amounted to about N0.42 trillion. The same analysis points to the fact that mutual funds gathered an estimated sum of N46.7 billion in gains.
Compared to 2019, the capital activities, comprising of subscriptions and redemptions were slightly far afield. In 2019, subscriptions stood at N0.52 trillion while redemptions came up to N0.14 trillion, resulting in a net inflow of N0.38 trillion. Net inflows for 2020 stands at N0.483 trillion. Unlike in 2019, when mutual funds made an estimated gain of N9.9 billion, the N46.7 billion made in 2020, makes Corona Virus a non-issue for the industry.
Majority of the funds ended 2020 in the black, as 15, out of the 118 mutual funds on the SEC’s NAV Summary Report. The good thing about it is that no particular fund group dominated in making gains.
Although most of the funds that recorded huge gains came from the Euro Dollar category, Bond and Fixed income funds were not left behind as a whole lot of them stood out with mouth-watering gains. Out of nowhere, Stanbic IBTC Nigeria Equity fund sneaked in with some sizable gains too.
On the downside, the two funds that recorded the greatest losses came from the Real Estate Investment fund category. Apparently, the Real Estate Investment Trust funds have not been doing good. Be that as it may, it is laudable that the Nigerian mutual fund industry stood out in 2020.