It appears that Nigerian pension fund managers are loading up on cash. Data obtained from the National Pension Commission and analyzed by Quantitative Financial Analytics indicates that pension fund managers have been engaging in what one may call a conservative asset allocation strategy.
Over the course of the year, fund managers have moved funds around, almost totally exiting from foreign money market investments and shifting away from commercial papers and treasury bills into cash and agency bonds.
Huge Jump in May
As at May 31, 2021, pension fund asset allocation to cash and other assets increased by 37.6% from N122.8 billion at the beginning of the year to N169 billion, by the end of May 2021 on a year-to-date basis. In May 2021, alone, pension allocation to cash increased by 57.24%. Prior to May 2021, there was a decrease in pension asset allocation to cash of 12.49%. It is not very apparent why the sudden jump in allocation to cash.
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Though the fund managers have their reason for such increased allocation to cash, the impact on return should also be a consideration. Agreed that having increased allocation to cash can pose some performance challenges, not having enough cash can as well pose some operational challenges as the pension fund managers need to maintain the right level of liquidity to meet anticipated and unanticipated cash outflows.
With the adverse effect of Covid-19 and the economic hardship going on in Nigeria as a result of insecurity and bad governance, who will blame the pension fund managers if they decide to load up on cash to meet the requirements of pensioners who may want to cash out from their pension funds as a means to ride the waves in the economy?
Pension fund managers are in a bind
If anything, the fund managers should rather be sympathized with as it is not easy to deal with the need to have adequate cash to meet outflow needs while achieving the need for improved performance or returns on assets. There is no doubt that it requires some analysis. It requires careful cashflow planning, analysis and cashflow management as an integral part of pension fund management and investment strategy.
One way to do this is for fund managers to hold assets that are liquid enough to be turned into cash with ease and cost-effectively while providing as much returns as possible.
This form of asset rotation is necessary due to uncertainties.