Pension funds move away from stocks for FGN bonds and bank placements

The Nigerian stock market has seen recurring bearish trading performance this year, with the All-share index dropping 5% year-to-date, due to massive sell-offs of blue chip stocks on the exchange.

According to a stockbroker who spoke to Nairametrics, “Pension funds don’t buy anymore and there are no foreign portfolio investors, so the market is practically dead”, suggesting that the lack of involvement of institutional investors such as pension funds affects the performance of stock markets. The data also confirms the suspicions.

According to the Pension Fund Industry Portfolio Report, it appears that Nigerian pension fund investments in Nigerian stocks declined by N27.84 billion between January and April 2021. One possible reason why shares were negatively affected.

As of December 31, 2020, the Pension Fund’s investments in national stocks amounted to N858.46 billion, which fell to N830.62 billion in April 2020. This represents a decrease of 3.2%. within four months. On the other hand, pension funds increased their purchases of government securities and their investments in bank investments.

While the allocation to equities declined somewhat, the allocation to banking investments increased to 1,640 billion naira from 1,533 billion naira. The allocation to FGN bonds also increased from 7.3 trillion naira to 7.45 trillion naira. Keep in mind that total pension fund assets in April 2021 were 12.39 trillion naira compared to 12.30 trillion naira in December 2020.

According to an analyst who spoke on Nairametrics’ “OneTheMoney” Twitter Spaces last Saturday, pension funds are being courted by banks to place funds in term deposits that promise up to 15% per year. As the CBN continues to debit banks through its CRR policy, some banks have resorted to pension funds to consolidate their deposits and avoid borrowing short-term funds through the punitive window of the CBN’s standard lending facility. .

Mark to market hit actions

Analysts also suggest that the mark-to-market policy of valuing the net assets of pension funds is also a major factor affecting their purchase of shares. All pension funds are required to publish their net asset value per share (NAVPS) daily, which is essentially the market value of their assets divided by the number of shares issued to contributors to their pension fund.

  • In order to value their assets on a daily basis, they will need to update the value of their investments which include stocks as well as fixed income securities such as bonds, treasury bills, term deposits, etc.
  • Unfortunately, the most volatile asset class in their portfolio is stocks. Stock prices go up and down every day, so in a market that is bearish or perceived to be bearish, stock prices are likely to fall sooner or later.
  • Pension fund administrators are well aware of this risk and therefore reduce their investment in shares to avoid any negative effect on their net asset value per share. When stocks performed very well towards the end of 2020, pension fund administrators increased their investments in Nigerian stocks from 595.48 billion naira in January 2020 to 858.46 billion naira at the end of 2020. 2020.
  • However, as of April 30, 2021, the total gross asset value of equity investments had declined as they diverted funds from equities.

Another stock broker who shared his frustration with Nairametrics suggested that the lack of confidence in stocks shown by fund managers is a major issue for market participation. “Pension fund managers either wait for foreign portfolio investors to lead the way or whoever does it first among their counterparts,” he said, suggesting that the drive to invest in the market is driven by fear of missing out (FOMO) rather than fundamentals.

As the economy as a whole continues to struggle with a low rate of GDP growth in the first quarter of 2021, most listed companies performed very well in the first quarter of 2021. For example, Nigerian listed companies worth a thousand billion and over market capitalization (1TMCs), all reported improved earnings per share in the quarter ended March 2021.

Other reasons

  • Nairametrics also understands that foreign portfolio investors continue to be sidelined in the wake of the forex debacle in Nigeria. Fund managers who spoke to Nairametrics on condition of anonymity reveal that orders from foreign investors have yet to recover from falling during the height of the Covid-19 lockdown.
  • From the 4the Quarter of 2020, foreign portfolio investment in stocks fell to just $ 18 million, their lowest level since we started tracking. Even in the second and third quarters of 2020, when stocks were bullish, portfolio inflows into stocks were only $ 53 million and $ 44 million, respectively.
  • Investors also cite the shallow nature of the Nigerian stock market as a challenge. As one fund manager explained, “If we already have stakes in large stocks, what else is there to buy? “ Pension funds are not allowed to hold more than 7% of the capital of a listed company.

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