PFAs: Major force behind market liquidity

·         Search for superior returns in equities to sustain positive vibration 

 Pension funds are collective investment undertakings that manage employee savings and retirement. They are dedicated funds expected to meet the financial demands of retirees after their active service years.

Regardless of the type, pension funds must grow to ensure that they can afford their current and future obligations to workers. As a result, pension funds make significant investments in a variety of asset classes to ensure both growth and stability.

As at the end of August 2020, total pension assets under Contributory Pension Scheme rose to N11.35 trillion from N11.31 trillion at the end of July 2020.

Prior to the lower yield regime in money market and fixed income space, PFAs invest more in the money market, bonds and treasury bills because of the relatively low risk involved as against equity market that is more volatile.

Pension fund asset is highly regulated by PenCom as regards investment. There is investment guidelines to all PFAs from PenCom on how the fund should be invested. Due to the volatility of the equity market, the maximum allowable proportion is 30% in equity. At that, maximum allowable fund by PenCom to play the equity market is N3.405 trillion from from the total pension assets of N11.35 trillion.

Incidentally, the pension assets alone in Nigeria equity market is over 30% of the entire market. This is a huge investment to date and its impact on the market cannot be undermined. Hence, the pension fund asset as a single unit aggregated holds a significant impact on the stock market.

The top 7 places Pension Funds were invested as at August 2020 are

  • Federal Government Securities- N7.52 trillion (66.27%)
  • Local money market securities- N1.88 trillion (16.60%) 
  • Corporate Debt securities- N755 billion (6.65%)
  • Domestic Ordinary Shares- N545 billion (4.80%)
  • Real Estate Properties- N218 billion (1.92%)
  • State Government Securities- N148 billion (1.31%)
  • Foreign Ordinary Shares- N79 billion (0.70%)

As interest rates are been lowered, by the Monetary Policy Committee of CBN, return on investment in money market became no longer attractive. Pension Fund Administrators will not want to put their money where they will get 1%. Therefore in search for higher return on investment, the equity becomes the save haven where they can get returns that is higher than the inflation rate.

Local investors currently control 60% of the equity market while foreign investors play 40% of the market. The current bull we are experiencing in the market is due to the liquidity from PFAs in search for higher returns.

Commenting on the impact of pension funds on the Nigerian capital market, Mr. Uthman Olubodun, the Investment Manager of NLPC PFA, stated thus:

“The impact of the pension fund on the Nigerian capital market is numerous in the sense that before the advent of the pension fund industry in Nigeria, that is, the reformed contributive pension scheme, the equity market is dominated by Foreign Investors. They only invest on a short term and immediately the market gives them their target return, they pull out. This has put us at the mercy of foreign investors. But now with the pension funds, we have seen improved situation in the market and this can be buttressed by the recent event of covid-19 in which the market was down to the barest minimum. Stocks with good fundamentals like Guaranty Trust Bank, Zenith and the likes went down. I could remember, Zenith went as low as N10; Guaranty Trust Bank went as low as N17. Now post covid; the recovery was very fast and the reason is not farfetched. The reason is that we now have a lot of domestic participation coming majorly from the pension fund. The PFAs are now taking position. Even the fact that we are in very low yield environment. When you invest in fixed deposit, you get 1%.  When you invest in primary auction government bond, you get as low as 6%. This has really helped the market. People have been taking position in the equity market, that’s why you see that Guaranty has recovered fully from N17 to N35; Zenith is around N25.”

“This has really helped in terms of liquidity and in terms of participation domestically. Pension fund has really helped in the capital market. Even in the bond market. We now have a lot of liquidity. PFAs are now buying and selling equity. Currently the total pension assets is over N11 trillion, and just imagine having over 50% of that amount in the equity market and bond market. So it goes a long way to bring about liquidity and this will help to determine a good value for our stocks and good yield for the bond. The impact is positive and very numerous. It has really reduced our reliance on foreign investors; where they come and for any little information that appears risky, they pull out, leaving us at the mercy of the market. Now, there seems to be a kind of stability in the market”.

“The bullish trend is basically caused by the low yield environment. Imagine getting 1% on fixed deposit; 0.24% on Treasury Bills in 364 days. Because of that shortage of investment instrument in the market, people don’t have choice than to hit the equity market. And the market is highly liquid now, a lot of liquidity flying around. Despite the low return of T-bills and money market, all these instruments are still been oversubscribed. That’s why you see the last Treasury bills auction was oversubscribed over 300%. For fixed deposit, you’ll see bank telling you we don’t want money”.

The current government is bent on stimulating the productive sector of the economy. They want to bring about growth in the productive sector. They want the manufacturers to get fund at lower rate.

“Going forward, in the next 3 years I don’t see the market going down, in as much as we continue to have 1% of fixed deposit or lower. For instance, GT Bank is offering 0.3% on 90 days fixed deposit; Government is doing 0.20 on Treasury Bills. Even in the bond market, if you are doing 20/50 years bond, the coupon is not even more than 6% now. So the only option left is for people to take position in the equity market. So in the next 3 to 4 years, I don’t see the market going down because, it is stable. If you cash out in the market, where do you put the money? If you had GT Bank at N17 and it has appreciated up to N35; and I cash out (sell), the question is where you invest the money. So we are currently facing what we call the REINVESTMENT RISK, where you cash out, and there is nowhere to put the fund. So I see the market remaining stable in the next 3-4 years because the current government is bent on stimulating the productive sector of the economy. They are doing everything they can to continue to make sure that the downward slide interest rate remain the same.

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