Stocks market rally likely as PFAs comply with multi-fund structure

As Pension Fund Administrators (PFAs) begin to align their investment portfolio with the Multi-Fund Structure regulation as required by the National Pension Commission (PenCom), it might be another game changer in favour of Nigerian stocks.

PenCom recently released the amended regulation on investment of Pension Fund Assets for the pension industry and introduced a Multi-Fund Structure, which replaces the “one-size-fits-all” structure that puts all active contributors into one Retirement Savings Account (RSA) Fund without consideration for age or risk profile of such contributors.

The multi-fund structure is a new system of fund management that allows the splitting of the RSA  ‘Active’ fund into three different funds; Fund I, Fund II and  Fund II. The ‘Retiree’ fund remains and it’s called Fund IV.

Not many active contributors are aware that the multi-fund structure commenced since January 1, 2018. With PFAs now informing their clients about the new regulation, the perceived investor preference for equities amid declining fixed income yields will further drive stock market performance higher.

“We are glad to inform you that from July 1, 2018, you can choose 1 of the 4 fund types to invest your RSA”, Stanbic IBTC Pension Managers said in a recent message to its clients.

“We believe that the Federal Government has taken a significant and commendable step towards unlocking the investment potentials of pension fund assets in Nigeria. It is thus expected that the inclusion of new asset classes in the list of Allowable Instruments will widen the investment horizon for PFAs”, according to a Lagos-based law firm, Banwo & Ighodalo.

The firm anticipates that the newly-introduced Multi-Fund Structure presents PFAs with increased opportunities to make targeted and well-tailored investments and also spread the risks usually associated with undiversified portfolios; adding that “Pension funds will boost activities/transactions in the money and capital markets, going forward”.

Fund I which is strictly by formal request from a contributor and suitable for contributors who want to invest in high risk projects with higher rewards has threshold of 75 percent maximum and 20percent minimum of portfolio value.

Fund II is for active contributors who are 49 years and below as at their last birthdays and its investment threshold is 55percent maximum and 10percent minimum of portfolio value. Fund III is for active contributors who are 50 years and above as at their last birthdays with investment threshold of 20percent maximum and 5percent minimum of portfolio value; while Fund IV, exclusively for retirees has investment threshold of 10percent maximum and Zero percent minimum of portfolio value.

Yields on fixed income securities have fallen dramatically this year and the Central Bank of Nigeria (CBN) shows commitment to single-digit inflation. The FGN bond market was fairly active on Tuesday, with yields contracting across the curve. The Monetary Policy Committee (MPC) rose from its two day meeting and eight members voted against one to leave all its policy parameters unchanged.

Yields generally narrowed at the Eurobond market, particularly for sovereigns. Opening market liquidity on Monday was positive at N81billion. Interbank rates closed within 16percent to 18percent levels.

On the Nigerian Treasury Bills (NTB) secondary market, yields also dipped for several maturities. Despite that first-quarter (Q1) 2018 results had little impact on the bourse, the equities market has remained positive with return of about 5.25 percent this year.

“The decline in yields on FGN paper since mid-2017 could lead to a change in asset allocation by PFAs. The share of Assets Under Management (AUM) invested in equities has risen, but we are not witnessing a sea-change. The generally average results of listed companies other than tier-one banks militate against such a change,” said Gregory Kronsten-led team at FBNQuest Research.

They noted that though the assets under management (AUM) of the Nigerian regulated pension industry increased by 23.7percent year-on-year in February to N7.79trillion ($25.5billion); they are growing at a reasonable rate yet, at just 6.9percent of 2017 GDP, and running well behind many emerging markets.

“The industry’s holdings of FGN paper amounted to 69.7percent of their AUM in February, compared with 72.3percent one year earlier. The beneficiary has been domestic equities, the share of which gained 1.9percent over the 12-month period.

“PenCom’s latest data do not point to a surge of investment in domestic equities. The NSEASI rose by 71.1percent in the 12 months to end-February while AUM in the asset class increased by 54.8percent over the same period,” according to FBNQuest Research.

“The Nigerian equities market is unlikely to post a high double-digit return in 2018. However, we think modest returns can still be achieved in 2018. For instance, sustained recovery in the broader economy – driven by higher oil prices which have helped to bolster Nigeria’s current account – points to a bullish outlook”, said the Kayode Tinuoye-led team of research analysts at United Capital Plc.

After an impressive rally in 2017, equities have given up almost all its early 2018 gains as flows into Nigerian stock market this year is been subdued by uncertainties around the upcoming 2018 presidential election.

Despite this, the analysts said in their recent note to investors that, “The major trigger for increased demand for equities is the recent multi-fund structure regulation to PFAs, which is expected to increase their equity holding significantly from the current levels”.

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