Declining yields may spur change in PFAs asset allocation
By Many Pension Fund Administrators (PFAs) may be routing to reduce allocation of assets under management to Federal Government securities resulting from declining yields.
PFAs investment in FGN securities was valued at N5.589 trillion or 70.37 percent of the N7.943 trillion total pension assets. Out of the total pension assets, N3.861 trillion or 48.61 percent was invested in FGN Bonds while N1.659 trillion or 20.89 percent was invested in Treasury Bills (T-Bills).
In the trading week to May 25, average T-Bill yield increased by 99basis points (bps) to close at 13.3percent. Yield on 91-day T-Bill went up 51bps to 12.9percent last week, 182-day was up 113bps to 13.1percent, and the 364-day was up 134bps to 13.9percent.
On the flip side, average bond yield inched lower by 5bps to end the review week at 13.4percent. As at Monday, May 28, 2018, the FGN bond market was fairly active and yields contracted for several maturities across the curve.
Analysts believe sentiments in the fixed income (FI) space is tied to the stance the Central Bank of Nigeria (CBN) takes regarding fiscal paper supply.
Though the role of the PFAs in local debt markets remains pivotal but if the industry is to realise its full potential, forward-looking leadership from the regulator and new products to extend coverage across the economy are required.
Recently, the National Pension Commission (PenCom) replaced the “one size fits all” investment structure for PFAs with the Multi-Fund Structure (MFS) regulation which considers for age or risk profile of such contributors.
“PenCom’s latest data do not point to a surge of investment in domestic equities. The NSEASI rose by 62.7percent in the 12 months to end-March while Asset under Management (AUM) in the asset class increased by 54.3percent over the same period”, said FBNQuest Researcher in its May 30 note.
They agreed that the decline in yields on FGN paper since mid-2017 could lead to a change in asset allocation by PFAs; adding that “the share of Asset under Management invested in equities has risen but we are not witnessing a sea-change”.
Equities may witness major trigger in medium-to-long term as the recent multi-fund structure regulation to PFAs is expected to increase their holding significantly from the current levels.
While PFAs investment in FGN Bonds is the highest with percentage of 48.61percent of the total pension fund assets as at March 31, and closely followed by Treasury Bills (T-Bills) with 20.89percent weight and domestic ordinary shares with 9.25percent weight, agency bonds has the least with 0.07percent weight.
They noted that the industry’s holdings of FGN paper which amounted to 70.4percent of their AUM in March is less when compared with 72.8percent one year earlier. “The beneficiary has been domestic equities, the share of which gained 2percent over the 12-month period”.
“It is unlikely that the implementation of the MFS framework will have an immediate impact on the equities market, especially with the 6 months transition period provided for PFAs, to restructure their portfolios in accordance to the framework”, according to United Capital Research analysts in their May 29 note to investors.
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