Low Yield Environment: PFAs Shun T-Bills as Investment in Stocks Rose by 51.4%

Kayode Tokede

On the back of a low yield environment, Pension Fund Administrators (PFAs) in the country shifted investments to stocks listed on the Nigerian Exchange Limited (NGX), among other Exchanges in 2021, as their exposure increase by 51.4 per cent in 11 months.

Analysts have expressed that the moves by the PFAs was in a bid to escape the unattractive yield environment that prevailed in the Treasury Bills (T-Bills) market in 2021.

THISDAY investigation revealed that PFAs investment in stocks between January and November of 2021 was N9.48trillion, an increase of 51.4 per cent from N6.26trillion reported by the National Pension Commission (PenCom) between January and November of 2020.

The aggressive investments by the PFAs in the stock market impacted significantly on listed blue-chips companies and local investors outshining foreign investors on the bourse.

For instance, the stock market in 11 months of 2021 had gained N1.5trillion to N22.567 trillion from N21.063trillion it opened in 2021, while the NGX All-Share Index or ASI appreciated by 7.4 per cent to 43,248.05basis points to close at 40,270.72 basis points it closed in 2020.

The stock market had closed at N22.30trillion in 2021 after appreciating by N1.24trillion.

The All-Share Index of the Exchange closed 2021 at 42,716.44 basis points, up from 40,270.72bps at the end of 2020.
According to NGX’s domestic & foreign portfolio participation in stock trading in 11 months of 2021, out of the N1.74trillion total trade, domestic investors traded N1.34tillion or 77.07 per cent while foreign investors traded N399.18billion or 22.93 per cent in the period under review.

The latest data obtained by THISDAY from PenCom revealed that PFAs exposure in the stock market reached its second peak in November 2021.

PFAs exposure in domestic shares dropped by 3.1 per cent Month-on-Month (MoM) to close at N876.45billion in November 2021 from N904.74billion reported by PenCom in October 2021, while exposure to T-Bills dropped to N274.99billion in November 2021 from N642.03billion in November 2020.

However, PFAs investment in T-Bills depreciated by 52.6 per cent to N5.49 trillion in 11 months of 2021 from N11.6trrillion in 11 months of 2020.

THISDAY checks revealed that the real return on the short-term instrument, (T-bill interest rate minus inflation), in 2021 stood at – 10.5 per cent, better than the -14.54 per cent reported in 2020.

After crashing to a four-year low of near-zero per cent in 2020, yields on the FG’s risk-free T-Bills jerk up to more than 17-month high of 9.75 per cent around May 14.

The rate, however, plunged to an 11-month low of 4.9 per cent at the last auction of 2021, as compiled from T-Bills’ primary market auction results for December 29, 2021.

Further analysis of the T-bill auction result for 2021 revealed that while interest rates on the 91-day and 182-day bills were mostly constant at about 2.49 per cent and 3.45 per cent, respectively in the review year, the longer 364-day reported the most decline, ending the year at 4.9 per cent.

According to analysts, investors’ interest in T-bills and consequently, the lower interest rate, has been largely due to their unwillingness to take a risk on longer-term instruments due to expectation of higher interest rates in 2022.

Further analysis showed that PFA’s total investment in FGN securities that include FGN Bonds, T-Bills, Agency Bonds (NMRC), Sukuk Bonds, Green Bonds and State Govt Securities rose by 11.8 per cent to N91.47trillion in 11 months of 2021 from N81.81trillion in 11 months of 2020.

Analysts, however, have expressed mixed feels over the penetration of PFAs in the domestic stock market.

The regulation on Investment of Pension Fund Assets of February 2019 stated that: “A PFA may invest the pension fund assets of any one Fund in the ordinary shares of a listed company, subject to a maximum limit of 7.5 per cent of the issued share capital. Cumulatively, in the six (6) Funds under the Multi-Fund Structure, a PFA shall not hold more than 20 per cent of the issued share capital of a listed company.”

Commenting on why the PFAs are not meeting regulatory guideline, CEO Pension Fund Operators Association of Nigeria (PenOp), Mr. Oguche Agudah said: “The target is a guild not by force for PFAs to meet the 20 per cent requirement set by PenCom. I can decide to do five per cent and beyond but it is not necessary I meet the 20 per cent.

“So, it depends on the individual PFAs business strategies and what equities are available for them to buy. PFAs can’t just invest in any stocks. Their investment in equities is still huge relatively to other institutional investors in Nigeria.”

He explained further that: “PFAs were looking for higher yields and balancing their portfolios.”

Commenting, the Vice Executive Chairman, Highcap Securities Limited, Mr. David Adonri argued that average PFAs exposure to stock market last year 7 per cent, stressing that PFAs average exposure limit under the Pension Fund Assets by PenCom Act was 20 per cent.

He said, “It means the PFAs under performed by 13 per cent investment in the stock market in 2021. The PFAs are not patronizing the stock market up to the expected threshold.”

Speaking with THISDAY on why PFAs were aggressively investing in stocks last year, the Chief Operating Officer of InvestData Consulting Limited, Mr. Ambrose Omordion said: “The returns on stocks on the Exchange was higher compared to T-Bills despite the risk-free investment.

“When the reward is high amid the risk, investors will always want to invest. PFAs were moving from higher risk to higher reward because at the end of the day, they will want to grow account of their contributors.”

He noted that PFA exposure in the stock market minimal with the regulatory 20 per cent threshold.

According to him: “PFAs have 20 per cent of their asset invested in equity but most of them have refused to meet the target because of the risk involved. If they can invest the 20 per cent requirement by PenCom Act, it will make the capital market more bullish. However, these are pensioners contributing funds and PFAs are taking cautions investing in short-term and long-term investment.”

Analyst at PAC Holdings, Mr. Wole Adeyeye explained that most PFAs positioned and invested in undervalued stocks on the Exchanges, stressing that the yield on short-term instruments was not attractive.

“In the second of last year, the yield on most fixed income instrument decline and in the same period, there was migration from fixed income market to stock market. It was in the same period MTN Nigeria and Airtel Africa were given approval to operate as PSP, ”he said.

He noted that the contribution of PFAs is responsible for surge in domestic investors’ participation in the stock market compared to foreign investors in lately.

He said: “The PFAs always commanded volume and it is expected to impact on domestic investors’ total trade on the Exchange.”