Undervalued Stocks, Yields on Long-term FGN Bonds Attract FPAs, Stake N12.4tn 

Kayode Tokede

Data from the National Pension Commission (PenCom) has revealed that the pension industry’s Net Asset Value in the Nigerian stock market and FGN Bonds Held-to-Maturity (HTM) rose to N12.4 trillion as of the end of October 2023, an increase of N2.27 trillion compared to N10.13trillion recorded at the beginning of the year.

This means that Pension Fund Administrators (PFAs) operating in Nigeria have increased the value of their assets in the stock market and the Bond market by 58 per cent and 18.95 per cent in the 10 month period, respectively.

The renewed interest is coming on the backdrop of stock market bullish run amid cheap stocks, and lucrative yield on long-term FGN bonds.

Following PFAs exposure in stock market, the Nigerian Exchange Limited (NGX) All-Share Index in 10-month gained 35.09 per cent (currently at 41.24 per cent Year-till-Date (YtD) growth as of December 15, 2023).

THISDAY analysis revealed that the growth of the pension industry’s exposure in the stock market was also in tandem with the performance of the NGX Pension Index, as it rallied by 65.59 per cent in 10 -month and 74.33 per cent YtD growth as of December 15, 2023.

Analysts believe the PFAs and investors reacted sharply to naira depreciation in the foreign exchange market, double-digit inflation rate, coupled with the Central Bank of Nigeria (CBN)’s 18.75 per cent Monetary Policy Rate (MPR) currently at 18.75 per cent.

They expressed that the pension industry has been recording significant growth in recent years, following several regulatory reforms by PenCom, which has seen the number of PFAs in the industry reduce as a result of some mergers and acquisitions.

PenCom in its latest report disclosed that the industry’s total assets gained a whopping N2.67 trillion in 10-month to stand at N17.66 trillion as of October 2023, representing a 17.8 per cent increase when compared to N14.99 trillion as of the end of December last year. 

As of October 2023, total FGN securities that include: FGN bonds (HTM), Treasury Bills, Agency Bills, Sukuk bonds, Green bonds increased to N11.42 trillion, contributing 64.7 per cent to overall PFAs total assets.

On the other hand, PFAs exposure in stock market accounted for 8.1 per cent of the total assets, indicating that the bulk of the industry’s exposure is still towards less risky asset classes.

The pension Industry operates under stringent regulations due to the nature of handling public funds, primarily the contributions of workers meant for their retirement. The PenCom enforces guidelines and limits to ensure the safety and security of contributors’ funds as restrictions are placed on PFAs regarding the allocation of contributors’ funds into volatile assets.

This cautious approach is in line with the need to protect contributors’ savings and ensure that they have a secure and reliable source of income during their retirement years.

To achieve this, the PFAs adopt a mix of fixed and variable assets in their investment portfolios.

This diversified approach takes into consideration the risk tolerance of contributors and the different fund categories within the pension system.

The surge in PFA assets in Nigerian stock market, in tandem with the broader growth of the pension industry, suggests a positive outlook for both pension fund managers and the Nigerian stock market.

Responding to PFAs exposure in the stock market, Chief Research Officer, InvestData Consulting Limited, Mr. Omordion Ambrose told THISDAY that low pricing of some fundamental stocks and portfolio rebalancing contributed to PFAs renewed interest in stocks.

He said, “The PFAs do not take trade in the stocks with a speculative report as they trade long-term. Attractive revaluation led to PFAs renewed exposure in the stock market.”

On his part, the CEO, Wyoming Capital and Partners, Mr. Tajudeen Olayinka explained that PFAs and investors reacted to low prices of some fundamental stocks on the exchange.

According to him, “Prices had become too low to resist, and this happened because of prolonged repricing of securities across markets and instruments, pushing down stock prices below the levels they should ordinarily be.

“It also demonstrates improved earning capacities of some listed companies, as they continue to adjust to variability of costs and cost pressures in the short run, in order to stay afloat. Another factor is the usual positioning and repositioning for year-end rally by investors, as some companies begin to show strong earnings’ prospects ahead of full year results.”

Also speaking, the Vice President, Highcap Securities, Mr. David Adonri acknowledged the PFAs’ role in lifting the stock market, stressing that some PFAs opted to invest in the stock market.

He noted that, “As long as the Nigerian economy continues its current trajectory of stability and growth, the pension industry’s assets in the stock market are likely to remain robust. However, it’s essential to remain vigilant and take a cautious approach. Financial markets can be inherently volatile, and it’s crucial for PFAs to maintain a balanced and diversified investment strategy.”