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By Chinwendu Obienyi and Chukwuma Umeorah
Owing to the rise in the year-to-date return of Nigeria’ stock market, pension funds in equities have risen to N1.43 trillion, a pension funds and equities report from Coronation Research has revealed.
The NGX All Share Index rose 28 per cent between the first quarter of 2023 and by the end of October 2023, contributing to the increase in the value of pension funds’ equity holdings.
However, despite the market’s strong performance, pension funds made relatively small additional equity purchases during the period, possibly around N50 billion.
This amount, according to analysts at Coronation Research, is considered minor in the context of a market trading some N7 billion per day owing to the projection that pension funds would increase their equity allocation, given the high returns of equities over the past few years and the drivers that would propel equities higher this year.
It said, “At the end of Q1 2023 Nigerian pension funds had a total N1.04 trillion in equites, 6.07 per cent of their total assets. The latest data from the end of October shows them with a total N1.43 trillion in equities (8.1 per cent of total assets). We assume that these are mainly NGX Exchange-listed equities. Between Q1 2023 and the end of October the NGX All-Share Index rose by 27.7 per cent”.
So, if the pension funds had neither bought nor sold equities during the intervening seven months, we would expect this total to have increased to N1.33 trillion by the end of October. They held only N98.5 billion more than this, some N1.43 trillion in total and, of that incremental N98.5 billion, over half could have come from the effects of receiving dividends and reinvesting them. Perhaps as little as N50.0 billion in additional equity purchases were made. This would have had some effect on driving the market higher but, in the context of a market trading some N7.0 billion per day, not much”
The report noted that given the enormous returns of the NGX ASI over the past four years (2020: 50 per cent, 2021:6 per cent, 2022: 20 per cent, 2023: 41 per cent year-to-date), pension funds still do not invest more in equities because a large sum of money is tied up in funds for people close to retirement, and these must be allocated to low-risk fixed income funds as opposed to equities.
It said that while a large number of new subscriptions to Nigerian pension funds come from individuals under 30 years of age, who could potentially have funds exposed to equities, the overall trend suggests a conservative approach in fund management.
According to the analysts, the way Nigerian pension funds value bonds may be a contributing factor to their conservative stance.
They said, “There is an understandable tendency to hold bonds to maturity, but this can lead to not valuing them according to the mark-to-market method. In a year like 2023, when market interest rates rise and the mark-to-market value of bonds falls, this is important. Knowing the market value of a bond helps compare its value with that of equities.
Not thinking along market-to-market lines avoids making the comparison and contributes, in our view, to the conservatism of Nigerian pension funds. We now revise our opinion, expressed last July, that Nigerian pension funds are ‘warming to equities’ and instead believe that they are as cold towards equities as they ever have been. For some categories of Nigerian pension fund holders, this is a pity”.
Meanwhile, the nation’s bourse is currently experiencing Santa Claus rally in full gear, resulting in the market hitting all time highs.
For instance, since resuming the market, it’s All Share Index (ASI) which opened the trading week at 72,389.23 points, is nearing the 75,000 mark as it closed Thursday’s trading session at 74,289.02 points.
Furthermore, it’s market capitalisation has risen from N39.613 trillion to N40.65 trillion, representing N1 trillion gained so far this week.
