TUE, JULY 18 2023-theGBJournal |In the context of this year’s rally in the NGX All-Share Index, consider the position of Nigeria’s pension funds. Together they manage some N15.6 trillion of assets, which, in theory, is equivalent to 48.4% of the current market capitalisation of the NGX Exchange.
Yet pension funds have historically low percentage allocations to equity. Recent data from their regulator points to them holding, on average, just 6.7% of their assets in equity.
This is despite the positive returns recorded by the NGX All-Share Index in the successive years 2020, 2021 and 2022.
The average return of the equity market over those three years was 25.4% per annum, which rises to 33.5% per annum when one factors in the compounding effect of receiving dividends and reinvesting the gross proceeds back into the market.
That is considerably better than Federal Government of Nigeria (FGN) bond returns, with the Bloomberg Nigeria Local Sovereign Index returning an average 10.7% per annum over the same period.
Why do pension funds shy away from equities? The experience of 2014, 2015, 2016, 2018 and 2019, all them years with negative equity index returns, likely has something to do with it.
However, one might argue that, since the creation of market interest rates well below the rate of inflation in late 2019 (and market interest rates in terms of T-bill yields and FGN bond yields have been lower than inflation ever since) pension funds have had plenty of time to reassess equities.
One factor, in our view, is mark-to-market accounting, or more precisely the lack of emphasis on it.
To hold a portfolio of bonds to maturity makes sense when managing long-term pension assets, but not to mark them to their market value is to miss an opportunity to compare their returns with equities.
This may be the problem, namely that a proper comparison is not being made (although mark to market is formally enshrined in the rules).
We would expect domestic pension funds to increase equity allocations this year, given the very obvious benefits of holding equities. This is one reason why we expect the equity market rally to continue.-Analysis is provided by Coronation Research
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