Thursday,March 05, 2020 /09:20 AM / By FBNQuest Research / Header ImageCredit: FBNQuest

Wenote from Pencom's latest monthly report that the assets under management (AUM)of the regulated pension industry in Nigeria increased by 18.3% y/y in Decemberto N10.22trn (US$27.9bn), and by 2.3% m/m. The share of equities in AUM peakedat 16% in 2007, ie before the blowout on the NSE. It then slumped becauseinvestors were assured of double-digit returns on fixed-income assets. Thosereturns have recently halved in many cases (see below), which should have addedto the case for equities. Investors have been slow to move, however.

The PFAs' holdings of FGN paper amounted to 71.8% of AUM in December,compared with 70.8% the previous month. There was, however, a clear shift toFGN bonds, the share of which picked up from 48.6% to 52.4%. This was matchedby a decline in holdings of NTBs from 21.2% to 18.4% of the total.

The shift was caused by the crashing of yields on NTBs following the CBNcirculars of late October that barred domestic non-bank players (notably thePFAs) from its open market operations (OMO). As their bills issued within OMOmature, fund managers obviously have to make alternative investments.

Initially they favoured the NTBs: those yields buckled and many PFAsturned their attention to the FGN bonds. The monthly auction in January saw arecord total bid of N625bn including N372bn for the long bonds popular with thePFAs for matching purposes. In turn, the bond yields have narrowed, to +/-10%in mid-curve.

The investment landscape is now changing rapidly after a long period ofsomnolence. PFAs have several outlets for their maturing OMO bills, including:FGN bonds despite the sharp yield compression; equities despite the unexcitingnarrative on growth and market-friendly reforms; and the FGN's mooted N2trninfrastructure fund. There are weaknesses in each argument.

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