Thursday, August 17, 2017 7:00AM / Quantitative Financial Analytics
Nigerian Pension funds continue to show resilience and strength so far in 2017 as they gather improvements in performance but it seems that no matter how hard they try, they are lagging the performance of pure equity portfolios. All the major indexes in Nigeria are recording mouth-watering performances in the upper double digits except NSE Insurance and NSE Oil and Gas Index whose performance is of single digits. While NSE Banking index has generated a YTD return of 64.07%, NSE Pension index is showing its strength at 58.48% YTD return. Not to be out done, the NSE Premium index is standing tall with a YTD return of 51.64%, the NSE Stock Index 30 is also doing the same with a return of 45.44%. The NSE Industrial, Lotus Islamic and NSE Consumer indexes are proud of themselves with YTD returns of 42.27%, 30.66% and 37.36% respectively but the Allshare index is beating them with its YTD return of 41.78%. The fundamentals of the economy are so strong as reflected by the Nigerian equity market that the S&P Nigerian Sovereign index is doing better than the S&P African Sovereign Index. It may take the efforts of financial historians to remember the last time the market did so good.
Even among individual equities that trade on the floor of the exchange, a great majority have rewarded their holders with fantastic returns. May and Baker has recorded a 261% return YTD, Stanbic IBTC Holdings, 168.24%, Fidson Healthcare Plc, 146.54% to mention but a few although there still are a few like MRS Oil, Forte Oil plc and 7-Up Bottling Co that are still making negative returns.
For those saving for their retirement through various pension schemes, there is the temptation to find out how good their pensions are doing in the light of the performance of the equity market. To such investors, my take on that question is that the pension funds are doing good but not so good comparatively. Among the pension funds in the RSA category, only 6 can boast of double digit YTD returns with APT RSA fund taking the lead with 15.37% followed by AIICO pension RSA fund with 10.02%, according to analysis by Quantitative Financial Analytics. The good news however is that all the RSA funds are showing positive YTD returns of some sort. The story is the same among the Retiree fund category in which APT Pension fund leads the YTD return ranking with 14.94% followed by Crusader Pension Retiree fund with 12.81%. Like the RSA funds, all the Retiree funds show positive YTD returns.
There is no doubt that the Nigerian pension fund industry has been very resilient through thick and thin. When the market headed south in Q2 2016, pension funds held their own and put some smiles of the faces of retirement minded investors and savers. However, Pension funds seem to be missing out on the current equity market performance mostly because of the asset classes pension funds are allowed by regulation to allocate their capital to. In keeping with such regulatory requirements, Nigerian pension funds have only about 7.45% of their assets in the domestic equity market, according to analysis of latest data from Pencom. With such little exposure to the equity market, it is difficult not to be hurt when the equity market performs good like it is doing now.
Another reason why pension funds are missing out on the largesse of the stock market is the low correlation between the stock market (Allshare index) and pension funds. Per analysis conducted by Quantitative Financial Analytics, many of the pension funds have low correlation to the market. Correlation is a ratio that measures the degree to which asset types like stocks, bonds, pension funds or mutual funds move up and down at the same time. When two asset types are highly correlated, they tend to move up or down together but when they have low correlation between them, then they do not gyrate up or down together as much as when they are highly correlated.
In another analysis, Quantitative Financial Analytics measured the relationship between the stock market and pension funds by calculating the beta of the pensions in relation to the Allshare index. The analysis reveals that Nigerian pension funds have very low beta with respect to the equity market. The result of these analysis is not surprising given that the asset allocation strategies of the pensions is over weight in bonds and other fixed securities. The implication of this is that the pension funds do not move in tandem with the market. It is agreed that pension funds need to be pursue conservative investment strategies to reduce the risk of loss of investors’ capital, it may be reasonable to increase exposure to the equity market in such a way that returns can be maximized while controlling risk.
Pension fund investors should however take solace in the fact that what they are missing in high performance they ae gaining in low risk. A risk analysis conducted by Quantitative Financial Analytics using the standard deviation of returns for pension funds and equities shows that the pension funds are much less risky than equities. While the seemingly riskiest pension fund has a standard deviation of 1.37, the corresponding number for equities is 31.58, according to the analysis. Investment performance analysis experts are united in the opinion that risk adjusted returns are more meaningful than absolute returns. So pension fund investors can go to sleep in comfort knowing that what they lost in capital appreciation they gain in capital preservation.
1. The Unspectacular Growth of RSAs
2. 7.59m Nigerians Are Registered Under the National Pension Scheme as at Q2’17 - NBS
3. Decent Growth Posted by The PFAs
4. PenCom issues reminder on requirement for annual certificate of compliance
5. Voluntary Pension Contribution: Arresting the tax leakage from withdrawals?
6. APT Pension Fund continues its impressive track record of performance
7. Improved flexibility from PENCOM
8. Low Level of Pension Penetration in Nigeria
9. Nigerian Pension Funds continue to reduce exposure to Equities
10. Sound Asset Growth of the PFAs Pension funds post strong first-quarter return