PFAs pump N9.4trn into stocks in 2021 on unattractive T-bills market yields

A report by the National Pension Commission (PenCom) shows that the total investments into the stock market by pension fund administrators (PFAs) in 2021 increased 51.4 percent to N9.48 trillion from N6.26 trillion reported in 2020.

This increased exposure by the PFAs in just 11 months has been linked to the bid by these investors to escape the unattractive yield environment that prevailed in the treasury bills market in 2021.

Last year, aggressive investments by the PFAs in the stock market impacted significantly on listed blue-chips companies and helped local investors to outshine foreign investors on the bourse. As a result, the Nigerian equities market in the space of 11 months reported total capital gains of about N1.5 trillion, while the market capitalization closed at N22.56 trillion during the period after opening the year on N21.06 trillion.

The data report from PenCom shows the PFAs exposure in the stock market reached its second peak in November 2021 as the total exposure in domestic shares dropped by 3.1 percent Month-on-Month to close at N876.45 billion in November 2021 from N904.74 billion reported by PenCom in October 2021, while exposure to the treasury bills segment dropped to N274.99 billion in November 2021 from N642.03 billion in November 2020.

On the other hand, PFAs investment in treasury bills depreciated by 52.6 percent to N5.49 trillion in 11 months of 2021 from N11.6 trillion in 11 months of 2020.

Analysts have expressed mixed sentiments over this penetration of PFAs in the local equities market. But, the regulation on Investment of Pension Fund Assets of February 2019 stated that:

“A PFA may invest the pension fund assets of anyone Fund in the ordinary shares of a listed company, subject to a maximum limit of 7.5 percent of the issued share capital. Cumulatively, in the six (6) Funds under the Multi-Fund Structure, a PFA shall not hold more than 20 percent of the issued share capital of a listed company.”

Ambrose Omordion, chief operating officer, InvestData Consulting Limited, commenting on why PFAs were aggressively investing in stocks in 2021, said, “The return on stocks on the Exchange was higher compared to T-Bills despite the risk-free investment. When the reward is high amid the risk, investors will always want to invest. PFAs were moving from higher risk to higher reward because, at the end of the day, they will want to grow the account of their contributors.”

“PFAs have 20 percent of their assets invested in equity but most of them have refused to meet the target because of the risk involved. If they can invest the 20 percent requirement by the PenCom Act, it will make the capital market more bullish. However, these are pensioners contributing funds and PFAs are taking cautions investing in short-term and long-term investment,” he said.

A short recap of the activities on the exchange in 2021 indicates that the NGX All-Share Index closed the year at 42,716.44 basis points, up from the 40,270.72bps at the end of 2020, whereas the market capitalization ended at N22.30 trillion in 2021, after appreciating by N1.24 trillion year on year.

A recent foreign portfolio investment report from the NGX shows that the participation of both domestic and foreign portfolio investors in the stock market, after 11 months, show a total of N1.74 trillion in total trade registered, with domestic investors trading N1.34tillion or 77.07 percent, while foreign investors traded N399.18 billion or 22.93 percent in the period under review.

A further check shows that the real return on the short-term instrument (T-bill interest rate minus inflation) in 2021 printed a negative 10.5 percent in its moderation, better than the -14.54 percent reported in 2020.

Meanwhile, yields on the FG’s risk-free T-Bills jerked up to more than a 17-month high of 9.75 percent, after crashing to a 4-year low of almost zero percent in 2020. The rate, however, plunged to an 11-month low of 4.9 percent at the last auction of 2021, as compiled from T-Bills’ primary market auction results for December 29, 2021.

Also, a cursory breakdown of the T-bill auction result for 2021 revealed that while interest rates on the 91-day and 182-day bills were mostly constant at about 2.49 percent and 3.45 percent, respectively, in the review year, the longer 364-day bill, reported the most decline, ending the year at 4.9 percent.

According to fixed income analysts, investors’ interest in T-bills and consequently, the lower interest rate, has been largely due to their unwillingness to take a risk on longer-term instruments due to the expectation of higher interest rates in 2022.

Thus, PFA’s total investment in FGN securities that include FGN Bonds, T-Bills, Agency Bonds (NMRC), Sukuk Bonds, Green Bonds and State Govt Securities, rose by 11.8 percent to N91.47 trillion in 11 months of 2021, from N81.81 trillion in 11 months of 2020.