Pension Funds investment in corporate securities rise 43.9% to N1.4trn

The Pension Fund Administrators (PFAs) interest in corporate debt securities rose by 43.9 percent Year-on-Year (YoY) in August, 2022, on the back of rising yields environment in the market segment.

The PFAs committed N1.380 trillion at the end of August 2022 as against N960.58 billion in the corresponding period in 2021.

The breakdown shows that the N1.380 trillion invested in the corporate securities represented 9.59 percent of N14.39 trillion total PFAs’ assets within the eight month period.

Details of the PFAs exposure during the month shows that N1.351 trillion, representing 9.36 percent of total investment in corporate debt securities was committed in corporate bonds.

Corporate infrastructure bonds, followed with N23.84 billion, while N6.31 billion was invested in corporate green bonds.

On a Month-on-Month (MoM) basis, they raised their exposure by 0.8 percent from N1.37 trillion in July, while on a year-to-date basis the investment spiked by 38.6 percent from N997.03 billion.

Meanwhile, the PFAs’ investment in money market instruments stagnated at N2.122 trillion.

Financial analysts that spoke to Vanguard on the development said that yields on corporate debt have been much higher in recent times.

They noted that the PFAs reallocate assets to debt securities each time the fundamentals of the economy shifts in favour of debt instruments.

Commenting, Marvellous Adiele, Senior Associate at Parthian Partners Limited, said: “Towards the end of 2021 into this year, we saw corporates taking advantage of the relatively low interest rate level environment to raise funds in the market. “At the time as well, most PFAs in search of higher interest rates and ‘safety’, started to reduce their exposure in the equities space in preparation for expected rate hikes on the back of rising inflation and upcoming elections.

“Funds were redirected to the fixed income space and corporate issues were quite attractive at the time. This resulted in the high stake in corporate debts by the PFAs.”

“It was believed that yields will rise later in the year so at the start of the year was a good time for corporates to raise debt in the market. Most corporates took advantage of that, Adiele added.

Also commenting, David Adonri, Vice Chairman, Highcap Securities, said: “Pension funds are generally risk averse because of the nature of liabilities they must settle. Therefore, they concentrate on less risky investments like government bonds and treasury bills. When the return offsets the risk in corporate bonds, they move in. They rarely invest in equities except in blue chips that meet certain stringent criteria.

“When compared to government debt, yield on corporate debt has been much higher in recent times. The companies issuing bonds like MTN Communication Nigeria Plc, Dangote Cement, Presco Plc and others are blue chips that also meet all pension funds investment criteria for equities. “In pursuit of higher yield, PFAs are channeling investments to corporate bonds which in their estimation satisfy their risk appetite levels.

“Public and corporate bonds are the traditional investment outlets for pension funds. Whenever fundamentals of the economy shifts in favour of debt securities and opportunities arise in the secured corporate segment, PFAs will seize them in order to maximize returns on their investment.”

On the outlook, he said: “Corporate bonds market used to be inactive until recently. Several investors shunned corporate bonds in the past because of failure by many issuers to pay interests or redeem their liabilities.

“However, the situation has changed due to better regulations and involvement of big and credible corporate issuers that are not likely to default. Therefore, going forward, the outlook for corporate bonds as a credible investment outlet for pension funds is very bright.

SOURCE: https://www.vanguardngr.com/2022/10/pension-funds-investment-in-corporate-securities-rise-43-9-to-n1-4trn/