Pension funds and asset managers are buying government bonds and commercial paper to recoup losses from the country’s stock market, down 60 percent from its March 2008 peak.“A year ago we might have been 60-65 percent in equity but now we’re 40 percent in equity and the rest in fixed income,†said Kenneth Spurling, head of FSDH, which manages N50 billion.
He said the focus had switched to fixed income because bond yields were higher than dividend yields on the stock market.
The nation auctioned N50 billion in 20-year, 5-year and 3-year sovereign bonds earlier this month at its sixth debt auction of the year.
The 20-year paper, the longest tenor government bond offered by Nigeria, introduced last November to deepen the debt market, attracted a marginal rate of 12.33 percent, up from 11.5 percent in April, according to the Debt Management Office.
Dividend yield for equities are typically around 6 percent.
The increased liquidity brought about by higher investment by Nigerian funds and banks in government debt has made it easier and more attractive for foreign investors to access the bond market, analysts say.
“The decline in equities related to rising interest rates has caused foreign investors to look more closely at this development, and become more aware of the attractiveness of fixed income,†said Richard Segal, London-based Africa specialist and head of macroeconomic research at UBA Capital.
The Federal Government’s 20-year paper established a benchmark yield curve, allowing some of the state governments to take advantage of the investor interest in debt and issue their own bonds.
Imo State is the latest to do so, this week issuing N18.5 billion worth of 7-year bonds with a 15.5 percent coupon to part finance water and critical road projects as well as the construction of a new conference centre and financing government’s equity investment in Imo Wonder Lake.
Lagos State plans to issue a second naira bond this year after its N50 billion issue in December was oversubscribed. The funds are to be used for infrastructure.
The asset management industry is dominated by pension funds, which came into existence in 2004 as part of reforms meant to deepen Nigeria’s financial markets. The pension funds say they account for up to 70 percent of funds under management.
Industry sources say the amount managed by pension funds grew to over N1 trillion in the first quarter of the year from around N600 billion a year earlier.
“We have no more than 10 percent of our fund in the stock market but previously our exposure was between 18 and 22 percent,†said Adeniyi Falade, the head of Crusader Sterling Pensions.
Falade, who declined to say how much his fund had under management, said his investment in the money market — commercial paper and bank deposits — was capped at 35 percent while the rest was invested in government bonds.
Pension funds in the country are allowed by regulation to invest 100 percent of their funds in government bonds and can construct portfolios with varying limits of not more than 25 percent in equities and 35 in the money market.
They are not allowed to invest outside the country.