Nigerian pension funds have shown a renewed interest in equities, with their holdings surging by 47.5% in just seven months, reaching a total of N1.3 trillion. This shift in investment strategy reflects a positive response to four consecutive years of positive equity returns on the Nigerian Exchange Limited (NGX).
Key Insights:
- Growing Confidence in Equities:
- Nigerian pension funds have demonstrated a growing enthusiasm for equities in 2023. From January to July, their total assets under management (AUM) increased by 13.8% to N17.1 trillion. The value of their equity holdings saw an even more significant growth of 47.5% to N1.3 trillion.
- Effective Stock Selection:
- Analysts suggest that this substantial increase in equity holdings may be attributed to a combination of net purchases, potentially amounting to around N200.0 billion. This indicates that pension funds are not only skilled in stock selection but were also net buyers of equities.
- Impact on Asset Allocation:
- The surge in equity holdings led to a rise in the proportion of equities in the AUM of pension funds from 6.1% to 7.8%.
- Preference for Liquid Stocks:
- Given the substantial size of pension funds, they are likely to focus on the most liquid stocks, which are typically found in the banking sector. Bank stocks are known for their high free floats relative to their total equity, making them appealing to pension funds.
- Historical Comparison:
- In contrast, in 2022, while the total assets of pension funds increased by 11.7%, their equity holdings actually experienced a slight decline of 0.8%. This shift in behavior towards equities highlights a notable change in their investment strategy.
- Return on Equities vs. Bonds:
- Pension funds may have observed that equities have outperformed bonds in recent years. The cumulative return from the NGX All-Share Index in 2020, 2021, and 2022 exceeded inflation rates, indicating the potential for higher returns in equities.
- Outlook for 2023:
- The comparison between bond and equity returns suggests that 2023 is poised to continue this trend, further reinforcing the attractiveness of equities for pension funds.
Conclusion: The significant increase in equity holdings by Nigerian pension funds highlights their growing confidence in the equities market. This shift in investment strategy has been influenced by positive returns in recent years, positioning equities as a viable option for pension fund portfolios. The trend is expected to continue as pension funds seek to maximize returns on their investments.
