Fund managers raise stake in debt market segment

Ministry of Finance investment secretary Esther Koimett (centre) with Consolidated Bank chairperson Eunice Kagane, and CEO David Wachira when the bank unveiled its corporate bond trading at the Nairobi Securities Exchange last August. Photo/Diana Ngila 

By GEOFFREY IRUNGU

In Summary

• Between 2010 and last year, fund managers were the only category of investors that raised their stake in the debt market segment.
• Data from CMA shows that as at December 2012 some floating corporate bonds were entirely held by fund managers.
• For the period 2010-2012, while fund managers grew their corporate bond holdings by about 1.6 per cent, bankers saw theirs shrink by 6.4 per cent.

Pension funds firmed their grip on the corporate bond market as other market players, especially banks and investment companies, saw their holdings fall in the past three years.

Between 2010 and last year, fund managers were the only category of investors that raised their stake in the debt market segment. Last year, the average holdings by pension funds stood at about 70 per cent having grown by an average of 1.6 per cent during the three-year period.

Data from the Capital Markets Authority (CMA) shows that as at December 2012 some floating corporate bonds — such as Safaricom’s first and second tranches as well as Housing Finance’s second tranche — were entirely held by fund managers.

Corporate bonds, which are more than 70 per cent held by pension funds, include Consolidated Bank’s 2012 Sh2 billion paper, KenGen’s Sh25 billion and CFC Stanbic Bank second tranche floating bond issued in December 2010. Others are Mabati Rolling Mills fixed-coupon bond of 2008, PTA Bank paper of 2007 and Barclays two tranches.

Corporate bonds fit the profile of pension fund obligations as they only need to repay pensioners when they retire and therefore do not need to liquidate them mid-term. On the other hand, analysts say, government securities are held for speculative purposes and tend to be dominated by banks, rather than by pension funds.

“While government securities are held for speculative purposes, investment in corporate bonds should ideally be long term as they’re not actively traded on the secondary market,” said Dyer and Blair Investment Bank report.

(Read: Retirement funds’ assets rise to half a trillion shillings)

For the period 2010-2012, while fund managers grew their corporate bond holdings by about 1.6 per cent, bankers saw theirs shrink by 6.4 per cent.

Investment firms and institutions cut their holdings by 7.1 per cent. Insurers and individuals reduced their stakes by 1.2 and 2.2 per cent, respectively in the three-year period (2010-2012).

One glaring fact is that the pension funds are basically Kenyan and not from other East African countries or foreigners. The data shows local corporate funds held nearly 91.5 per cent of the corporate bonds as at end of December while individuals held nearly seven per cent, leaving the rest to foreigners and east African (non-Kenyan) individuals.

Last year, the National Social Security Fund (NSSF) of Uganda is reported to have shown interest in the Kenyan stock market having enlisted three brokers for trading namely African Alliance, Equity Stockbrokers and Crested Stocks and Securities.

However, NSSF Uganda does not yet seem to have made a mark in the fixed income market as seen in the paltry amount that is held by East African corporate and individual investors at only 0.33 per cent by the end of last December.

Analysts say the pattern of large holdings of bonds is also reflected in the longer-term government paper where pension funds tend to dominate. This allows pension funds to match the maturity of the long-term bonds with the time that obligations fall due for repayment.

In the latest Central Bank of Kenya data, banks held 50.9 per cent of securities while pension funds had 22.4 per cent, insurers 11.4 per cent, parastatals 4.6 per cent and other investors 10.7 per cent.

Analysts say the dropping of banks was influenced by the fact that they had focused on the long end of yield curve. “Bank holdings likely dropped due to a majority of the short-dated bonds issued in early 2012 being matured in the first quarter of 2013.

 “Toward the end of 2012 Treasury started to issue longer term bonds which were picked up by the fund managers who had been starved for duration…although bank holdings may have dropped they were also more active in the T-bill and repo market,” said Alexander Muiruri, a fixed-income trader at African Alliance Investment Bank.