Low stock returns at NSE hit pension funds’ 2014 gains

Money Markets

Nairobi Securities Exchange staff Winny Jones attends to an investor. PHOTO | SALATON NJAU |  NATION MEDIA GROUP

By JOHN GACHIRI, jgachiri@ke.nationmedia.com

In Summary

• Analysts say they expect the three-year bull run may not continue with the same momentum this year and for insurance companies, which are some of the largest investors at the NSE, the slowdown will see them grow more skittish.
• Fund managers expect more investment in alternative sectors such as private equity which can offer pension contributors a reprieve when the equities are not performing well.
• Lower pension returns normally hit hardest employees cashing out in a particular period as their valuations tend to reduce.

Pension contributors will come face to face with the impact of a relatively poorly performing bourse as fund managers unveil significantly reduced 2014 earnings.

The Alexander Forbes Financial Services Investment Performance Survey for 2014 shows the average return for the schemes dropped to 15.5 per cent in 2014 from the previous year’s 21.4 per cent.

“The main reason for the reduction in the performance in 2014 compared to 2013 was the lower performance of equities in 2014 compared to 2013. The average equities return for the year ended December 31, 2013 was 42.8 per cent per annum compared to an average return of 18.7 per cent per annum for the year ended December 31, 2014,” said Michael Vaati, senior actuarial analyst at Alexander Forbes.

“This is reflective of the dip in equity market performance from 44.05 per in 2013 to 19.2 per cent in 2014 as reflected by the NSE All Share Index (NASI).”

The flagship NSE 20 Share Index marginally rose to 5,112.65 points in 2014 from 4,926.97 points a year earlier, a 3.77 per cent increase, but returns still fell having peaked in 2012.

The survey looked at data from 314 schemes with Sh479.4 billion in assets under management.

Schemes on average invested 32.7 per cent of funds in stocks, 9.9 per cent in real estate, 2.9 per cent offshore while the remaining 54.5 per cent went to fixed income investments.

Since earnings season began a few weeks ago, 13 companies listed on the Nairobi Securities Exchange have declared profit warnings signalling a possible dividend drought for contributors.

READ: Dividend drought looms as 12 firms in profit warning

In the meanwhile performance ranged from the sub-inflation to others outperforming the NSE.

“However, an interesting observation is still the significant range in returns with the lowest one-year return being 4.8 per cent and the highest being 28.1 per cent,” said part of the report. “The range over one year decreased when compared to the previous reporting period’s 38.6 per cent (September 2014).”

Analysts say they expect the three-year bull run may not continue with the same momentum this year and for insurance companies, which are some of the largest investors at the NSE, the slowdown will see them grow more skittish.

“We also note the declining returns year-on-year and feel the market is in an overbought position. Insurers are expected to be more selective with their equity exposures or reduce them significantly in 2015,” says an insurance sector report by Exotix, a London-based broker.

Fund managers expect more investment in alternative sectors such as private equity which can offer pension contributors a reprieve when the equities are not performing well.

Nation Media Group and Kenya Power are some of the pension schemes that have lately invested in private equity. The schemes invested through Ascent Capital.

The two put a combined $5 million (Sh455 million) in Ascent Capital, which made its first investment two weeks ago. Ascent invested Sh228 million in Medpharm, an Ethiopian healthcare provider.

READ: Ascent Capital makes first investment in Ethiopian firm

Lower pension returns normally hit hardest employees cashing out in a particular period as their valuations tend to reduce.