It has been rightly said that if the bird learns to fly without
perching, the hunter too must learn to shoot without missing. That
proverbial statement seems to be taking root in the pension fund
industry. Since interest rates began and continue to trend southwards,
Nigerian pension fund managers have been reducing their asset allocation
and exposure away from their once darling treasury bills.
As revealed by analysis of the recently released August edition of
the Asset Summary of Nigeria pension funds, Nigeria pension fund
managers have increased their exposure or asset allocation to foreign
money market securities by 214% since the beginning of the year, while
the allocation to treasury bills has decreased by 47% within the same
period.
As at the beginning of the year, only N5.3 billion was invested in
foreign money market securities, but that has increased to N16.9 billion
by the end of August. Comparatively, asset allocation to treasury
bills which had stood at N1.9 trillion as at the beginning of 2020, has
fallen to N1.005 trillion by August end.
Implications for domestic borrowing
Pension fund managers have played and continue to play a big role in
providing funds to the Nigerian Government’s domestic borrowing
initiatives. However, the seeming lack of interest in FGN Treasury bills
due to near-zero interest rates may affect the extent to which the
government realizes its domestic borrowing goals through inflows from
pension fund managers.
Currency Devaluation
The attraction to foreign money market securities may not only be due
to higher interest rates elsewhere, as interest rates seem to be very
low or even in the negative range in some foreign countries.
It may rather be the devaluation of the local currency that is
fueling the interest in foreign securities. Though cross-country
investments are good for diversification and all the benefits that come
from it, it may be necessary for the government to be eagle-eyed on the
Naira exchange rate, as that may lead to more cross-country investments
and some form of capital flight with all its negative implications.
Commercial Papers
Another asset type that has benefited from the realignment or
allocation of assets by pension fund managers is Commercial Papers. By
the end of 2019, pension fund managers had allocated N116.8 billion to
Commercial Papers but that has increased by 110% to N245.2 billion by
the end of August 2020.
A commercial paper is very much like a money market security – a form
of an IOU or promissory note issued by large corporations, who need
funds required to finance their short-term operations.
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