Nigerian pension funds double investments in Commercial Papers

  by Uche Ndimele

In a bid to derive increased and better performance and return, Nigerian pension funds turned their focus to Commercial Papers in the month of August.

An analysis of the August 2021 edition of the Pension Asset Summary released by the National Pension Commission (PenCom) shows that pension fund managers more than doubled their allocation to Commercial Papers in August. By the end of July 2021, pension funds allocation to Commercial Papers stood at N62.3 billion, but at the end of August, that figure had increased to N125.2 billion, representing an increase of 101.07%.

The increase is quite understandable as most of the Commercial Papers currently in the Nigerian market have yields ranging from as high as 16% and as low as 2.6%. In addition to the higher yield being offered by the Commercial Papers, they provide pension fund managers with a means of liquidity management since they mature within short periods of time. In spite of the large increase in allocation to Commercial Papers, that asset class only commands 1% of the total pension fund assets.

Source: Quantitative Financial Analytics

Commercial Papers are increasingly becoming a financial management tool in the hands of many corporate entities in Nigeria especially banks. There are currently 22 Commercial Papers being traded in the Nigerian money market, according to information available on FMDQ.

On the other end of the spectrum, pension fund managers divested massively from Real Estate Investment Trusts, REITs, reducing their asset allocation to that investment type or asset class by a whopping 96.85%. As of the end of August 2021, only N2.6 billion of pension fund assets was invested in REITs, a far cry from the N83.4 billion that was invested in REITs in July 2021.

It is likely that the lacklustre performance of Real Estate Investment Trusts is the reason for the asset allocation away from REITs.

What are Commercial Papers?

Commercial Papers are short term unsecured borrowing by large corporations who use them as alternatives to more costly methods of financing. They are basically IOUs issued by large corporations as short-term debt obligations usually for bridging short term financing needs.

Commercial Papers mature within 270 days. Among the Commercial Papers in Nigeria, the longest matures in 104 days and offers 11.9744% in yield