Transforming Investment Strategies in Nigeria’s Pension Industry

Explore how Nigeria’s pension industry is boldly diversifying investments for optimized returns and efficient risk management.

Exploring the Surge in REITs Investment over Four Years

The investment strategies in Nigeria’s pension industry are undergoing a remarkable shift from traditional fixed-income instruments to a diversified mix of alternative assets.

The industry’s attention is now directed towards infrastructure funds and both open and closed mutual funds.

With rising inflation and interest rates, pension funds are reassessing their portfolios, looking to optimize returns and manage risk more efficiently.

Changing Landscape of Investment Strategies

The Impetus for Change

As of April 2022, Nigeria’s inflation rate was an alarming 22.22%, prompting the Central Bank of Nigeria to increase interest rates to 18.50%.

Consequently, the pension industry is finding traditional fixed-income instruments increasingly unattractive.

Meanwhile, the year-to-date returns for pension products for RSA holders have hovered between 3.57% and 4.45%.

Asset Management Trends

The National Pension Commission (PenCom) released data on the total asset allocation for the pension industry as of 31 March 2023, revealing significant growth.

The total assets under management (AUM) have seen a robust increase of 80.4% between December 2018 and March 2023, from N8.64 trillion to N15.58 trillion.

In contrast, alternative assets have experienced a remarkable growth of 64.15%.

Despite such growth, alternative assets still account for only 3.20% of the total AUM, signaling an immense untapped potential.

The Rise of Alternative Assets

Infrastructure Funds

Since 2018, the allocation to infrastructure funds has soared by over 560%, from N18.51 billion to N123.4 billion as of March 2023.

The steady growth from 6.10% in 2018 to 24.75% by March 2023 in these investments underlines the appeal of long-term, stable income generation, particularly for sectors such as transportation, logistics, energy, oil & gas, and information and communication.

Open/Close Ended Mutual Funds

Open/Close Ended Mutual Funds have also seen phenomenal growth, exceeding 900%.

The allocation to these funds has fluctuated between 2.79% and 18.15% over the observed periods.

It’s noteworthy that infrastructure funds also feature within this category, but with a different structural arrangement.

Real Estate Investments

Real Estate Investment Trusts (REITs) and direct real estate properties have also attracted pension funds.

In the last four years, REITs have increased from just under 1% to 5.22%.

On the other hand, while the absolute value of investments in real estate properties has remained above N200 billion since 2018, its percentage value has decreased from 75.67% to 43.81% due to the overall growth of the AUM.

Private Equity Funds

Private equity funds allocation ranged from 7.90% to 11.63%, demonstrating their potential for higher returns and diversification.

Despite a fall to 8.85% in March 2023, this asset class has consistently grown over the past four years.

Future Implications

The observed shifts demonstrate the flexibility of pension funds to adapt to market conditions and their pursuit of diversification strategies.

This shift signifies a broader recognition within the pension industry of the need to diversify investment portfolios beyond traditional fixed income instruments.

With the volatile inflation and rising interest rates, pension funds are moving towards alternative investments that can potentially offer higher returns and act as a hedge against inflationary pressures.

Moreover, the growth in infrastructure funds indicates a positive sentiment towards long-term investments in key sectors.

These investments offer stability, contribute to the country’s economic development, and facilitate job creation.

Although direct real estate investments have historically been a significant component of pension fund portfolios, there’s a noticeable shift towards REITs as the preferred exposure to the sector.

As the investment landscape evolves, pension funds are likely to continue exploring alternative assets to optimize their returns and manage risk effectively.