Low fixed income yields dampen Q2 pension returns from equities

Pensioners enjoyed better returns from equities compared to other asset classes in the second quarter but poor fixed-income returns meant lower take compared to previous period.

A report by Alexander Forbes Financial Services (AFFS) shows large pension schemes – holding assets worth more than Sh1 billion each – leveraging on bigger investment pots, enjoyed higher returns from equities at 24.2 per cent compared to the smaller ones that averaged 23.4 per cent.

But average return of the participating schemes was 14.6 per cent over one year to June, lower compared to the corresponding 26.2 per cent seen in June 2013, but above the annualised 13.9 per cent over a three-year period.

The firm says the average scheme invests 31.7 per cent of its assets in equities, 57.4 per cent in fixed income, 7.9 per cent in property and 3.1 per cent offshore.

“The average equity returns for all schemes over the year to June 2014 was 23.7 per cent, which was an improvement compared to 14.2 per cent as at March 2014. The average fixed income performance posted a drop at 8.5 per cent as at June compared to 16.9 per cent as at March 2014,” said Alexander Forbes.

“Offshore performance also posted an improvement as at June at 19.9 per cent compared to nine per cent as at March 2014.”

Yields on Treasury bills in the three months to June were on average at around 8.8 per cent, lower than first quarter when the rate averaged 9.1 per cent.

The NSE has in the meantime been returning a higher rate of growth this year, with the All Share Index having gained 12 per cent between January and June and climbing 18 per cent in the year-to-date.

READ: NSE climbs to six-year high in rush for blue chips

According to data from the Retirements Benefits Authorities (RBA), blue chip counters in manufacturing, banking and telecommunications comprise the bulk of pension scheme equity investments, taking up two thirds of the entire equities portfolio.

Constituent counters of these sectors such as Safaricom, EABL and KCB were hit by foreign capital flight in the first quarter, but have since seen their prices rebound, with year-to-date gains currently between three and 23 per cent.

“The Nairobi Securities Exchange entered a Bull market in April 2012, with the All Share rallying more than 115 per cent over 36 months.

“The recent acceleration confirms the bona fides of the market and is signalling that equities remain a healthy investment,” said analyst Aly Khan Satchu.

The Alexander Forbes analysis indicates that over the three-year period to June 2014, investments in equity achieved an average annual return of 21.6 per cent, fixed income 10.8 per cent and offshore investments 4.4 per cent.

The invested assets of the 381 schemes participating in the survey totaled Sh500.7 billion.

However, the range of returns among the surveyed schemes remains high, with the lowest one-year return being 3.8 per cent and the highest 27 per cent.

“The range of returns increased against the previous period and does support the need for further analysis of the impact of asset allocation, mandates and asset management styles and approaches,” said Alexander Forbes.