Pension funds raise stake in fixed incomes as returns on shares fall

Pension funds raised their investments in fixed income and guaranteed funds in the second half of last year as they slowed down on new equities investments following reduced returns over the period.

Retirement Benefits Authority (RBA) data for 2014 shows that between June and December fixed income and guaranteed funds asset classes’ investments rose by 40 per cent to Sh94.1 billion and 11 per cent to Sh46.5 billion respectively.

Investments in equities, government securities and property only rose by 2.5, 1.2 and 2.3 per cent respectively over the period.

“The increase in investments in fixed income securities is as a result of floating of bonds in the market that included Britam, CIC, NIC, EABL and Centum Investments,” said RBA.

Guaranteed funds, one of the more conservative collective investment options, assure at least a return of the initial invested amount. They tend to rise in popularity in times of unfavourable capital market performance.

Compared to last December, the industry’s assets under management grew by 13.1 per cent from Sh696.68 billion to Sh788.15 billion, with government securities constituting the largest share at 31 per cent, equities second at 26 per cent and property at 17 per cent.

The volatile markets have meant that fund managers have to be nimble in shifting their new investment options around the different classes in order to maintain favourable returns for fund members.

The allure of fixed income instruments — especially corporate bonds — may be affected, however, this year by an increase in interest rates on offer from banks and on short term government paper.

READ: Saccos, investment clubs pull billions out of treasury paper

“Early on this year the market thought interest rates would remain stable, but they have ended up going up, meaning fixed income has become less attractive,” said AIB Capital chief executive Paul Mwai.

“We have seen the funds moving into short term cash, therefore, with an increase in their bank deposits, treasury bills and two-year bonds, as they avoid longer term bonds.”

Returns from equities dipped last year as the stock market slowed down, with the NSE 20 share index growing at 3.8 per cent compared to 19 per cent a year before.

National Social Security Fund, which maintained a higher than industry average exposure to equities last year (at 41 per cent versus 26 per cent), saw assets under management grow at a slower rate of 2.5 per cent than other top fund managers such as Pinebridge Investments (10 per cent) and Genesis Kenya (9.3 per cent).

ALSO READ: Pinebridge widens asset gap on NSSF to Sh30bn

Alexander Forbes Financial Services (EA) head of operations and administration Shera Noorbhai said, however, that there has been no deliberate attempt to move out of equities by the funds. 

Although the outlook for returns this year remains unfavourable, falling equities prices may also allow for further buys in equities once valuations go below fair value.

“If there is a significant reduction in allocation in equities, schemes may not be able to then restructure their portfolio to the optimal allocations when the markets improve. As it is difficult to ascertain when exactly the equity markets will improve, some schemes may purchase stocks at this point as prices are lower to benefit from the potential upside,” said Ms Noorbhai.

She added that offshore investments have been performing well, boosted by the decline in the exchange rate of the Kenya shilling against the US dollar, while property has been steady in performance.