Pension fund managers bet on risk free property investments

Britam Insurance Regional Director Stephen Wandera(right) says the property market is predictable and more stable. [PHOTO: Courtesy]

By JACKSON OKOTH

Kenya’s booming property market is proving to be a popular investment option for most pension fund managers.  It now rivals returns from the equity market.

Britam Insurance Regional Director Stephen Wandera said the property sector is followed closely by equities, which have fared equally well against the backdrop of turbulent times on the international market.

“The property market has provided the best returns over the last couple of years compared to equities,” said Wandera, who is in charge of Britam’s insurance businesses in Kenya, Uganda, South Sudan and Rwanda.

Pension survey

Latest figures are however not available until end of the year, when insurance companies declare their performance and returns credited.

But the Pensions Schemes Investment Performance Survey by Actuarial Services Ltd puts equities as the best performing asset category.

The survey dated June 30, 2012 showed that equities have  a returns of 12.6 per cent up from 10.7 per cent in the previous quarter. The report places offshore investments as the worst performing asset category with returns of 0.9 per cent.

Fixed income registered returns of 6.4 per cent from 6.1 per cent in the previous quarter. This out-performed its benchmark of 3.3 per cent. Pension schemes are long-term investments structured with a 10, 20, 30 years or more horizon.

 For this, the preferred asset classes are long term. “Highest attraction is mostly in equities and property since their return grows with time and at a rate that mirrors inflation in the long term,” said Wandera. “You will find the bulk of most investments by fund managers biased towards these two asset classes.” 

This is in addition to government securities, especially five or ten-year bonds, which are also a good avenue.  The plan is always to make investments that beat inflation.

In investment circles, there exist five asset classes that fund managers deal with. They include government securities such as Treasury Bills and Bonds, cash-bank deposits and offshore investments.

The market regulator allows up to 15 per cent total value of a scheme’s worth to be invested offshore.  Then there are equities and the property market. “Equities offer predictive features that indicate performance thereby allowing the fund managers then to buy or stock up for a possible high return,” said Wandera.

Greater risks

“Watch market performance over a long while and look at the industries they drive; fund managers then manage returns.”

 On the one hand, the default risk in equities is that a company could collapse and leave investors with a share that has no worth. Property on the other hand has stable returns. However, a downward trend in the economy and a rise in interest rates could result in a drop in property value. With property also comes legislative risk. “A case in point is the property gains tax which, once effected, will reduce the returns for developers and owners,” said Wandera.

Government securities have returns that are lower than inflation, making them attractive due to their guaranteed returns and a fixed rate which is both a merit and a demerit.

 “Cash returns are always lower than inflation and come with a guarantee, thanks to legislation on deposit protection funds in the event that a bank collapses — which is really a remote possibility,” said Wandera.

Offshore investments come with a currency risk — if the Kenya shilling strengthens, fund managers lose.