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Fund managers bet on pool investments

Financial Standard
 All decisions on what assets the industry will be investing in will then be made at this level and approved by the players. [iStockphoto]

Pension and fund managers have resolved to form a consortium that would dictate what assets they will invest their clients’ money into.

The resolve, whose strategy can be seen as a move to protect their turf, is meant to enrich their investment decisions by ensuring they have an impact on the economy.

The strategy forms part of the resolution that capital managers reached on Thursday last week, following a meeting called by the Association of Pension Trustees and Administrators of Kenya (Aptak).

The meeting was attended by pension and fund managers, investment bankers and brokers, National Social Security Fund (NSSF) and had representation from the Nairobi Securities Exchange (NSE).

The resolutions of the round-table meeting come in the wake of the dwindling performance of the capital markets which is linked to the exodus of foreign investors due to the improved interest rate of the US dollar.

Aptak President Hosea Kili said the meeting was meant to engage industry players and brainstorm solutions to the challenges being faced.

He said the market performance has dropped by a significant amount due to the high-interest rate regime and capital flight by foreign investors, adding that the decision for the industry to approach the market as a ‘consortium investment’ is meant to ensure impactful investments.

All decisions on what assets the industry will be investing in will then be made at this level and approved by the players.

“All pension schemes will agree through Board of Trustees and then they will make targeted investments which will have an impact in our country,” he said.

Real estate, through Real Estate Investment Trusts (Reits) as the preferred vehicle, bonds and stocks are the assets the fund managers have locked as their targets. Our different ways of investing are not helping us,” said Mr Kili.

He said the industry will focus more on long-term investment options as they raised a regulatory issue that requires fund managers to submit quarterly reports. “This gives a lot of pressure that they intend to invest long-term. This is affecting our fund managers and also customers,” he said.

Fund Managers Association Chairperson Patrick Kariuki, said this approach will allow them to also align with the government’s long-term goals.

“As you are aware, one of the goals of the Bottom-up Economic Transformation Agenda (BETA) is affordable housing and that is one of our targets,” he said.

NSE Chief Operating Officer David Wainaina said the exchange did present its case for preference which he exuded confidence of being considered.

“These are the owners of capital,” he said. “This is a strategy that has been tried and tested.” The resolutions will also involve the formation of a task force with industry players which will come up with solutions that will be presented to regulators for possible approval.

It is not clear so far how much this move will unlock in the market even as Aptak revealed they have Sh1.6 trillion at the moment under their management. 

Pension fund investments are guided by the Retirement Benefits Authority (RBA) which provides the investment regulations and policies.

For example, immovable property has a threshold of 30 per cent as well as Reits incorporated in Kenya and approved by the Capital Markets Authority (CMA).

Private equity and venture capital are capped at 10 per cent, debt instruments for infrastructure (10 per cent), fixed deposits as guided by the Banking Act (30 per cent), listed corporate bonds, mortgage bonds and fixed income instruments (20 per cent) and commercial paper (10 per cent).

Pension funds can also invest in East African Community Government Securities and infrastructure bonds issued by public institutions with an exposure of 90 to 100 per cent

A half-year industry report from RBA shows retirement benefits assets under management increased by 8.09 per cent to Sh1.7 trillion in June 2023 from Sh1.6 trillion in December 2022.

“The growth of the assets during the period is partly attributed to the enhanced contributions to the mandatory scheme, NSSF, which began in earnest in February 2023 following the court appeal ruling and improved performance of the offshore assets arising from exchange rate fluctuations,” the report by RBA states in the September 2023 report.

The report states that the fund managers and approved issuers held the majority of the assets amounting to Sh1,598.68 trillion.

The assets under management included Sh261.65 billion of NSSF funds. Even as Mr Kili noted the detrimental effect on the economy when pension funds invest more in government paper, with the current returns being 18 per cent, the RBA report shows this asset class is still lucrative to the industry.

The report says the quoted equities recorded a negative growth of 19.14 per cent with the investments dropping from Sh215.24 billion in December 2022 to Sh174.05 billion in June 2023.

Negative growth

Listed corporate bonds recorded a negative growth of 3.64 per cent with assets declining from Sh7.82 billion in December 2022 to Sh7.54 billion in June 2023 while immovable property recorded a marginal negative growth of 0.85 per cent with investments declining from Sh284.42 billion in December 2022 to Sh246.31 billion in June 2023.

“The schemes continued to invest heavily in government securities which accounted for 47.79 per cent of the total assets under management. This was followed by guaranteed funds which accounted for 19.19 per cent,” the report says.

Investments in immovable property and quoted equities accounted for 14.46 per cent and 10.22 per cent of the total assets under management respectively.

The report documents that most of the investments during the first half of the year recorded some growth except quoted equities, immovable property and listed corporate bonds.

“The investment trend tends to shift towards “safer” or less volatile assets such as government securities, guaranteed funds and fixed deposits,” the report says. “The investments in fixed deposits increased sharply by 60.25 per cent from Sh42.23 billion in December 2022 to Sh67.68 billion in December 2023 while the offshore investments increased from Sh14.13 billion to Sh23.13 billion in June 2023 recording an increase of 63.65 per cent.”

It adds that investment in alternative assets such as private equity and venture capital continued to be attractive to schemes due to their diversification effects, which increased by 50.76 per cent during the period, rising from Sh3.56 billion in December 2022 to Sh5.37 billion in June 2023.

“Investment in Reits increased sharply during the period - from Sh283 million in December 2022 to Sh10.64 billion in June 2023 due to the addition of unlisted Reit - Acorn Student Accommodation Development Reit amounting to Sh3.45 billion.

This was previously captured as an investment under the “any other assets” category and the investment in the Laptrust Imara Income Trust amounting to Sh6.92 billion,” the report says.

According to the report, retirement benefits assets are expected to grow in the second half of 2023, owing to the rebound of the economy, which it said has remained resilient despite the adverse effects of domestic and external shocks.

“However, the growth will be slow due to the high interest rates and fluctuating exchange rate. The schemes are expected to continue to invest in alternative assets given the broadening of the allowable investment categories and also take advantage of the government infrastructural projects,” says the regulator in the report.

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