Why pension funds should diversify portfolios

Liaison Group Managing Director Tom Mulwa [Courtesy]

Kenya’s pension funds have been known to be conservative in investments, choosing low-risk products such as government securities.

Over the years, there has been a push even from the Retirement Benefits Authority (RBA) for the funds to diversify their investment portfolio to include classes such as private equity.

The Covid-19 pandemic brought with it uncertainty, creating a more cautious approach among pension fund managers who also saw retirement savings dip.

Liaison Group Managing Director Tom Mulwa said the portion of assets under management (AUM) in government bonds hit more than Sh1 trillion at the height of the pandemic. This represented 70 per cent of the total AUM.   

“The pandemic unfortunately pushed the pension funds into more conservatism in terms of their investments,” he told Real Estate in an interview.

“We, however, expect the trend to reverse as more private instruments come to market such as the infrastructure and affordable housing bonds.”

The MD said infrastructure and affordable housing capital market instruments were some of the low-hanging fruits for pension funds in diversifying their portfolios.

“They offer both yield and social returns, are nascent and offer better future growth owing to the sector they will invest in,” he said.

In 2021, Kenya pension funds recorded the biggest growth in lending to government.

The Kenya Pension Fund Investment Consortium (Kepfic), whose members control about $2.63 billion (Sh302 billion) in AUM, said its 18 members were seeking to invest over Sh250 billion in large infrastructure projects through the public-private partnership (PPP) model.

They were looking at projects in affordable housing, roads and energy to diversify their asset class and yield better returns for retirees. RBA investment guidelines allow a fund to sink up to 10 per cent of its portfolio in infrastructure and other asset classes, but Mr Mulwa said the uptake is slow.

“The uptake has been slow but interest has been rising owing to lack of instruments that exploit the improved guidelines. However, we saw the Kenya Mortgage and Refinance Company being the first issuance in that asset class getting oversubscribed by up to eight times,” he said.

“Such investments are the next frontier in expanding the capital markets, and indeed we had the first such investment approved for issuance by the Capital Markets Authority (CMA) for funding the completion of the Pangani Affordable Housing Project. And we shall continue to churn out more of such investments.”

In the last few years, the property market has been depressed and this is bound to raise a lot of concern. Some pension funds have started reducing this exposure. “The property market has been depressed but mostly due to oversupply in the upmarket segment,” Mr Mulwa said.

“We expect pension funds to approach this asset class with caution but as more instruments keep coming into the market, their understanding of it will also be cemented and therefore be more comfortable investing in it.

“We have significant exposure in property, and we look to continue investing in impactful value add in future investments.”

Liaison Group is not part of Kepfic but works closely with them on transactions. “There are benefits of being part of it given the nature and size of transaction they can execute,” Mr Mulwa said.