Fund managers in Nigeria’s capital market are favouring equities in their portfolio pick, a decision which further justifies investment analysts’ view that most equities are priced at a discount.

Analysts link fund managers’ prime preference for equities to their rational belief that equities will outperform fixed-income instruments like bonds or treasury bills (T-Bills) over the long term, particularly in the area of returns.

With the regulation of the Securities and Exchange Commission (SEC), fund managers allocate funds to equity-based funds, money market funds, bond funds, real estate funds, balanced-based funds, ethical funds, sector funds, and specialised funds.

Despite being seen as least factor in this trend, analysts believe that liquidity considerations often influence fund managers’ preference for equities, relative to bonds and less-liquid alternative asset classes.

A breakdown of Collective Investment Scheme (CIS) monthly investment schedule as at March 2014 shows that Stanbic IBTC Asset Management Limited, fund managers of Stanbic IBTC Nigeria Equity Fund, allocated 87.18 percent of the fund’s assets to equities, 10.97 percent to money market, while it held 1.85 percent of the assets as cash.

Also, Asset & Resources Management Company Limited, fund managers of ARM Discovery Fund, allocated 59.63 percent of the fund’s assets to equities, 6.70 percent to fixed income, 23.34 percent to money market, 4.91 percent to real estate, while 5.41 percent of its assets was held as cash.

FSDH Asset Management Limited, fund managers of Coral Growth Fund, as at March had 45.23 percent of the fund’s assets allocated to equities, 11.09 percent fixed income, 43.67 percent to money market, and held 0.01 percent as cash.

Also in the review period, Investment One Financial Service Limited, fund managers of Nigeria International Growth Fund, allocated 30.52 percent of the fund’s assets to equities, 1.47 percent to fixed income, 18.48 percent to money market, 40.68 percent to real estate, and held 8.85 percent as cash.

For Legacy Fund, a fund managed by First City Monument Bank, it had 80.97 percent of its investments allocated to equities, 14.10 percent to money market, while it held 4.93 percent of the fund’s assets as cash.

IMB Energy Master Fund, also managed by First City Monument Bank, had 39.75 percent of its assets allocated to equities, 58.87 percent to money market, while it held 1.38 percent as cash.

Rasaq Abiola, market analyst at Associated Discount House Limited, said the relative preference for equities by fund managers (as reflected in the relatively high asset allocation to equities than fixed income assets in balanced portfolios) was driven largely by four factors.

“I do share this belief (equities will outperform fixed income instruments over the long term), especially as the realities of returns on the equities market in Nigeria have validated this presumption,” he said.

According to the analyst, “Up till 2013, the equities market, as measured by the returns on the NSE Index, has rallied 17 percent CAGR over the last two decades (that is a smoothed annualised return of c.17 percent approximately over the last two decades), outperforming extrapolated return on bonds, which is slightly below 13 percent. The outperformance of equities reinforces the theoretical risk premium on required return on equities. Hence, long-only funds, especially long-term funds like pension funds and life insurance funds, are expected to have relatively higher exposure to equities.”

Abiola said equities represented 47 percent of global pension assets, a divergence from Nigeria’s pension funds’ relative aversion to equities (as reflected in the estimated 13 percent exposure to equities).

“That said, in determining asset allocations, fund managers are expected to consider the investment policy statement of the fund, as well as a host of other factors including the fund beneficiaries’ ageing category, income needs (which typically defines redemptions and overall cash outflows) and market expectations,” he said.

Furthermore, as at March 2014, Sterling Capital Market Limited-managed Frontier Fund allocated 61.62 percent of its assets to equities, 37.40 percent to money market, while it held 0.97 percent of the assets as cash.

Chapel Hill Denham Management Limited, which manages Denham Management Millennium Fund, in the period under review allocated 64 percent of its assets to equities, 32.20 percent to money market, and held 3.80 percent as cash. Also in the fund manager’s kitty is Paramount Equity Fund which had 86.38 percent of its fund allocated to equities, 13.37 percent to money market, while 0.25 percent was retained as cash.

UBA Equity Fund, a fund managed by UBA Asset Management Limited, had 58.83 percent of its assets allocated to equities in March, 35.08 percent was allocated to money market, and 6.09 percent was held as cash; while Asset & Resources Management Company Limited, the fund managers to ARM Aggressive Growth Fund, allocated 88.01 percent of the fund’s assets to equities, 1.76 percent to fixed income, 8.23 percent money market, and held 2.01 percent of the fund’s assets as cash.

ACAP Canary Growth Fund, equity-based fund managed by Alternative Capital Partners Limited, allocated 40.29 percent of its assets to equities, 34.05 percent to money market, 24.20 percent to real estate, while 1.46 percent was held as cash.

Cashcraft Asset Management Limited, the fund managers of Anchor Fund, allocated 89.50 percent of the fund’s assets to equities, while 10.50 percent of the fund’s asset as at March was held as cash. Also under the fund manager’s custody is Bedrock Fund which had 87.24 percent of its fund assets allocated to equities, while 12.76 percent was held as cash.

Zenith Equity Fund, which is managed by Zenith Capital Limited, allocated 91.92 percent of its fund’s assets to equities in March, 7.78 percent to money market, while 0.30 percent of the fund asset was held as cash.

Abiola linked the increased preference for equities partly to recent stellar performance of the equity market, “a psychological trap or anchoring effect which may have affected market expectations and attendant asset allocation decisions. Even so such effect may lead to sub-optimal asset allocation, especially at the peak of the market”.

Iheanyi Nwachukwu