Nigeria’s sovereign wealth fund (SWF), saw profits slump by 59 percent in the first quarter of 2017 with costs rising even as global risk assets rallied following the November election of United States President Donald Trump.
The fund managed by Nigeria’s Sovereign Investment Authority (NSIA) had assets of $2 billion in September according to Uche Orji, the newly reappointed chief executive officer (CEO).
For the first three months through March 2017, NSIA’s profit after tax profits dipped to N1.79 billion from N4.43 billion recorded the previous year.
Drilling down into the figures shows total operating profit dipping by 54.24 percent to N2.21 billion in the period under review as the fund recorded N357.84 million of foreign exchange losses.
According to NSIA, the Net foreign exchange loss represents loss on monetary assets of the Authority during the period as a result of fluctuation in the exchange rate.
“The recent devaluation may have affected the performance of the company or Fund,” said Ayodeji Ebo, Managing Director/CEO of Afrinvest Securities Limited.
“The NSIA is more focused on long term investment which I feel in the nearest future will generate higher returns. I see the company enjoying returns on some of those projects,” said Ebo.
The profit slide was also exacerbated by N669.07 million net loss on financial assets in Mach 2017 as against a gain of N3.55 billion in the previous period.
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NSIA’s costs are rising at a higher rate than income as cost to income ratio (CIR) increased to 115.74 percent in the period under review as against 8.74 percent in the previous period.
Total operating and administrative expenses surged by 593.17 percent to N2.94 billion as at March 2017 from N423.8 million in the earlier period.
Drivers of operating and administrative expense items, include personnel expenses which increased by 18.4 percent to N331.45 million from N279.8 million, other professional fees which jumped by 569 percent to N243.55 million compared to N36.4 million and general and administrative expenses which rose by 184.7 percent to N135.42 million from N47.56 million in 2016.
Costs were also impacted by a N2.15 billion charge for cost of sales of Fertilizer.
Orji said in September that authority has revamped 11 fertilizer-blending plants so far this year as part of President Muhammadu Buhari’s initiative to boost farming output and reduce the economy’s dependence on oil, which contributes two-thirds of government revenue.
The 11 plants delivered 6 million bags of fertilizer at 30 percent below market prices, according to the information ministry.
The lower returns of the NSIA compares unfavourably with other sovereign wealth funds.
Abu Dhabi Investment Authority (ADIA) 20-year and 30-year annualised rates of return in U.S. dollar terms were 6.1 percent and 6.9 percent respectively in 2016.
That compared with 6.5 percent and 7.5 percent respectively in 2015.
Saudi Arabia’s sovereign wealth has an annual return of between 3 to 9 percent as it targets an annual return of 8-9 percent by 2025-2030.
Norway’s SWF has generated an annual return of 5.9 percent since January 1998, a figure that is reduced to 4 percent when management costs and inflation are included.
In 2016, it clocked a 6.9 percent return worth 447 billion Norwegian kroner ($57 billion).This year is shaping to be even more prosperous. The fund made 499 billion kroner ($63 billion) in just the first two quarters of 2017.
Data from the Full Year 2016 results of the NSIA shows that a more conservative portfolio may have led to poor returns compared to peers or benchmark despite being in a period of rising global asset prices.
The Futures Generation Fund (FGF) component of the NSIA which is allocated 40 percent of NSIA assets had an absolute return allocation (19.6%) which underperformed in 2016, and it is unclear if this position had been unwound as at the Q1, 2017 period, Businessday analysis of the funds Full year 2016 report shows.
“The absolute return allocation of the FGF as a whole contributed -1.4% versus 5.5% for the HFRI Event-Driven (Total) Return Index. This poor performance was driven by one manager in this strategy whose stock picks and market-neutral exposure detracted after markets rallied contrary to the manager’s expectation,” the NSIA said in its full year 2016 annual report.
Expense ratios for the funds being managed by the NSIA also seem to be high as the 3 funds which include stabilisation fund, FGF and Infrastructure fund incurred operating and administrative expenses of N100.6 million, N132.5million and N139.86 million respectively on operating income of N708.4 million, N1.63 billion and N1.991 billion data from Q1, 2017 results show.
The fund also ramped up exposure to Nigerian treasury Bills to the tune of N985.7 million in 2017 from zero position in the Q1, 2016 period.
“The low returns could be as a result of portfolio selection. They invested in Nigeria’s local securities because it has a high return compared to Europe’s,” said Johnson Chukwu, Managing Director and Chief Executive Officer (COE) of Cowry Asset Management Limited.
“They should adjust and rebalance their portfolio selection in order to get a higher returns, but should be conscious of risks associated with high return instruments,” Chukwu said.
BALA AUGIE
