What you need to know:
- Pension funds now hold Sh485 billion worth of government debt compared to Sh389 billion at the beginning of the year.
- The holdings in fixed-income instruments have since gone up, as equities came down in the midst of a bear market.
Pension funds have increased their holdings of government securities by nearly Sh100 billion this year as they continue to migrate from the poorly-performing equities market.
The latest data from the Central Bank of Kenya (NSE) shows that the funds now hold Sh485 billion worth of government debt compared to Sh389 billion at the beginning of the year.
They now hold 26.9 per cent of the total government debt of Sh1.8 trillion, compared to January when they held 25.4 per cent of the debt, which stood at Sh1.53 trillion at the time.
According to data compiled by financial services firm Alexander Forbes, pension funds had on average 70.5 per cent of their assets in fixed income at the beginning of the year, 25.1 per cent in equities, 3.2 per cent in property and 1.2 per cent in offshore investments.
The holdings in fixed-income instruments have since gone up, as equities came down in the midst of a bear market.
“The average scheme’s investment in equity fell to 22.4 per cent whereas fixed income and property both went up to 72 per cent and 4.5 per cent respectively. Offshore remains at 1.1 per cent,” said Alexander Forbes in the 2016 half-year pensions industry survey.
The stock market has since March last year been on a negative run, with the main NSE 20 share index down more than 14 per cent year to date.
On the other hand, interest rates on short-term government securities have averaged between seven and 12 per cent this year, while longer-term bonds have offered between 12 and 15 per cent in yields.
Although pension funds by nature are long-term investors not given to knee jerk reactions to markets, their portfolio managers still do gradual shifts from investment classes that give low returns due to the obligation to show returns for investors through their trustees.
The Alexander Forbes survey shows that the annualised median return from fixed income by June 2016 was 13 per cent, compared to a return of -14.5 per cent from equities and -7.1 from offshore investments.
The pension funds also invest in corporate bonds, which usually give a higher return in comparison to government securities due to their added risk.
Their investments in the fixed-income segment are likely to go even higher before the end of the year given that interest rates are trending upwards in reaction to the government’s higher domestic borrowing target.
Last week, the rates on the 91, 182 and 364-day T-bills was 8.6, 11 and 11.9 per cent respectively, from 8.5, 10.8 and 11.7 per cent the previous week.
The auctions were oversubscribed by 18.9 per cent last week, and by 83.5 per cent the previous week.
“Interest rates have bottomed out and we are currently witnessing upward pressure on interest rates given government borrowing for the new fiscal year,” said Cytonn Investments in their latest weekly markets brief.
The pension funds are second only to commercial banks in lending to the government in the domestic market.
The CBK data shows that the banks hold Sh983.5 billion worth of government debt, equivalent to 54.5 per cent of total domestic debt.
Others are insurance firms, which have lent the government Sh137.1 billion, parastatals at Sh95.6 billion and other investors (who include individuals, Saccos and investment groups) Sh101 billion.