Fund managers in Kenya are working to safeguard pension funds from further erosion by a protracted bear run at the stockmarket.
Over the past year, the Nairobi Securities Exchange has recorded a persistent bear run that has seen the NSE All Share Index and the NSE 20 Share Index plunge by 18 per cent and 23.7 per cent respectively.
This is in contrast to 2017, when the All Share Index recorded 27 per cent growth and the NSE 20 Share Index rose by 16.5 per cent.
The depressed performance wiped out $4.9 billion in investor wealth as the NSE saw market capitalisation decline from $24.3 billion in January to $19.4 billion in December 2018.
"The steep drop in the performance of the equities market was in tandem with significant equity portfolio outflows attributable to a myriad factors, including profit warnings and declining profitability of listed companies, post-election inertia as well as macro-economic and fiscal policy challenges," said the Capital Markets Authority in its 2018 Quarter 3 market performance report.
Local institutional investors -- fund management firms, investment banks and investment advisory firms -- account for about 70 per cent of the total shares held at the bourse.
The effect has seen companies like Britam and Cytonn Investments join a growing a list of firms posting profit warnings.
"The expected decline is mainly due to performance at the stockmarket, which has led to a decrease in returns from our equity investments," said Britam in a profit warning.
Fund managers are also feeling the pain, not only in terms of earnings but also from the erosion of pension investments: The 26 fund management firms in Kenya have invested on average 23 per cent of their portfolio in equities.
"We expect to feel the impact of the bear run in our books. However, investors must consider that these are market cycles and the situation will take a turn," said Simon Wafubwa, Enwealth Financial Services managing director.
He added that Enwealth, which has a fund base of $584.4 million, has invested about 23 per cent of it in the equity market.
Exposure in equity
Pension analysts say that with the bear run not showing signs of abating, fund managers may have to reduce their exposure in equity even though the majority have invested in only a few asset classes.
"Fund managers, especially those who maintained their position in equities over the past year, have taken a hit to their portfolios as the markets continued to be bearish.
"However, money managers who booked their 2017 gains and diverted to fixed-income securities would have had a comparatively better year," said Gerald Muriuki, research analyst at Genghis Capital.
He added that historically, the majority of fund managers' portfolios have been skewed towards equities.
"We would not expect the returns of 2017 to be replicated in 2018," he said.
In 2017, returns on pension investments in equities averaged 30 per cent after recovering from a negative showing in 2016 and 2015.
While equity returns have been volatile, returns from fixed income have largely been stable, averaging 12.8 per cent.
"In the past five years, fixed income median annualised returns at 12.9 per cent exceeded the corresponding median equity return at 12.6 per cent," stated the survey.
Fund managers need to safeguard pension assets, which have grown from $818.2 million to $10 billon over the past 18 years.
"Fund managers should be proactive in diversification and put in place strategies that can maximise returns when there is a shift in the market," said Mr Wafubwa.