Kenya Pension Funds Too Big on Bonds, $39 Billion Firm Says

(Bloomberg) -- Kenyan retirees may be missing out on better returns because of the over-emphasis local pension fund managers place on domestic fixed-income assets, according to money manager Allan Gray.

Retirement fund managers in East Africa’s largest economy invested less than 2% of their assets offshore, well short of the 15% allowed by the industry regulator as of the end of 2018, figures from the country’s Retirement Benefits Authority show. They cut allocations to equities to 17%, the lowest in at least two years, while stepping up exposure to government securities to 39%, the highest since December 2016.

“If you look at how Kenyan retirement funds are positioned today, we think they are overexposed to fixed-rate bonds in general,” Tapologo Motshubi, chief executive officer of Allan Gray’s Kenyan unit, said by phone. The combination of Kenya’s relatively high level of government debt to gross domestic product and a local currency that may have strengthened too much can reduce returns for such a strategy, he said.

Cape Town-based Allan Gray, which oversees about $39.1 billion for its clients, began investing in Kenya in 2012 and started full operations there in the middle of last year. It now manages about 5 billion shillings ($49 million) in the East African country, offering a strategy of performance-based fees.

Kenyan banks are among stocks that he said appear more attractive than bonds. More broadly, yields from investing in equities have become increasingly attractive as those from government securities fall to six-year lows, reducing the appeal of gilts.

Kenya’s debt has more than doubled since 2013 to 5.28 trillion shillings by the end of last year, equivalent to 52.7% of GDP, according to the National Treasury. The International Monetary Fund said in October the Kenyan shilling was as much as 17.5% overvalued. The currency has weakened 0.8% this year against the dollar.

Local fund managers betting heavily on Kenya, which has a 0.1% exposure to global capital markets, are locking out prospective returns from the rest of the world, Motshubi said.

“We aren’t sure why there is such limited offshore investment, but we believe home country bias/preference is a factor,” he said. “This can be harmful to long-term pension fund member returns given the likelihood of better risk adjusted returns being available offshore.

--With assistance from Srinivasan Sivabalan.

To contact the reporters on this story: Eric Ombok in Nairobi at eombok@bloomberg.net;Adelaide Changole in Nairobi at achangole2@bloomberg.net

To contact the editors responsible for this story: David Malingha at dmalingha@bloomberg.net, John Viljoen, Jon Menon

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