14-12-2015 by 
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The Nigeria Stock Exchange announced in July 2015 that it has created "the NSE Pension 40 Index as part of initiatives to drive market optimization". According to various news media, "the NSE explained that the Index would provide a tracking mechanism for PFAs, CPFA and others that follow the PENCOM guidelines, adding that it can act as a benchmark for measuring performance and reporting performance to RSA Holders”. The Stock Exchange hoped that the index "can also act as a benchmark for measuring performance and reporting performance to retirement savings account (RSA) holders."

It has been six months since the announcement and the question is how has the index performed vis a vis the performance of pension funds, especially Retirement Savings Accounts (RSA).

Though the Nigerian Equity Market has not been smiling favorably at investors for the greater part of 2015, a look at the price chart of the NSE Pension 40 Index points to the fact that it is heading south. On the other hand, price charts of most RSA funds (where available) indicates that those are quite steeply upward sloping.

Source: Quantitative Financial Analytics

Analysis reveals that the NSE Pension 40 Index is an all equity based index but most pension funds, RSA or Retiree funds are heavily invested in fixed income securities and money market instruments. More than 90% of the pension funds have less than 10% exposure to equities. It is therefore questionable if an all equity index  is a good bench mark for measuring the performance of funds that are heavily biased towards bonds and money market instruments.

Source: Quantitative Financial Analytics 

While comparing those may look like comparing apples and oranges, it may also create a false impression of good performance by the pension fund managers who are consistently outperforming the index given the current downward trend in the equity market.

Source: Quantitative Financial Analytics

Take for instance the YTD performance of the index and some pension funds as at November 30th. It is obvious from the performance chart  that the pension fund managers outperformed the index to a large extent. While the NSE Pension 40 Index has lost 17% since July 2015, most of the RSAs and Retiree funds make positive returns in upwards of 4%. ( note that there were no available price information for those with zero returns) 

Source: Quantitative Financial Analytics

Analysts and investment experts have cautioned that it is always a good practice, when measuring investment performance against bench marks to compare apples to apples.

 

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