News Column

Sovereign Wealth Fund Records Modest Q1 Outing

June 25, 2014

Kingsley Ighomwenghian

Buoyed by its humble performance at the end of its first full year of operation, the management of the Nigerian Sovereign Investment Authority (NSIA) at the weekend announced a net profit of N1.2 billion for its operations in the first quarter of 2014, which is more than double the N525 million reported for the whole of last year.

The NSIA, which started out with seed funding of $1 billion from the federal and state governments, reported the 2013 profit on the back of a total investment income of N1.466 billion.

Uche Orji, chief executive of NSIA, in an interactive session with newsmen at the weekend in Lagos, said the result is an indication of many good things to come, particularly as only a small fraction of the investible fund has been invested so far.

Orji, who was accompanied by Hanspeter Ackamann, executive director and chief investment officer of NSIA, said the organisation has made considerable progress in several respects, in areas such as "deployment of capital, selection of managers across asset classes, key personnel build out, (and) infrastructure investments."

He added that the first quarter audited result for the 2014 operating year stands out clearly as an encouraging trajectory "of our financial performance in absolute terms."

Especially, he added, in the fourth quarter of last year. Before then, he recalled, the board and management spent considerable time designing the framework of the organisation , governance, management and enterprise risk imperatives necessary to run it in line with global best practice.

Besides this, he told his listeners, "the focus has been on ensuring that the investments are relevant, of impact and geared to generate attractive returns to the benefit of Nigerians across generations.

"We invested in the emerging markets when they were at the bottom at the end of February... we invested in developed markets in Europe and even Japan.

"We are encouraged that the financial performance as at first quarter 2014, have improved within the bounds of our expectations with an audited net profit for the period standing at a robust N1.2 billion. While it is humanly impossible to correctly predict the future, I am nonetheless confident that the NSIA is on the path to deliver a more robust performance by the end of 2014, all things being equally."

Going by the trend seen so far, he believes, the fund is on track to deliver similar or higher numbers as seen between January and March in the current quarter and the first full year of operations.

40% total allocation

Explaining further, Orji said at the beginning, the fund's investment policy covered three specific genres, namely: Stabilisation Fund, Nigerian Infrastructure Fund and Future Generation Fund, just as the asset allocation strategy was couched to ensure that risk is taken calculatedly at all times during the life of the fund, while guaranteeing reasonable returns.

He said only 40 per cent of the fund was allocated in total, with the Future Generation Funds getting 25 per cent allocation of the $400 million, distributed among four hedge funds cutting across various strategies, ranging from global macro to long-short equities.

Reporting on the performance of the managers, the NSIA chief executive said while two of the managers made money, to others were slightly down, with the best performing returning 12.21 per cent year-to-date, while the worst depreciated by 2.8 per cent within the period.

The managers, he explained, were selected to have different performance profiles in different market environments, such that when one is struggling to perform, others will outperform.

The long-only equity managers, he continued, was allocated 10 per cent of assets for investments in developed markets of Europe, United States and Japan, and 15 per cent to be invested across emerging markets, bringing total allocation to managers across all markets to 25 per cent.

"Our timing for allocating capital to emerging markets, in late February 2014, has been excellent as we practically picked the bottom of these markets resulting in strong performance for this assets class. Our investment in Edgbaston, an emerging market manager, has performed particularly well since deployment in February, accruing 7.7 per cent to the end of April," he added.

Investment in developed markets by the NSIA, managed by a European manager- Cevian, has achieved 9.8 per cent returns year-to-date, he said, adding that capital was deployed to the other two markets between April and June, promising to report back on their performance.

In the area of private equity investment, Orji said: "We have made some allocations to two private equity managers- of which one (Z-capital) has already started to provide returns, whilst (Xenon) will commence investment in the coming period. We are in advanced stages of evaluating a number of managers focused on Nigeria and should be in a position to report those by third quarter of 2014."

Private equity, he reminded, is a long time asset class, expressing hopes that Internal Rate of Return would be at least 20 per cent a year over the life of these funds. Given the time horizon, he assured also that the asset class demonstrates the greatest historical performance.

In the utilisation of the infrastructure, Orji said the NSIA has so far funded three commitments in the infrastructure fund such as the Nigeria Mortgage Refinancing Company, in which it holds 22.7 per cent stake; agriculture financing co-sponsored with the Ministry of Agriculture and the German Development Bank (KfW), and the Second Niger Bridge co-developed with Julius Berger. The NMRC, he said, is poised to deliver 10,000 homes yearly.

The authority, he assured, is currently evaluating projects in power, real estates, water resources, agric and motorways and should announce more commitments in the coming quarters.

Fielding questions, he said "water resources is a very lucrative area, but the regulatory environment is unclear," assuring that when some of the bottlenecks are resolved there would be investment in conjunction with some partners.

Expatiating further on the second Niger Bridge project, he assured that work is continuing, just as the Environmental Impact Assessment (EIC), on the request of the NSIA, is ongoing and would be published when ready

Given the need for daily liquidity, besides the low interest rate environment and the conservative nature of the mandates, he said the stabilisation fund is not expected to yield significant returns, adding that it made a modest positive return of 0.55 per cent through the end of April

Going forward, he said: "We have decided to tweak the strategy of this fund as we adjust to the near zero-interest rate environment in developed markets and the uncertainty of rising rates. As such, we have reallocated the growth portion of this portfolio to managers with the expertise and latitude to navigate such contrasting environments."

The reallocation, he stressed, is ongoing and would be completed in a fortnight.

Target sectors

Apart from plans to invest in sectors such as real estate, with the huge housing deficit; healthcare, especially going by the huge amount spent annually on medical tourism annually; power; agriculture, which remains the next frontier for savvy investors in Nigeria; and motorways; there are plans to invest in some other sectors as their operating and legal environment become clearer going forward.

Apart from those already noted like water resources, gas pipeline and gas storage and processing, there are other targets areas like Free Trade Zones and industrial parks, oil refining, mining and basic materials, sewage and waste, communications and rail.

Investments in these areas would flow from the Nigeria Infrastructure Fund (NIF), which accounts for 40 per cent of assets under management, Orji explained, "is a domestic infrastructure fund focused on investing in critical infrastructure that would attract and support FDI (Foreign Direct Investment), economic diversification and growth."

The NIF is a five-year infrastructure investment rolling plan prepared to provide strategic guidance. The decision of what sectors to focus on in the five-year rolling plan was after due consultation, he said, with relevant sector experts, regulatory agencies, strategic partners, Ministries Departments and Agencies (MDAs), among others, while final selection was guided by principles such as their alignment with national priority and their potentials for attracting commercial and social returns. Others include how conducive the regulatory environment is and the ability to unlock private sector participation.

The Minister of Finance and Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala, had on February 11, 2014, announced an additional $550 million or 55 per cent increase in investible funds, bringing total funds made available to the NSIA by the Federal Government to $1.55 billion. The additional funds were derived from the nation's $1 billion Eurobond successfully floated last year, proceeds of which were set aside for financing power infrastructure.

A breakdown shows that while $200 million is set aside for the Infrastructural Fund, the remaining $350 million will go into a liquidity facility. The facility is to be managed by the Nigerian Bulk Electricity Trading Company (NBET) on behalf of the Federal Government to boost investors' confidence in the power sector reforms.

The Infrastructure Fund is to finance gas to power investments with the private sector, with the aim of generating "catalytic funding for gas to power infrastructure which will leverage on available funds to boost the development of the power sector and improvement of power supply," she said.

Orji noted at the weekend that the $200 million for investment in gas-to-power is currently going through the legal paperwork, while agreements for management of the $350 million are ongoing.

"I am expecting some more of such managed funds... we are investing in gas with more money from government," he enthused.

On target

The performance of the NSIA so far, Orji admitted at the weekend, is heartwarming, considering the modest target set at the very beginning.

For instance, speaking at the 2013 edition of the Securities and Exchange Commission (SEC) lecture series, in September last year, he said: "We are measuring ourselves over 20 years, and have set targets for ourselves. There would be years when we would be able to meet that target and there would be years when we won't make any profit

"But we will try not to lose money in the first year although it will be tough. We will measure ourselves in a rolling three-year basis. There would be good yields and there would be great yields but not all the time. We will review ourselves from time to time to know how far we are progressing

"Most of these countries started the SWF at a time when they had no money and would want into be out in other critical sectors. We are aware of all these issues and will try to invest the money wisely. We take responsibility and we are independent," he stressed.

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Source: AllAfrica

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