Our report focuses on the non-pension asset management business and covers key segments including Collective Investment Schemes, Discretionary & Non-discretionary segregated portfolios, Insurance and Trustees.
The Nigerian Asset Management Industry displays a dominance of bank related asset managers. Two of the top three asset management companies belong to bank holding groups and are estimated to control up to 25% of the assets under management in the industry. Even with the foray of asset management companies operating in the Industry, we expect this to persist in the short to medium term as we do not foresee the smaller operators making large enough strides to reverse this structure.
Nigerian asset managers operate in a moderately competitive environment. However, competition is expected to intensify in the CIS space in the short term with the introduction of new funds – as operators compete for the same finite set of customers. Effective distribution is expected to remain a key competitive tool in this segment and in the overall Industry, as operators seek to attract the critical mass of investors required to operate profitably.
The Industry is also yet to carve a strong niche in the Nigerian financial markets. The vast majority of funds that enter into Nigeria’s financial system do not pass through the Asset Management Industry. A large number of individual and institutional investors invest directly by purchasing securities through stockbrokers and managing their own portfolios. The implication here is that a large number of investors do not see the value addition provided by Industry operators and the benefits of the Industry’s investment products in a diversified portfolio. The Nigerian asset management industry is also plagued by a credibility deficit (as the market is yet to recover from the 2008 economic crisis), weak financial literacy, limited product offerings and a weak operating environment.
In 2015, the fears of devaluation, slump in oil prices and the slow appointment of cabinet members all culminated in a highly uncertain and speculative operating environment. Although improving, growth in the Industry has been slow relative to the size of the potential market due to a combination of a large informal sector, credibility deficit and the low value attached to professional management of assets. Nonetheless, cumulative AuM of the non-pension asset management industry was estimated to have reached the ₦2 trillion mark as at year end 2015 a 10% growth over the prior year, with a penetration ratio (AuM to GDP ratio) of 2.1%. This is low when compared to other emerging markets such as India and South Africa with asset management penetration of 102% and 133% respectively.
Despite the weakening macroeconomic environment, Nigeria remains an attractive investment destination for foreign investors looking for long term capital projects. A common conception amongst industry operators is that the introduction of clear policy direction with respect to monetary policy and exchange rates will stimulate an influx of foreign direct investments which could initiate a recovery in the markets. We believe the return of foreign portfolio investors will trigger recoveries in the equities market in the short term.
On the fixed income side, we expect that increased borrowings and the implementation of tighter monetary policy tools will result in higher interest rates. Higher interest rates imply that asset managers can earn more from investments in fixed income instruments and attract foreign investors as negative real interest rates are reversed. However, higher interest rates also imply lower liquidity and slower economic growth rates and could lead to a decline in the marginal propensity of domestic participants to invest which could dampen industry growth.