Asset allocation by pension funds in sub-Saharan Africa in 2019 has continued to favour equities, according to Bright Africa report.

Produced by RisCura, the report said that in Nigeria and East Africa, asset allocation, however, is dominated by fixed-income allocations, mainly comprising of local bonds.

“When viewed alongside the high asset-growth in these regions, this can be attributed to regulation as well as a lack of alternative local investment opportunities.”

According to Bright Africa, local regulation remains one of the main drivers of asset allocation.

While much of African regulation is supportive of local investment, there are often significant differences between the regulatory allowances for pension funds, the size of local capital markets and actual portfolio allocations.

The basis of asset allocation is reflective of several factors, including familiarity with alternative asset classes, such as private equity, development of local capital markets, and availability of investment opportunities.

“In many countries, assets are growing much faster than products are being brought to market, limiting investment opportunities if regulation does not allow for pension funds to invest outside of their own countries.”

Several countries, including South Africa, Botswana, Nigeria, and Namibia have led the way for alternative asset classes such as private equity.

According to Bright Africa, South African pension funds are active in African private equity investment, both locally and across the continent, enabled by regulatory change.

“Since 2011, Regulation 28, which is the governing law for pension funds in South Africa allows up to 10% of pension assets to be invested in private equity, an increase from the previous 2.5% allowance for all ’other’ asset classes.”

“However, it is argued that this allowable allocation is not fully utilised due to several barriers such as the illiquid nature and complexity of private equity investments.”

In Nigeria, the regulator, National Pension Commission (PENCOM), also prescribes restrictions such as a minimum of 75% of the private equity fund to be invested in Nigeria, registration of the fund with the Nigerian SEC, and a minimum investment of 3% in the fund by the General Partners.

Regulation can also enable regional and international diversification, said Bright Africa.

Namibia, for example, allows up to 35% of assets outside the Common Monetary Area (Lesotho, South Africa, Namibia, and Swaziland) however, with a limit of 30% outside Africa, while Botswana allows up to 70% investment abroad.

“This diversification allows pension funds the freedom to find suitable investment opportunities without being constrained by the current limitations of local market development. Whereas, in East African countries such as Uganda and Tanzania, offshore investment is not allowed, although in Tanzania, it is unclear whether the restriction applies on a country or regional level.”