Monday, March 25, 2013


Last week National Social Security Fund (NSSF) held its first members meeting.

At the meeting the fund’s management said the fund now had assets of more than three trillion shillings or just over a billion dollars, was growing at the rate of sh50b a month.

The funds investments are skewed heavily towards fixed income assets – treasury bills and bonds, fixed deposits and corporate bonds, which account for eight in every ten shillings with NSSF, with real estate and equity investments accounting for less than a fifth of the funds gargantuan portfolio.

Understandably it was good year for NSSF given the high interest rates and government paper yields, profit rose almost three fold to sh239b from the previous year’s sh84b.

They have set themselves an unambitious target of paying members an interest of two percentage points above the average annual inflation over the previous ten years.

The idea of course is that members should earn a real return on their money over the long term.

They are obviously hedging their bets.

As the fund’s hoard of cash grows it becomes increasingly difficult for NSSF to show an attractive return for its members, this coupled with the fund’s bias towards low yielding, safe investments will make it difficult for a while for the fund to show real juicy returns.

This may not be a problem of the management’s making.

The funds tumultuous history meant that managements scared of public criticism stuffed the portfolio with treasury bills and bonds, not only were they safe but has good double digit returns.

For the more ambitious managers like current boss Richard Byarugaba and David Jamwa before him attempts to better balance the portfolio have come up hard against the dearth of investable projects in this country.

If NSSF was to liberate just a tenth of its fixed income investments this would come to sh240b.  It is not in NSSF’s mandate to lend directly to business unless those businesses issue a bond or sell shares.

They could buy property but thanks to the overinflated price of real estate the returns on these would minuscule.

So the fund is looking to invest their funds outside Uganda starting in the region and then later on further afield.

The question came up during the annual meeting, why would NSSF want to invest abroad when we have such dire need for affordable funds at home? How can we invest abroad when we need the money here?

Chairman Ivan Kyayonka was quick to point out that their fixed deposits in commercial banks all sh717b of them and another sh100b or so in corporate bonds were all invested locally so they cannot be accused of not investing locally.

But the sheer volume of money under NSSF’s command means that there is an urgent need for huge investments in order to show an overall return.

Luckily for NSSF the ten year moving average inflation rate will dip this year and so they may lower the interest next year from the current 10% , but think about it with sh2,621trillion in accumulated members funds the fund still needs to see a  return of about sh300b annually to cover operating costs and interest

The world’s richest and arguably best investor Warren Buffett calls it elephant hunting. He this year committed $23b to take over H.J. Heinze – the tomato ketchup manufacturer.  With up to $45b in cash last year it’s only this magnitude of investments that will ensure he shows an adequate return for his investors.

By the way since 1976 Buffett has shown average annual return of 19% in excess of the treasury bill rate and the 6.1% in excess of the stock market index.

If he tried to peg his returns to the US two percent inflation rate he would long have been laughed out of business.

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