Tuesday, October 8, 2019

I WANT TO KNOW, CAN NSSF MAINTAIN IT'S GROWTH MOMENTUM

Last week National Social Security Fund (NSSF) announced an interest rate 
of 11% on member savings, which was a let down from last year's record 
15% payout.

Ironically because of the way the Fund's portfolio is constructed with eight in
every ten shillings parked in fixed income assets, mostly government paper, 
when there are fears of inflation the rates go up and NSSF booms. But when 
inflationary pressures ease, as happened last year, yields fall and NSSF suffers.

Which is what happened this year as average yields on their paper fell to just 
above 15% from more than 17% the previous year.

Nevertheless the Fund's total assets grew 14% last year, a bit of a slow down 
because over the previous four years assets grew an average of almost 16% 
annually, but this number grew faster than the economy's six percent.

Asset growth is important because assets throw off the revenues, which are 
used to pay interest to members but more importantly grow the asset base. 
Ideally more assets lead to high income, ploughed back into acquiring more 
assets, which leads to higher income. A virtuous cycle.

The question for me as a saver is, can NSSF continue this double digit growth
into the future, or at least until when I am ready to cash out?

NSSF's principal duty is to ensure the safety of member savings, so it should 
come as no surprise that whereas they are planning to reduce their dependence 
on fixed income assets, these will remain a major component of their portfolio.

As long as inflation remains under control we can expect that this asset class 
will show a real return for members. Real return is a return higher than inflation rate.

The government budget is currently financed 50% by debt, mostly treasury bonds,
so one can assume that well into the future yields on this government paper will 
remain in double digits, as government looks to meet its commitments on 
infrastructure, health and education. Or until oil start gushing out of the 
Albertine region. People familiar with that situation are not holding their breaths.

Higher fixed income yields are however a double edged sword. When these 
are higher share prices tend to suffer, why should a fund manager try to be clever 
betting on the stock market when government is offering double digit returns?

But also for the companies, higher yields on government paper mean that lending 
rates also rise, constricting expansion and growth. No wonder share prices suffer.

But NSSF is committed to building its equity portfolio to 25% from its current 19% 
as it reduces its exposure in fixed income to 70%.

In long term this makes sense. In a growing economy like our own, the smart 
money is buying shares in companies which will ride on the economy's growth.

NSSF's sh11trillion asset base is the largest pool of patient capital we have in this 
country. With more than half of its savers under 30 years of age, It can therefore afford 
the luxury of buying shares and holding these for the long periods it takes for these 
to mature.

The challenge though is that, because of its size NSSF cant find enough sizeable 
equity investments to move its needle.

But it’s well set up to play a pivotal role in the aforementioned oil sector. NSSF like 
it did in relieving UK private equity firm, Actis of its stake in Umeme a few years ago, 
may very well find itself in the thick of things in contributing funds to the refinery and 
oil pipeline projects.

And finally the Fund plans that in the next decade it will bring at least 7000 housing 
units to the market, which alone will make it the biggest rea estate developer in Uganda. 
This aside from the tens of thousands of square meters in commercial space they will 
be bringing online during the same period.

Granted, the cash on cash returns on real estate are anemic, but these will serve 
to swell the Fund's asset base, which it can leverage to get involved in bigger and 
more lucrative deals here and abroad.

And how all these grandiose schemes be financed?

Over the last five years savings contributions have been growing at annual average of 
11.9% to last years sh1.2trillion. What this means that this figure will be doubling at least 
every six years.

This is before you talk about realised income which last year came in at sh1.25trillion 
and doubling every five years.

The proposed amendments to the law that governs NSSF if passed, will only strengthen 
its position to collect more and be more attractive to members by providing more than 
the existing products.

According to the annual report released last week the management of the fund is 
becoming more efficient as measured by cost to income ratio -- 1.28% and expectations 
are that this should improve as the Fund's processes become more automated and 
its own agency service kicks in.

However, in answering our question, will NSSF continue to grow, the one metric 
that then Fund is best placed to capitalise on is that, out of a 14 million workforce barely 
two million have any form of social security.

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