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NSSF’s search for elephants

By Vision Reporter

Added 25th March 2013 03:03 PM

Last week NSSF held its first members meeting. At the meeting, management said the fund now had assets of more than three trillion shillings or just over a billion dollars and was growing at the rate of sh50b a month.

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Last week NSSF held its first members meeting. At the meeting, management said the fund now had assets of more than three trillion shillings or just over a billion dollars and was growing at the rate of sh50b a month.

The fund’s 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 fund’s 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 fund’s tumultuous history meant that managements scared of public criticism stuffed the portfolio with treasury bills and bonds. Not only  were they safe but have good double digit returns.

For the more ambitious managers such as 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 be 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.

pbusharizi@newvision. co.ug

twitter:@pbusharizi

NSSF’s search for elephants

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