 component of its 3 major funds to the detriment of unborn Nigerian children.){kind=link}
On surface the $2 billion Nigeria Sovereign Investment Authority (NSIA) or Sovereign Wealth Fund (SWF) is a well-managed, professional organization that is increasingly being called upon to manage numerous funds on behalf of the Federal Government.
Look below the hood however and there are issues with the poor returns being generated by the NSIA which manages Nigeria’s Sovereign Wealth Fund (SWF), as well as its unnecessary dabbling in unprofitable exercises like Fertilizer sales, laced with corruption and which the NSIA is hopelessly incapable of policing.
Because the NSIA headed by its largely competent CEO Uche Orji, manages proceeds of Nigeria’s oil wealth today, for the benefit of unborn generations tomorrow, it is imperative that the organisation is held to a high level of scrutiny and discharges its obligations in a manner that optimizes resources made available to it, which it holds in trust for Nigerians.
Our thesis? The NSIA is not optimally managing the Future Generation Funds (FGF) component of its 3 major funds to the best possible manner in upholding its mandate, to the detriment of unborn Nigerian children.
It is also needlessly being saddled with activities it is not equipped to handle such as Fertilizer trading (often at a loss), under its Nigeria Infrastructure Fund (NIF).
A situation that is also prone to corruption and abuse by counterparties.
MoneyCentral dug through the 130 pages annual report of the NSIA released in July and we lay the case out below.
Background
Nigeria Sovereign Investment Authority (‘NSIA’ or ‘the Authority’) was established to receive, manage and invest the excess funds from the country’s sale of crude oil in a diversified portfolio of medium and long-term investments.
The Authority was setup by the Nigeria Sovereign Investment Authority Act, which was signed in May 2011 and was allocated an initial $1 billion in seed capital.
The Authority commenced operations in October 2012.
To actualize its mandate, the Authority has established three separate “ring-fenced’ funds.
They include Stabilization Fund (SF), Future Generations Fund (FGF) and Nigeria Infrastructure Fund (NIF).
The Authority has received three additional capital contribution tranches totaling $750 million after the initial contribution.
On the 8th of April 2020, the Authority received the sum of $250 million as additional capital contribution.
This amount forms part of the entity’s core capital from the Federation and is to be allocated to the three ring fenced funds in line with the approved sharing formula, according to the NSIA.
Total initial capital now being managed by the NSIA is today at $2 billion.
The investment activities of the funds are managed by various global and domestic fund managers as follows:
Stabilisation Fund: UBS Global Asset Management Limited, Smith Graham & Co, Income Research + Management.
Nigeria Infrastructure Fund (NIF): In-house Management Team, Fund for Agricultural Finance in Nigeria (FAFIN).
Future Generations Fund : Cevian, Edgbaston Investment Partners, Somerset, Marathon, Prince Street Institutional Fund, AQR Style Premia Offshore Fund Ltd, RWC Emerging Markets Equity Fund, Goldman Sachs Emerging Market Equity Fund, The Canyon Value Realisation Fund (Cayman) Ltd, CNPG, Palestra Capital, Brasidas Asia, Alpstone Global Macro Fund, Holocene Advisors Offshore Fund Ltd, NAYA FUND, Vanguard S&P 500 ETFs, Fundsmith Equity Fund, John Street Systematic Limited, Bayview Liquid Credit Strategies Offshore, Z Capital Partners, Healthcare Royalty Partners,Xenon, Helios Investors, FAFIN, Actis Africa, Africa Capital Alliance CAPE IV, Abraaj Growth Healthcare Fund, Akina Euro Choice, Z Capital Fund, Reverence Capital FUND II, Healthcare Royalty Partners IV L.P., G Squared IV SCSp, Xenon Private Equity.
Issues Relating to NSIA Subpar Returns
The S&P 500 was up 28.9 percent for 2019, its biggest one-year gain since 2013, when it rallied 29.6 percent.
The Nasdaq also had its best one-year performance in six years after rallying 35.2 percent in 2019.
The NSIA however had very little exposure to global equities in 2019.
Its performance for 2019 fell by -25 percent compared to the year earlier period as it recorded profit of N34.4 billion, compared to N46.5 billion in 2018.
Data from the financial statement shows that equity instruments by the NSIA measured at Fair Value actually fell to N5.75 billion in 2019, from N9.47 billion in 2018.
Meanwhile of the N247.1 billion of assets held by the NSIA (through the profit and loss accounts) at least 90 percent are held in fixed income and hard to value, Hedge funds, private equity investments and currency swaps (see table below).
The fixed income, Hedge Fund and Private Equity bias of the NSIA clearly flies against the examples from more successful sovereign wealth funds (SWF) such as Norway’s or even Saudi Arabia.
As the markets sold off due to the coronavirus pandemic, Norway’s $1 trillion sovereign wealth fund began to buy stocks that got hammered during March’s historic market decline, adding to stakes in companies such as Carnival Corp. and Royal Dutch Shell Plc.
The fund acquired holdings of 5 percent or more in seven U.S.-traded companies since mid-March, according to filings by Oslo-based Norges Bank.
The list includes Australian mining giant BHP Group Ltd. and Liberty Broadband Corp. as well as Shell, where the Norwegian fund doubled its holding.
Saudi Arabia’s $320 billion Public Investment Fund, another sovereign money manager built from petroleum revenue, also invested in Carnival and Shell amid the global stock swoon.
Saudis, SWF is required to keep roughly 70 percent of assets in equities and devote the remainder to fixed income and real estate.
The Norwegian fund is the world’s largest sovereign wealth vehicle, and on average owns 1.5 percent of global listed equities.
Through the end of last year, the Norway fund’s annual return since inception has averaged 6.1 percent.
NSIA not positioning for a post oil world
We hear it all the time but seeing it happen in real time should make Nigeria be really anxious about life after oil. 2020 was the year oil prices were negative for the first time.
It is also the year of Tesla and the Tech heavy NASDAQ and big Tech names such as Google, Apple, Facebook and Amazon.
Yet there is no real sense that the NSIA understands the changes happening that will shape the next 20 – 30 years.
The NSIA has little exposure to any of these names, if it does it is probably a very tiny position through index funds like the SPY or Spider.
Instead the NSIA is more interested in politically correct endeavors like Fertilizer trading which we come to next.
N1.631 billion Fraud in NSIA Fertilizer Sales
The NSIA overseas a Presidential Fertilizer Initiative (PFI) which is being implemented by a subsidiary of the NSIA (NAIC-NPK Limited) to sustain the production and distribution of NPK 20:10:10 fertilizer.
To secure the inventory of raw materials and finished goods, the Federal Government of Nigeria set-up a joint task force of security forces to monitor the movement of both the raw materials and finished goods.
The Authority also ensures that the blending plants selected to implement the program are accredited based on stringent selection criteria.
According to the NSIA despite best efforts by it and other parties concerned to forestall stock loss and ensure raw material inputs translate to output for domestic production of NPK 20:10:10, some incidence of unauthorized lifting of the product was discovered at Bauchi Fertilizer Company and Bejafta Group Nigeria Limited, two of the blending plants participating in the PFI.
The development has been escalated to the security agencies for investigation, according to the NSIA.
In the interim, the NSIA said it has de-listed the 2 blending plants where the fraud was identified from participating in the 2020 PFI until the amounts owed, in the sum of N600 million and N1.031 billion by Bauchi Fertilizer Company and Bejafta Group Nigeria Limited respectively, are fully settled.
“In line with the relevant accounting standards, the full amount of N1.631 billion has been recorded as inventory loss in the financial statements and charged to the income statement,” NSIA said.
We believe there is no need to continue with this with program with the advent of the Dangote Fertilizer plant which has come on stream.
The NSIA should be recused from this responsibility to forestall more damage to its balance sheet from any future fraud arising from this program.
Loan Guarantee
NAIC-NPK Limited liability company was incorporated in 2016 as a subsidiary of the NSIA.
It was established under Nigeria Agriculture Investment Company (100% ownership) to establish, run and carry on business as proprietors of fertilizer plants and to manufacture, treat, process, produce, supply and deal in fertilizers and all substances (natural or artificial) suited to improving the fertility of soil or water.
The NSIA has issued a loan guarantee to NAIC-NPK, which is due between 6 months and 2 years of N36.4 billion as at December 2019.
We believe this puts the funds of the NSIA at risk of default especially since the Fertilizer sales being undertaken by NAIC-NPK are not profitable as shown below.
Subsidy payment
Revenues from the sale of Fertilizer by the NSIA (through its subsidiary (NAIC-NPK) amounted to N31.96 billion in 2019, while the cost of Fertilizer sales was N35.66 billion.
The NSIA says a subsidy amount of N3.55 billion for 2019 (2018: N8.6 billion) was granted to the group to settle the shortfalls of the 2019 Presidential Fertilizer Initiative (PFI) for cost differential on the sales of fertilizer by the Group subsidiary NAIC-NPK Ltd.
Even if this has been paid there is still a gap of about N150 million being borne by the NSIA as well as the undue time, costs and resources expended on this Fertilizer subsidy program.
We think the NSIA time and resources can be better spent.
Huge exposure to hard to value instruments
The NSIA has major exposure to hard to value instruments or Level 2 and 3 inputs.
Level 2 Inputs are those other than quoted prices in an active market such as over-the counter (OTC) markets, while Level 3 Inputs that are not based on observable market, e.g unquoted equity instruments and debt instruments.
The NSIA exposure to these instruments amounted to N247 billion at the end of 2019, with the harder to value Level 3 instruments (private equity and hedge funds) at N124.6 billion. (see table below).
Poor Returns on Equity Invested
The equity allocations to the three funds are listed below (see chart) with the Stabilization fund assets equivalent to N188 billion, Future Generation Funds (FGF) N207.2 billion and Nigeria Infrastructure Fund (NIF), allocated assets of N310 billion as at the end of 2019.
Incomes generated from these individual asset allocations were Stabilisation Fund – N10.224 billion, Future Generations – N16.7 billion and NIF – N10.647 billion.
The returns on equity invested are equivalent to 5.43 percent for the Stabilisation fund, 8 percent for the FGF, and 3.43 percent for the NIF at an operating income level.
Some 60 percent of the future generations funds returns came from interest from fixed income securities.
The FGF returns can be compared unfavorably with the S&P 500 returns of 28.9 percent in 2019.
The NSIA future generations fund (despite being much smaller), also compares rather poorly with Norway’s sovereign wealth fund which returned 19.9 percent, or 1.69 trillion kroner ($180 billion) in 2019.
Highlights of Norway’s 2019 SWF earnings include:
• Stock holdings rose 26%, bonds 7.6% and real estate 6.8%
• The Norway SWF held 70.8% in equities, 26.5% in fixed income and 2.7% in properties at the end of last year.
One Positive
So its not all doom and gloom from us, one positive to look forward to this year from the NSIA is that it should book FX revaluation gains.
The effective closing rate on the NSIA books as at 31 December 2019 was N325/ US Dollar (2018: N325/ US Dollar). The Naira has since moved to closer to N380/US Dollar this year and FX gains should help the books.
It is however not nearly enough to right all issues we have found, which we advise should be looked into and corrected as soona s possible to aid optimal returns, for the benefit of Nigerians.