Wealth managers in Nigeria are telling rich clients to invest in risk-free fixed income assets as well as alternative assets – from student housing projects to agriculture finance.
Nigeria’s rich have been hard hit by the COVID-19-induced market volatility and the economic impact of the decline in oil prices, which has upended traditional asset classes from equities to residential real estate.
Wealth managers have had a field day advising wealthy clients who are keen to either preserve capital or invest in assets with inflation-beating returns (above 12%), as they attempt to soften the damage wrought by the pandemic on their investment portfolios.
At a BusinessDay webinar, themed, “Private Banking and Wealth Management Solutions: Preserving value through the dip and turmoil,” held Wednesday, the wealth managers in attendance shared some insight into what they had been advising their clients to invest in.
“One of the first things we recommend at this time is to buy fixed income assets, which not only help preserve capital but guarantee a healthy return. For those who are heavily exposed to residential real estate, we are also advising them to sell down on some of them in order to have a diversified portfolio,” Titi Adeoye, founder of Sankore Investments, said.
“We found that close to 60 percent of the net worth of most high net worth individuals (HNIs) is held in real assets like residential real estate and little in fixed income.
“But we are now telling our clients to up their fixed income holdings to 47 percent, which should constitute not just Nigerian government securities but also sovereign bonds of developed and emerging markets as well,” Adeoye said.
Not every type of real estate is a preserver of long-term value and a hedge against inflation in Nigeria, according to Adeoye.
“Most real estate owned by HNIs are residential and in highbrow areas like Ikoyi. But when you look at the relatively high vacancy rate in Ikoyi, which is about 22 percent, you realise such assets are not necessarily great value for money.
“There are, however, opportunities in alternative assets and other forms of real estate like student housing and residential flats in areas like Yaba and Ikorodu, where the vacancy rate is below 2 percent, and the need for housing is huge,” Adeoye said. “I think alternative assets are the way to go for high returns.”
Fixed income assets also present a viable option for wealthy people to park their cash, according to Lanre Fabunmi, CEO of AIICO Capital, noting, “We have been pointing clients in the way of risk-free assets like government treasury bills.”
“Treasury bills have outperformed every other asset class in the last 5-10 years in Nigeria,” Fabunmi said.
“In the last five years, T-Bills have returned 111 percent on average and 328 percent in 10 years, that’s more than a three-fold return,” Fabunmi said, saying, “Equities on the other hand posted a loss of 12% in five years but a gain of 23 percent in 10 years.”
Yields on Nigerian treasury bills have collapsed to within 4 percent in 2020, from a high of 21 percent in 2016, but Fabunmi noted that the asset class should still be a preferred option for a passive investor seeking to preserve capital.
“We also recommend T-Bills and other fixed income assets to clients because of the tax advantage, given that capital gains tax don’t apply on fixed income, whereas it does for equities,” Fabunmi said.
Samuel Enuechusue, head of investment management at Investment One, also advised clients to invest more in alternative assets, noting, “The only place to get inflation-beating returns is in alternative assets, particularly the agriculture value chain.
“For instance, we have been taking to AFEX to see how we can help clients invest in agriculture.”
Alternative assets also form a good chunk of what wealthy clients are increasingly being advised to consider by Platform Capital, according to Akintoye Akindele, the firm’s chairman.
“There are exciting opportunities that can deliver over 20 percent return in the agricultural value chain, education especially, from a private equity perspective,” Akindele said.
Wealth managers are also increasingly advising clients to think of currency allocation, especially those with foreign currency expenses.
“It may be useful to have some US dollars holdings even as it is important to have sufficient naira liquidity as well,” Adeoye noted.