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Jonathan Cooper, Managing Director, Research & Analytics at FTSE, the global index provider, speaks in this exclusive interview with Financial Nigeria’s editorial team on the significance of the FTSE Nigeria Investable Pension Fund (IPF) Benchmark newly developed and launched in collaboration with Stanbic IBTC Pension Managers Limited. Cooper also reveals plans for other indices being developed for the Nigerian capital market.

Financial Nigeria: We believe the FTSE Nigeria Investable Pension Fund (IPF) will serve as a good benchmark for foreign and local institutional investors in Nigerian equities. More generally or specifically, what informed the development of the IPF index?

Jonathan Cooper: The pension fund market in Nigeria is growing. It is currently second only to South Africa in terms of the size of assets under management. Significant developments have been made in the last 10 years, as reflected in the enactment of the Pension Reform Act 2004, the establishment of the National Pension Commission (PenCom), the Retirement Savings Account (RSA) and the creation of the Pension Fund Administrators (PFAs). The investment guidelines set out by PenCom have created a good basis for growth in the Nigerian pension fund market.

An area that does require further innovation is the measurement and reporting around the performance of the funds themselves. This can be done by providing a suitable yardstick. The Nigeria IPF index initiative originated from talks FTSE had with Stanbic IBTC Pension Managers, the largest PFA in Nigeria. FTSE wanted to incorporate the benefits of the PenCom guidelines into its asset allocation for the Frontier Markets Index Series. This led to the creation of a performance benchmark that is suitable for adoption by the PFAs in Nigeria.

This means that pension fund managers have something to measure their funds’ performance against on an ‘apple to apple’ basis.  
 
FN: What impacts would this index have on the Nigerian financial market, in terms of corporate governance and transparency?
 
JC: The National Pension Commission has laid down guidelines for asset allocation that managers must keep. There is a limit to the amount they can have in stocks in a particular sector, which is a four-and-half percent cap. The equities held are also required to make a profit in three of the last five years.     

It makes sense that the index is adopted by portfolio managers as a performance benchmark; hence it should surely incorporate PenCom guidelines. By using the index, the pension fund administrator is working to a high level of corporate governance and performance.

In the case of Stanbic IBTC Pension Managers, the first PFA to adopt the index, it has led to a greater focus on best practice and corporate governance. Stanbic IBTC Pension Managers is now able to report to its clients the performance of its funds relative to a suitable benchmark. The index will help to continue to improve corporate governance, best practice and transparency. This can only be good for the asset management and the pension community in Nigeria.  
 
FN: About 35 Nigerian equities are included in this index. What is the defining profile of the equities?
 
JC: Last year, FTSE announced it was enlarging its Frontier Markets coverage. Our starting position was the Nigerian stocks included in the FTSE Frontier Markets Index Series. Within that universe, FTSE then looked at companies that had a large enough free-float and at medium-velocity trade. Finally we looked at foreign ownership limits and then ranked the stocks by market capitalization.

It is important to note that this is not FTSE picking stocks. As with all our indices, the Nigeria IPF Benchmark is based on a rules-based transparent and representative model. For instance, all FTSE ground rules are available on our website (www.ftse.com) as well as supporting factsheets, index methodology, etc. We then look at the guidelines that PenCom has put in place and review the stocks against it. If companies do not meet the free-float criteria, they would be excluded. If companies haven’t made profit for at least three of the last five years, they would also be excluded.

FTSE reviews the index every June and December. The index will be reviewed next month (June 2015) at which point some constituents could be added while some could be removed. Because we follow this rules-based approach, it is a very  transparent process. We also hope to minimise unnecessarily high turnover of poor portfolios that are tracking the indexes.    
 
FN: No doubt, Stanbic IBTC Pension Managers is one of the leading lights amongst the PFAs in Nigeria. Therefore, your choice of partnership with the company in developing this index is well-informed. However, do you believe the partnership confer any unfair advantage on Stanbic IBTC Pension?

JC: FTSE is a specialist index provider, and as a company our sole function is in the creation, calculation, distribution, and promotion of multi-asset class indexes. We advise clients but we cannot sell financial products. The indexes themselves can be adopted in the creation of funds of different classes and sophistication.

I also think it is important to note that FTSE is keen to further develop its local capital market knowledge in Africa. Stanbic IBTC Pension Managers has a strong and deep knowledge of the Nigerian market and PenCom guidelines. This has enabled FTSE to create the index and also to better understand the PenCom guidelines.

Stanbic IBTC Pension Managers has allowed us to fully understand the PenCom criteria so that we can implement it into the index.
 
FN: Are there reform prescriptions you have for the Nigerian pension industry, particularly now that it represents one of the largest asset classes in the financial market; and this new index tends to now put the pension industry on the spotlight as an investment pathfinder for Nigeria?
 
JC: It’s not appropriate for FTSE to suggest changes to the marketplace or the regulator. One of the effects of an index potentially might be that it asks wider questions due to its adoption, and this can improve the corporate governance of companies. FTSE’s job is to calculate indexes that are representative, transparent and can be easily adopted.

FN: According to your press release, both Stanbic IBTC Pension and Pencom have received quite well the new index. Are you looking at developing other indexes for the Nigeria financial market in line with the programme by FTSE to develop indexes for frontier markets around the world?
 
JC: The development of indexes is a push-pull effect. If you look at FTSE, we have completed our merger with Russell. We have over $20 billion of assets tracking at FTSE China Indexes; and we recently launched the FTSE Frontier Markets. These give us a strong institutional client base around the world.

FTSE hopes to continue to develop further indexes that support the Nigerian market. Fixed income, commodities and Islamic finance could all potentially be developed. FTSE already has global and localised Sharia indexes. Over the coming months, you can expect FTSE to make some more announcements about initiatives we are undertaking in Nigeria that will benefit the local market and promote investment in Nigeria.