In the past three years, Uganda’s and Rwanda’s National Social Security Fund made big splashes across their national borders into Kenya’s capital market.

Recently, when Safaricom, reported over $250 million in profits on revenues of $1 billion, it emerged that the most important foreign investor in one of Kenya’s largest mobile phone carrier — and one of the most successful in Africa — were these two state pension managers.

NSSF Uganda and NSSF Rwanda are today the fourth and eighth largest shareholders in Safaricom, respectively.

Now with the opening of the capital account in Tanzania, there are expectations that cross border investment will be fairly regular on the regional stock exchanges as fund managers seek higher returns and portfolio diversification.

The Nairobi Stock Exchange, (NSE) which is one of Africa’s largest equities markets, is expected to be an immediate beneficiaries with its wider selection of listed shares across different industries.

But Uganda, Tanzania and Rwanda are emerging as good hunting ground.

For instance, while fund managers in the past could not get easy exposure to natural resources, the cross-listing of Barrick Africa Gold on the Dar Es Salaam Stock Exchange will open such opportunities.

Now firms in the region will be able to diversify their portfolios and benefit from rising global commodity prices.

Though NSSF Uganda invested in Safaricom, pension funds managers have traditionally shied away from investing across the EAC, preferring instead to keep their money in fixed-income securities market, and a narrow product-mix in other regional capital markets.

Fund managers say this has left regional equity and debt markets in Kenya, Tanzania and Rwanda relatively starved of sizeable inflows from Uganda’s growing pension sector despite ongoing integration efforts.

The reluctance to make forays into regional stock markets has been blamed on a number of reason.

These range from currency and economic risks, liquidity risks, political risks and closed markets in the case of Tanzania.

As EAC’s Common Market is embraced, fund managers will increasingly get more comfortable in understanding and pricing these risks.

However, one risk that will come sharply into focus is the convergence in the economic and monetary polities of the region as a whole.

Investors are therefore likely to start paying close attention to economic growth rates, inflation rates, inflation rates and currency movements.

On a wider economic policy issue, it is the trends in food prices, particularly the ban in food exports and trading in surplus harvests, that is likely to be big policy issue affecting the fortunes of the EAC economy.

NSE remains East Africa’s oldest and largest bourse with 60 listed shares.

The Dar-es-Salaam Stock Exchange (DSE), on the other hand, which was until this week inaccessible to both regional and offshore players due to the country’s capital account restrictions is now open for business.

Rwanda’s Over the Counter (OTC) market comprises only government and municipal bonds.

The Uganda Stock Exchange has been performing well, but it still remains small and illiquid.

In Uganda, government debt in the form of treasury bills and bonds remain the dominant investment class. A lot of money is also packed in fixed deposits.

Owing to frequent internal scandals, the National Social Security Fund’s investment role in the local and external capital markets is viewed as shaky and inconsistent, though it has Ush1.6 trillion ($713.6 million) total asset base.

It however maintains a huge portfolio of government securities and fixed deposits, according to market sources.  

“Less than 15 per cent of the total funds held by local pension schemes is currently invested in regional markets like the NSE and DSE. Nevertheless, it would be good to invest the funds overseas because of the small size of the local markets,” said Keith Kalyegira, managing director of Renaissance Capital Limited.

“But it is not clear how much money has been invested in those markets because of different time horizons and the lack of established reporting mechanisms.” 

With the Bank of Uganda conducting an average one treasury bill and bond auction per month, with offers of more than Ush50 billion ($22million), respectively, coupled with a promising secondary market, fund managers are easily persuaded to invest considerably in government paper.

This is because of strong market liquidity and comparatively higher margins.

For instance, Uganda’s 91-day treasury bill discount rate currently stands at 4.2 per cent compared with Tanzania’s 2.79 per cent.

In comparison, the Uganda Securities Exchange (USE) has only seven local listings that offer very few options for risk diversification and are hampered by liquidity issues evidenced in mobilisation of large blocks of shares for sale, thereby rendering government securities more attractive.

Total assets in Uganda’s pension sector are currently estimated at Ush350 billion ($156 million).

Recurrent scandals at Uganda’s NSSF in recent years have left it incapable of executing aggressive but consistent investment strategies in both local and external markets, coupled with clear bias for buy and hold strategies.

Besides prolonged inactivity in the equity markets, sharp growth among local institutional investors’ assets in the Kenyan market is also seen as a threat to its penetration.

Nevertheless, local fund managers appreciate the impact of the NSE on their portfolios.

“The USE and NSE are equally dominated by banking stocks but the latter has provided a lot of room for risk diversification in sectors like Information Technology, agriculture, cement and hospitality industry.

This is clearly reflected in seven local stocks compared with 14 highly rated stocks at the NSE.

Strong growth in other market players like corporate pension schemes and moderate trading by state social security funds in the region are likely to diminish their role in the capital markets, “explained Nicholas Malaki of Pinebridge Investments Uganda.

A strong bullish rally experienced at the Nairobi bourse in the past six months has seen some fund managers register as much as 55 percent return  on investment against their Ugandan portfolios.

Regional integration could also eliminate gaps in investment returns.