The Impact of Pension Fund Size on Investment Diversification and Returns in Nigeria

This study empirically examines the relationship between pension fund size, investment portfolio diversification, and risk-adjusted returns in Nigerian pension fund administrators, contributing to the understanding of scale economies in pension fund management. Large pension funds are theorized to benefit from scale advantages in accessing diversified asset classes, negotiating lower transaction costs, and investing in illiquid but higher-returning alternative assets. In Nigeria, PFA size varies enormously, from the largest with over two trillion naira in assets under management to the smallest managing less than 50 billion naira, creating an opportunity to test size-performance relationships. This study uses PENCOM quarterly portfolio data and return statistics for all 19 licensed PFAs for the period 2016 to 2023. Fund size is measured using total assets under management. Diversification is assessed using the Herfindahl-Hirschman Index of asset class concentration. Returns are adjusted for risk using Sharpe ratio calculations. System GMM panel regression is applied to address dynamic endogeneity. Findings reveal a significant positive relationship between fund size and portfolio diversification, with larger PFAs maintaining materially lower asset concentration indices. Size is positively associated with equity and alternative asset allocation levels. Risk-adjusted returns are higher for larger PFAs, consistent with scale economy theory, though the marginal return to size diminishes above a threshold of approximately 500 billion naira. The study recommends PENCOM policy measures to facilitate consolidation among smaller PFAs to achieve diversification scale benefits.

Keywords: pension fund size, investment diversification, returns, PFA, scale economies.