* Local funds buy bonds to boost returns
* Growth in pension fund assets to slow sharply this year
* Poor returns from Nigerian stocks drag on performance
By Chijioke Ohuocha
ABUJA, Oct 7 (Reuters) - Nigerian pension funds have been selling equities and shifting to local bonds despite cheap valuations as illiquid currency markets limit foreign participation in the stock market.
Dave Uduanu, who manages 220 billion naira ($724 million) for Pension Alliance Limited, said his fund had cut its exposure to Nigerian stocks to 10 percent this year, from 20 percent last year, and increased allocation to local treasury bills and government bonds.
Nigeria, Africa's biggest economy, is facing its worst recession in 25 years, brought on by low oil prices, which has seen foreign investors flee its financial markets, causing chronic dollar shortages and creating risk aversion among local funds.
Uduanu said investing in stocks had become unattractive because foreign investors, which used to dominate the Nigerian market, have stayed away amid concerns on how to repatriate funds. Corporate earnings have also been poor as firms struggled to source dollars to pay for imports, he said.
"Asset allocation is getting more conservative so equity allocation has dropped. Pension fund investors have become more risk averse," Uduanu told Reuters on the sidelines of a pensions fund conference in Abuja.
Local funds with no currency risk were preferring treasury bills offering yields of around 18 percent, Uduanu said.
A fund industry source said most Nigerian funds' had probably made a return of around 10 percent so far this year, below inflation which is above 17 percent and less than an average return of 11.5 percent over the past five years.
The Lagos stock index is down 2.2 percent in naira terms this year and has struggled to rise much above a 28,000 point resistance level. In dollar terms it is trading near a 15-year low, due to a weaker naira after Nigeria's economic problems forced it to abandon its dollar peg in June.
"We are doing equities less and less by the day and more of fixed income," said Adeniyi Falade, managing director of Crusader Sterling Pension, another pension fund.
Falade, like Uduanu, has allocated 80 percent of his more than 100 billion naira pension fund to fixed income securities with the balance of 20 percent spread between cash, money market instruments and equities.
Investors want to see liquidity returning to currency markets now that the currency peg has gone, analysts say. But the central bank has said it expects liquidity to remain tight this year.
"There is a general aversion to risk at the moment hence low activity on the stock market, and investors, pension funds inclusive, have switched to fixed income securities which barely guarantee a positive real return," said Akin Adigun, Africa equity sales trader at Renaissance Capital.
Adigun said he favoured banks due to low valuations and industrial stocks which would benefit from rising government spending. Nigerian banks have been trading at 0.6 times book value compared with 1.1 times emerging market peers.
Uduanu said the weak economy would slow growth in the Nigerian fund industry's assets under management to 18 percent in 2016, from 30 percent last year. But his fund had managed to grow to 220 billion naira from 190 billion naira last year.
$1 = 304.0000 naira Editing by Susan Fenton