Kuala Lumpur: Malaysia’s second-largest pension fund plans to buy more bonds with maturities of 10 years and above to hedge against another interest-rate cut as it moves further toward becoming a full-fledged Islamic entity.
Kumpulan Wang Persaraan (Diperbadankan), which manages about 120 billion ringgit (Dh110 billion or $30 billion), is considering lowering its 5 per cent minimum return target because of the uncertainty in global markets, said Chief Executive Officer Wan Kamaruzaman Wan Ahmad.
The fund achieved a 6.15 per cent gross increase on investment in 2014, he said, adding that it’s seeking to expand its Sharia-compliant component.
The central bank unexpectedly reduced the overnight policy rate Wednesday for the first time in seven years, joining other Asian counterparts from Indonesia to Taiwan in lowering borrowing costs to spur growth. KWAP plans to become a full-fledged Islamic pension fund in line with the government’s ambition to be a global Sharia-compliant financial hub, the CEO said. Presently, 55 per cent of assets comply with Muslim tenets.
“It’s never been so difficult for an institutional investor to get these kinds of returns, but to me this is the new norm,” Wan Kamaruzaman said in an interview in Kuala Lumpur Wednesday. “This low interest-rate environment, low corporate returns, lower dividend yields will prevail for a much longer period.”
‘Double-edged sword’
Malaysia’s interest-rate cut is a “double-edged sword” as the fund’s existing portfolio is “in the money,” while new investments will probably be in instruments with lower returns, the CEO said. KWAP will be buying longer-dated bonds because “we see room for a further interest-rate cut,” he said.
KWAP bought 30-year Malaysian government bonds at a yield of 4.613 per cent on June 29, days after the UK voted to leave the European Union, Wan Kamaruzaman said. The debt was quoted at 4.51 per cent Monday, according to prices compiled by Bloomberg.
The fund has been able to maintain returns of about 5 per cent so far this year in part because it focuses on Malaysian securities rather than investments in other countries where yields are lower, he said. The yield on the 10-year Malaysian government bond was 3.57 per cent on Monday, compared with 1.55 per cent for US Treasuries with the same tenor at the close on Friday and negative yields in Germany and Japan, Bloomberg-compiled data show.
Malaysia is the world’s largest market for Islamic bonds known as sukuk and the global industry has expanded to about $2 trillion in assets.
“If the fund’s assets reach 70 per cent, then we will probably look at turning the whole of KWAP into a full-fledged Islamic fund,” Wan Kamaruzaman said, adding that the fund doesn’t have a definitive time frame to achieve the target. “Nevertheless, the Islamic finance ecosystem must be developed and complement our expectations.”
Wan Kamaruzaman said the fund will likely keep its roughly 2 per cent allocation to UK assets, despite the results of the referendum, because it adds diversification to the portfolio. KWAP, which agreed to sell its 88 Wood Street building in London for 270 million pounds ($357 million) in March, owns two other properties in the city.
It purchased the 10 Gresham Street office building, which had a unit of Lloyds Banking Group Plc as its anchor tenant, in 2012 for 200 million pounds, according to its website. KWAP bought about 80 per cent interest in the 440,000-square-foot Intu Uxbridge shopping centre in 2014 for 174.8 million pounds, the website shows.
London’s property market could face a “steep correction” after prices surged in recent times, Wan Kamaruzaman said. KWAP also has about 200 million pounds in equity investments in the UK, he said.
“You need to treat Brexit with caution,” he said. “The trouble is that the London market has always been at the forefront before, but the correction this time round could be deeper because of the impact on globalisation.”
‘Not sentimental’
KWAP may sell the Sydney building that houses the Australian Stock Exchange. The fund bought the 14-story property at 20 Bridge Street in 2011 for A$185 million ($141 million), its website shows.
“We have expression of interest from both Australian and global players, if the price is right, we will sell,” Wan Kamaruzaman said. “Even though we are underinvested globally, we are not sentimental about investments.”
KWAP receives an average of about 4 billion ringgit annually in pension contributions, Wan Kamaruzaman said. It reported gross investment income of 6.47 billion ringgit in 2014, with the largest contribution coming from equities at 39 per cent of the total, according to its website. Loans and private debt provided 23 per cent of income, while Malaysian government securities made up 17 per cent, the website shows.
The fund allocated 54 per cent to fixed income, 36 per cent to equities and the remaining 10 per cent to other investments, including real estate, at the end of 2014, according to the website. Overseas investments currently account for 15 per cent of total assets, while the fund has a mandate to invest as much as 19 per cent abroad, Wan Kamaruzaman said.
The fund’s 2015 results will likely be released in August, pending clearance from parliament, he said.