Malaysian institutions hear call to invest more at home

Malaysia's biggest institutional investors paid lip service last week to Prime Minister Najib Razak's call to support Malaysia's economy by bringing some of their overseas allocations home.

It's less clear how enthusiastic the country's top pension and sovereign wealth funds — including the 667.2 billion ringgit ($154 billion) Employees Provident Fund; the government's 145.5 billion ringgit strategic investment arm, Khazanah Nasional Berhad; and Kumpulan Wang Persaraan, the 110 billion ringgit pension fund for public officials — will prove to be in pausing or reversing their push into overseas markets in recent years.

At a Sept. 14 news conference to announce “proactive steps” to stabilize Malaysia's battered financial markets, the prime minister said they should do so.

In transcribed remarks on his official website, Mr. Najib encouraged government-linked investment companies “to take profits on their overseas investments” in favor of making relatively “high multiplier” investments at home.

At the top of the list of steps he announced, Mr. Najib said ValueCap — an investment holding company set up in 2002 to provide support for Malaysia's stock market, with Khazanah, KWAP and Permodalan Nasional Berhad, another government-linked fund, as equal shareholders — would be entrusted with 20 billion ringgit to invest in Malaysian stocks.

In recent years, ValueCap moved beyond investing its three shareholders' proprietary funds to accept third-party money as well. A company spokesman couldn't be reached for further details.

It wasn't immediately clear whether Khazanah, KWAP and PNB would have to provide the fund's capital. Khazanah spokesman Raslan Sharif said details of where the 20 billion ringgit would be coming from should be forthcoming in the next few days.

The call for local institutional investors to do national service will leave global money managers a “bit apprehensive,” said an executive of one overseas manager with Malaysian clients, who declined to be named. “If they're being pulled back to support the local market, that's a threat to our business,” he said.

A statement released by Khazanah immediately after Mr. Najib's press conference said the government's strategic investment fund was pleased to support the prime minister's proactive economic measures “in all relevant areas.”

Meanwhile, a headline — “KWAP supports government's proactive economic measures” — appeared on KWAP's website the day after the press conference, although it couldn't be confirmed if the pension fund made a fuller statement.

Wan Kamaruzaman Wan Ahmad, KWAP's CEO, and Nik Amlizan Mohamed, the fund's chief investment officer, couldn't be reached for comment.

While its more than 17% allocation to direct investments overseas as of Aug. 31 has been a key driver of its gains, Khazanah's statement said it will “review and, where opportune ... harvest a selection of its international investments” in support of the measures announced by the prime minister. The fund had been increasing its overseas investments, which accounted for 10.4% of assets at the end of 2012.

Khazanah also listed 6.8 billion ringgit of investments in domestic projects already underway that were being “accelerated or increased.” The biggest of nine projects listed was an investment of 4.5 billion ringgit to develop a leisure and tourism resort in Desaru Johor, a beach area on the South China Sea.

Year-to-date, overseas exposure has been a lifesaver for Malaysian institutional investors as a toxic cocktail of factors — including China's decelerating growth, plunging global prices for the oil Malaysia exports and unprecedented political turmoil at home — has seen the ringgit weaken sharply and domestic stocks sag.

Even after a 6% pop in the past month, helped recently by the ValueCap announcement, the Kuala Lumpur Stock Exchange benchmark index has dropped almost 10% in the 12 months ended Sept. 18, while the ringgit has fallen more than 30% against the dollar.

The Employees Provident Fund's Aug. 28 announcement of results for the April-June quarter noted its 25% allocation to overseas investments — up from 22% a year before, and 10% at the end of 2010 — had contributed 40% of the EPF's 11.41 billion ringgit in investment returns for the quarter.

History looks set to repeat itself as the current quarter draws to a close, with the dollar strengthening another 12% against the ringgit since June 30, even as the Kuala Lumpur exchange slipped 2.1%.

An EPF statement issued after the prime minister's Sept. 14 press conference seemed at once supportive and non-committal — welcoming the announcement of “broad measures to strengthen the economy,” while stressing that global diversification had been “instrumental” to the EPF's performance so far.

“To manage any potential risks present in volatile times, the EPF stands guided by its values and mandate to always protect members' interest, and ensure transparency, integrity and strong governance,” the statement said.

Shahril Ridza Ridzuan, the EPF's CEO, was traveling and couldn't be reached for comment.

KWAP, meanwhile, had seen overseas investments grow to roughly 11% of its portfolio by the end of 2014 from just more than 1% at the close of 2010.

It has been controversy surrounding another domestic institutional investor — 1MDB, a sovereign wealth fund launched by Mr. Najib six years ago — that's fueled a political firestorm keeping overseas investors at bay, despite the plunge in the ringgit's value that might otherwise have tempted bargain hunters.

While the fall in the stock market and the Malaysian ringgit have seen valuations return to attractive levels, Malaysia remains “one of our least preferred equity markets in Asia,” said Al Clark, Sydney-based global head of multiasset with Nikko Asset Management, citing a combination of political uncertainties and the fall in prices for Malaysia's main commodity exports.

“We do not expect this to stabilize in the near term and so see better valuation opportunities in other Asian markets,” he said.