Malaysia's Kumpulan Wang Persaraan pension fund for public officials, the country's second largest retirement fund with 120 billion ringgit ($29.8 billion) in assets, is pushing ahead with its efforts to become a diversified global investor despite increasingly difficult market conditions at home and a temporary political hold on the fund's overseas ambitions.
In a July 21 interview, Wan Kamaruzaman Bin Wan Ahmad, CEO of Kuala Lumpur-based KWAP, as the fund is known, said his team — like big institutional investors around the world — is being forced to “adjust our expectations” for a “lower-for-longer” monetary policy environment.
KWAP's investment return for the current calendar year is likely to miss its target of 5%, should Malaysian stocks post a third consecutive year of declines, the CEO predicted. Year-to-date, the Kuala Lumpur Composite index is down 2.1%, following declines of 3.4% in 2015 and 4.5% in 2014.
On the fixed-income front, noting the increasingly skimpy or even negative yields for many developed market sovereign bonds, Mr. Wan Kamaruzaman said he can't complain about the more than 3.5% yield from Malaysia's benchmark 10-year government bond. Even so, that advantage looks set to narrow, he said. On July 13, soft economic conditions at home prompted the country's central bank to cut its overnight policy rate to 3% from 3.25%, and further cuts of “at least 50 basis points over the coming year” are likely, he said.
In February, Malaysia's biggest retirement fund, the 681.7 billion ringgit Employees Provident Fund, credited its overseas diversification efforts for allowing the national defined contribution system to pay a 6.4% dividend into member accounts for 2015 — the second highest dividend since 2000 — despite another weak year for domestic stocks.
That boost from the 25% of EPF portfolio assets invested overseas reflected both investment gains by some overseas markets as well as valuation gains from the Malaysian ringgit's weakening of more than 20% vs. the dollar in 2015.
With KWAP only beginning to invest overseas six years ago, Mr. Wan Kamaruzaman said his fund's relatively modest 10.8% exposure to global markets wasn't able to provide as much of a boost for its portfolio in 2015, leaving gross investment returns for the year at 5.4%. That was below the 6.15% to 7.07% range for the previous five years.
For now, KWAP's efforts to boost its overseas exposure have been subjected to a political timeout after Malaysia's government at the start of 2015 instructed government-linked investment companies, including EPF and KWAP, to postpone further investments abroad, in an effort to provide support for the tumbling ringgit.
In September, Prime Minister Najib Razak went one step further, calling on government-linked investment companies to take profits on overseas holdings that had done well, and invest the proceeds in domestic markets.