Kumpulan Wang Persaraan (Kwap), Malaysia’s federal pension fund, is taking a proactive approach to mitigating ongoing turmoil in global markets.
“You need to be able to attack, not only defend,” Hazman Hilmi Sallahuddin, chief investment officer at Kwap, said on stage at AsianInvestor’s 12th Southeast Asia Institutional Investment Forum in Singapore on November 22.
“When we talk about resilience in portfolios, people often associate it with a defensive bias. Within the boundaries of our strategic asset allocation plans, we also see a resilient portfolio as having the opportunity to attack,” he elaborated.
Sallahuddin emphasised that the proactive approach will be taken on the foundation of steady strategic asset allocation (SSA). At Kwap, this means that ongoing factors like rising inflation and interest rates, as well as potential recession in some markets, will not impact the long-term investment objective of the federal pension fund.
“We remain steadfast to our SSA, but beyond that we have a tolerance corridor and a tactical asset allocation. To address short-term volatility, we can play with these two factors wherein the long-term target is still clearly defined,” Sallahuddin said.
Kwap’s total assets under management (AUM) is listed as MYR135.51 billion ($30.2 billion), but since a large share of the overseas investments is US dollar-denominated, Sallahuddin explained that the actual AUM is around $35 billion.
AN EVOLVING MIX
Sallahuddin is spearheading a movement of portfolios from an 80-20 percentage split in domestic and overseas assets, respectively, to 70-30. At the same time, the split between public and private markets will move from 90-10 to 80-20.
“We must relate to political risk in Malaysia rather than geopolitical risk. We had a very interesting election on Saturday (November 19) and the result was unexpected. A new government has to be formed, so with our current 80% domestic focus, that plays a role,” he explained.
Sallahuddin sees the domestic focus as a blessing in disguise this year, because it has made Kwap relatively resilient in terms of performance.
“Everybody’s performance [has been] affected by the markets this year, and the same goes for Kwap, but the domestic economy and market have been solid, including strong demand, so domestically our current exposure makes us quite resilient,” he elaborated.
Still, as Kwap’s overseas portfolio is about to significantly grow further, the biggest geopolitical risk for the pension fund in the medium- to long-term is the relationship between the US and China.
Moreover, the Russia-Ukraine conflict and its implications are making Kwap revisit its positions in Europe. Sallahuddin explained that one of Kwap’s economists has started the use of the term Wipe – war, inflation, politics and energy – as a benchmark in 2022.
“We hope that the conflict can be resolved in the medium- to long-term, but will continue to influence this Wipe view. Historically, geopolitical risk does not [last] forever, and as a long-term investor and pension fund, we remain steadfast to our SSA and execute accordingly,” Sallahuddin said.
THE NEED FOR SPEED
As Kwap increases its overseas share of the portfolio, the ongoing trend of deglobalisation and its implications also have to be taken into consideration. Sallahuddin said the two main risks here are supply chain disruption, especially in regards to China, and capital flows.
“When building a resilient portfolio in the context of deglobalisation, we firstly must make sure our SSA is consistent. It then means we go for the alpha and also diversify. That gives us the opportunity to look more at private markets and take advantage of the illiquidity premium there,” he explained.
To do so, Sallahuddin emphasised the importance of being agile and to adjust fast to changes to take advantage of investment opportunities. This has required a review of internal decision-making processes.
“Being a government pension fund is traditionally associated with relatively slow decision making and execution. This year, we launched a transition plan where we are optimising processes and changing everything, so we become even more progressive. The need for speed has become important to adjust to the ongoing macroeconomic development this year,” Sallahuddin said.
The optimised decision-making processes also seek to increase resilience via diversification. The strategic asset allocation changes, with higher allocation overseas and in private markets, will require exactly that, the chief investment officer said.
“We are currently heavily concentrated in North America. We are also a bit overweight in China compared to our benchmark, so those are some of the markets we need to diversify from,” Sallahuddin said.
Elaborating on asset types, he explained that the strategic asset allocation and the expanding private market exposure both impose on Kwap a certain bias.
“Even if we didn’t consider the SAA, we currently still see the best opportunities in private equity and private credit. That comes down to their ongoing revision valuation and the fund vintage, which provides a good position for us to acquire next year,” Sallahuddin said.
Sallahuddin was announced as Kwap’s new chief investment officer in January 2022. He joined with experience in private equity and venture capital investments and has previously worked with Malaysia’s sovereign wealth funds Khazanah Nasional Berhad for 12 years, among other roles.