Pension funds worldwide are grappling with geopolitical risks in an increasingly interconnected global economy, according to Hazman Hilmi Sallahuddin, the chief investment officer of Malaysian public pension fund Kumpulan Wang Persaraan (KWAP).
“Geopolitical risks are a crucial topic in our monthly investment committee meetings. We avoid overreactions and underreactions," Sallahuddin told a panel discussion at AsianInvestor’s 13th Southeast Asia Institutional Investment Forum in Singapore on November 22.
With over $30 billion in assets under management (AUM), KWAP's investment decisions significantly impact Malaysia's financial landscape.
“Our aim is to review how quickly we can escape and bring the capital back home if things go south,” he said.
KWAP's approach to geopolitical risks combines a strategy of rigorous field research and comprehensive desktop studies to stay abreast of global events. This methodology is particularly relevant when monitoring volatile regions like China, where political or economic changes can significantly affect KWAP's portfolio.
“It's crucial for us to personally assess the situation on the ground. This is particularly true when considering countries like China, which present a complex narrative. Hearing both sides of the story enables us to make better-informed judgments,” said Sallahuddin.
On the same panel, Sriram Iyer, chief executive of HDFC's $6 billion pension fund in India, offered a unique perspective.
HDFC's strategy is primarily India-centric, providing a natural hedge against many global risks. However, Iyer acknowledged the interconnected nature of today's global markets and the need for vigilance beyond their primary market.
"Despite our focus on Indian markets, we cannot afford to ignore the global economic landscape. We continuously review our holdings with significant global market exposure, balancing our growth aspirations with prudent risk management," said Iyer.
Due to current regulations, HDFC is not allowed to invest outside of India’s markets creating a layer of insulation for the pension investor according to Iyer.
“However, we have holdings in multinational companies exposed to global markets and we closely review these. For instance, India is a net importer of oil and we invest in oil companies listed on the index. So, we do have exposure to geopolitical elements," he said.
Geopolitics is certainly a significant consideration for the $400 billion Caisse de dépôt et placement du Québec (CDPQ) in its strategy according to Leong Wai Leng, the Canadian fund’s Asia Pacific head.
“It forms an integral part of our assessment, impacting both our direct and indirect exposure. Notably, 85% of our portfolio is actively managed by our team, which gives us a deep understanding of its potential impact,” Leong told AsianInvestor’s panel.
“We've made substantial investments in publicly listed companies that present a considerable amount of indirect exposure to geopolitical risks. These risks are always taken into account alongside other potential risks and opportunities,” she said.
Ultimately, CDPQ’s decisions are guided by the principle that risk-adjusted returns must be sensible and justifiable.
Despite the increasing challenges, the pension investors must continue to pursue growth amid the uncertainty while remaining true to their own missions.
Iyer highlighted HDFC's remarkable achievement in doubling its market share from 21% in 2019 to 43% in 2023, attributing the growth to his fund’s unique model as both a fund manager and distributor.
“Our dual role advantage has contributed significantly to our growth. Our ability to consistently beat the index for the last decade is a testament to our unique model," said Iyer.
Sallahuddin provided a contrast, discussing KWAP's growth strategy, which leans heavily towards private equity transactions. Amid low-interest rates and volatile markets, private equity has emerged as a promising avenue for pension funds seeking higher returns.
"We've significantly increased our private equity transactions, from 10 per year to an anticipated 35 this year. This strategic shift towards private markets signals our commitment to achieving better returns for our members," Sallahuddin declared.
In the pursuit of growth, CDQP has a constant objective—a primary commitment to generate risk-adjusted returns for approximately 8 million depositors and pensioners based in Quebec and a mandate to foster the Quebec economy, said Leng.
“Reflecting on market trends over the past 5 to 10 years, or perhaps even further back, every market cycle has underscored the importance of holistic portfolio allocation,” said Leng.
For CDPQ it has become crucial to understand its concentration levels, diversification strategies across asset classes and geographies, and to build resilience into the portfolio, which includes considerations like liquidity.
“What has changed for us is the integration of sustainability into our portfolio since 2017. We were among the early adopters of this approach, even tying it to our bonus targets, myself included. Our bonuses are now linked to the carbon intensity of our portfolio, which we actively measure,” she said.
In line with practices adopted by other pension funds, CDPQ has also shifted its portfolio allocation from being too heavy in its domestic investments towards a more global outlook. Currently, only 25% of the fund’s investments are in Canada, with the remaining 75% spread globally to enhance the robustness and resilience of its portfolio.
"In an increasingly complex and interconnected world, our focus remains on delivering sustainable and long-term investment returns for our depositors. We aim to strike a balance between risk and reward, always guided by our core values and commitment to sustainability,” said Leng.