Malaysian state pension fund KWAP is likely to see turnover of external asset managers increase in the short term, as it implements a new, automated system for awarding mandates, said chief executive Wan Kamaruzaman Binwan Ahmad.

He was talking to AsianInvestor about changes at the fund and how it has evolved, amid the recent upheaval in Malaysia.

Sharia-compliant fund managers have reason to be cheerful, given that KWAP plans to increase the portion of its AUM managed along sharia lines to 70% from a little over half currently.

Less so, perhaps, international asset managers, given that the $30 billion institution last year had its foreign-investment ambitions curtailed by Malaysia’s domestic problems.  

The fund had received permission in 2013 to expand its overseas allocations from 10% of total assets to 19%. It began to execute on these new freedoms, raising its overseas allocation from 6% to some 15% by the end of 2015. 

However, at the command of Prime Minster Najib Razak (also the minister of finance), KWAP and other big Malaysian institutional investors last year agreed to finance ValueCap, a fund manager set up in 2002. It will be used to stabilise the domestic stock market, hit by the scandal around state fund 1MDB.

Najib called for the biggest state-owned investment companies – KWAP, EPF, Khazanah Nasional and Permodalan Nasional – to repatriate assets to support the ringgit and domestic equities. KWAP liquidated certain overseas holdings, including a £270 million ($403 million) office building in central London it had held for only two years.

The fund had only started to pay out pensions for the first time last year, as the next step to becoming a fully fledged pension fund like the Employees Provident Fund (EPF), Malaysia’s biggest manager of retirement assets. KWAP has had no liabilities to meet until recently, so it was run with a low cash surplus of around 4%, noted Wan Kamaruzaman.

He said that despite the fund having the freedom – until last year at least – to operate on an absolute-return basis, it remained fairly cautious. It has 36% in equities, 50% in fixed income and 10% in real estate, private equity and infrastructure. KWAP’s domestic portfolio now accounts for 88.8% of its AUM, up from around 85% before last year’s changes.

The target return set by the board is 5% and the return is assessed on a five-year rolling basis. A mix of global equity and fixed income assets are part of the 11% of investment assets that are outsourced to 11 foreign managers with a local licence in Malaysia. 

The bulk of the mandates are run by global players such as Aberdeen, Amundi, BNP Paribas, Franklin Templeton, Goldman Sachs, and Nomura. KWAP’s local managers include Affin Hwang, AmInvestment, CIMB-Principal, Maybank and RHB.

As for private markets, KWAP is invested in 22 different funds, mostly global names but with a focus on the Asia-Pacific region. These allocations only account for 2% of the portfolio.

The fund operates an environmental, social and governance (ESG) approach, employing managers such as iVCap, Aberdeen and BNP Paribas to run ESG portfolios. Just over 50% of AUM is managed on a sharia basis. 

The KWAP board made a conscious effort to support the Islamic finance industry in Malaysia, said Wan Kamaruzaman. “We have specific mandates that are sharia-compliant and we expect more and more of our assets will be managed this way. Our target is to reach 70% in the next three to five years.”

For international manager selection, the fund typically uses consultants Willis Towers Watson or Mercer. Managers are reviewed once a quarter and given a tracking error of 500 basis points and a ‘three strikes and you’re out’ policy.

Despite the recent domestic turmoil and global uncertainty, Wan Kamaruzaman is sanguine. “Malaysia is not as bad as people presume,” he said.  

“We are getting used to the ‘new normal’ of low commodity prices, low interest rates and low inflation,” he added, noting that the global outlook naturally affects its return expectations. “We expect that market liquidity will be worse and volatility will be higher.

“Lower growth means lower earnings, and this is where the adjustment is being made, but we are well-positioned and have almost 35% of our equity portfolio in stocks with high dividend yield.”