Malaysia's RM120 billion ($30 billion) civil servants’ pension fund, Kwap, has begun a shift towards running its entire investment portfolio on a sharia-compliant basis, AsianInvestor has learned. Meanwhile, like other institutional investors, it is growing increasingly concerned about its ability to achieve its performance targets.
Kwap's shift towards sharia compliance is consistent with the Malaysian government’s intention for the country to become the leading hub for Islamic finance in Asia. It also follows a move by the country’s largest pension fund, the $160 billion Employees Provident Fund (EPF), to create a segregated sharia portfolio for members.
Currently, just over half the Kwap portfolio is run according to sharia principles. While there is no fixed timetable for the fund to convert fully to Islamic fund management, it is already being prepared for this eventuality.
Chief executive Wan Kamaruzaman told AsianInvestor that Kwap had completed a readiness assessment to set up an internal sharia fund or to convert itself into a fully sharia pension fund.
But before this can happen, he said, “the local and global Islamic finance eco-system must be improved and developed further to support our sharia ambition". While demand for sharia investments is growing, the larger institutions such as EPF and Kwap need a much broader market to be able to run diverse Islamic portfolios.
The are signs this is happening. For instance, sukuk issuance should be supported in the long term by the revamping of legislation in Asia and the Middle East, the growing Islamic finance industry in Asia and increasing sovereign funding needs, according to Fitch Ratings.
Bashar Al Natoor, global head of Islamic finance at Fitch in Dubai, said: “Greater harmonisation of sukuk standards, structures and legal frameworks resulting in improving transparency would also help improve issuers and investors' acceptance of such instruments.
Wan Kamaruzaman said Kwap may consider expanding its global sukuk allocation should the strategy continue to provide sustainable investment returns at appropriate risk levels. It is likely to allocate more to third-party managers as the state pension steps up its foreign investment exposure, he added.
Meanwhile, Kwap is another major fund to have expressed concern recently about the sustainability of investment returns amid prevailing low interest rates globally.
Wan Kamaruzaman said the institution may reduce its target return of 5% because the board considered that the situation of low interest rates, low earnings growth and low dividends will remain for a long period. While the yield on 10-year Malaysian government bonds is around 3.5%, compared to 1.5% for 10-year US treasuries, he said the fund would find it difficult to achieve its 5% target in the foreseeable future.
Kwap granted its first sharia mandates to third-party managers in 2011 in the form of two global sukuk mandates for a total of $100 million. The mandates have grown to $250 million after a capital injection and the appointment of two more external managers in 2014.
In terms of external Islamic mandates, to date Kwap has appointed five external asset managers to manage domestic sharia equities, six for domestic sukuk and four to run global sukuk, with a total fund size of $800 million. This represented some 2.7% of Kwap's AUM on December 31.
Malaysian asset managers running mandates for Kwap include Affin Hwang, AmInvestment, CIMB-Principal, Maybank and RHB. The bulk of the mandates for conventional asset management are run by global players such as Aberdeen, Amundi, BNP Paribas, Franklin Templeton, Goldman Sachs and Nomura.
Kwap's annual results for 2015 will be announced next month. For 2014, the fund’s allocation was 54% fixed income, 36% equities and 10% to real estate and other alternatives. The overseas portion of the portfolio totalled 15%.