Malaysia’s Hajj fund Tabung Haji (TH) is looking to diversify away from Asia Pacific ex-Japan markets into global markets in order to diversify and capture higher risk-adjusted returns, says its executive director of investment Mohamad Damshal Awang Damit.

In line with plans announced last year to increase foreign exposure through active external managers, the asset owner recently issued new mandates for global equities and has identified a few external managers that it will appoint shortly, he said.

Mohamad Damshal

The pilgrims fund is also eyeing foreign sukuk (Islamic bonds) to diversify globally. However, it remains cautious on alternatives. While Damshal acknowledges these could help enhance the fund’s returns, “given our liability and risk profile, we keep risky assets such as private equity at a low level to contain the overall risk,” he told AsianInvestor.

The fund currently allocates just 3% to private equity through domestic and foreign funds and direct investment, and does not have explicit plans to increase this percentage.

In contrast, other Malaysian government-linked investment companies (GLICs) such as Employees Provident Fund (EPF) and Permodalan Nasional (PNB) have expressed plans to increase their exposure to risky assets in search of yield.

A senior executive at a Malaysian asset management firm familiar with TH said this was likely explained by a lack of internal capabilities for conducting private asset deals, rather than a sign the fund was mindful of its asset-liability management (ALM) history.

“There were ALM issues in the past because they were holding very illiquid (small cap) equities, which dropped significantly in value,” the asset manager said.

The executive added that Damshal, who took over as CIO in February 2020 filling a role that had been vacant since 2018, was professionalising his team and building capabilities across strategy, risk, fixed income and equity.

PAST ISSUES

The fund underwent a restructuring in late 2018 after a 2017 audit by PwC found its total liabilities exceeded total assets by RM4.1 billion. It also emerged the fund had illegally paid out dividends since 2014, while insolvent.

As part of the restructuring, TH went under the supervision of Malaysia’s central bank and offloaded approximately RM19.9 billion in underperforming assets to a special purpose vehicle (SPV) controlled by the finance ministry, which made the acquisitions through the issuance of sukuk.

These assets included listed agriculture conglomerate Felda Global Ventures, an area of land in Kuala Lumpur it purchased from scandal-ridden 1MDB, and state electricity company Tenaga Nasional. 80% of the value assets moved to the SPV were equities, and the remaining 20% real estate. By June 2019, the fund’s assets once again exceed its liabilities, by RM1.8 billion.

TH declined to comment on whether this experience is behind its stance towards alternative assets, and how this might be constraining its ability to meet target returns.

CONFLICTING AIMS

While return targets are not disclosed, TH’s original mandate differs from that of other GLICs. Set up in 1963 to allow Malaysian Muslims to save for their once-in-a-lifetime pilgrimage to Mecca, it aimed to achieve stable returns for depositors and subsidise the cost of their trip.

Constrained by the types of assets it could invest in (being a Shariah fund) and liquidity challenges, it was not meant to seek the same returns as other GLICs like EPF or PNB, explained a former GLIC executive.

Wealthier members could also partly fund others’ pilgrimages by selecting more expensive packages, he added. Like performing Hajj, charity is one of the five pillars of Islam.

“However, it has veered away from its original intentions in order to have a “window dressing” of superior returns because the government wanted to show that all of its government-linked funds were performing well. As a result, for the longest time TH had governance issues. There were a lot of politicians being placed there and a lot of political pressure.”

He added TH was also seen by politicians as a way to reach Malaysia’s bottom 40% income group, who are largely Malay Muslim.

As Malaysians face increasing costs of performing the Hajj – approximately $5,600 as of May 2020 – TH will face increasing pressure to achieve adequate returns. Last year media reports said it would remove the subsidy except for the poorest 40% in order to improve long-run dividends.

Earlier this year, Malaysian prime minister Muhyiddin Yassin announced Saudi Arabia had agreed to increase the country’s annual pilgrim quota by 10,000, to 41,600. This will take effect once the pilgrimage resumes. The kingdom last week announced it would again ban foreign pilgrims in 2021 due to the ongoing Covid-19 pandemic.

TH declined to comment on how this would affect cash flows, its investment strategy or returns.

ASSET ALLOCATION

Guided by its strategic asset allocation (SSA) framework, as of June 2021, Tabung Haji has 58% of assets invested in fixed income, 11% in property, 23% in listed equity (of which 78% is domestic) and 5% in cash. In addition, 3% is invested in private equity, both through domestic and foreign funds and through direct investments. Damshal said the fund allows tactical deviations from SAA in light of temporary events.

“The current steepening of bond yield in Malaysia opens an opportunity for Tabung Haji to accumulate more sukuk,” he told AsianInvestor, adding he believes the country’s current inflationary pressures are transitory.

While the fund prefers value and cyclical stocks as the economy recovers, “an over-reaction on inflation fears could present fresh opportunity to accumulate slightly beaten quality growth stocks.” The fund expects to include foreign sukuk in the SAA in the future.

Damshal draws parallels between ESG and investing based on Shariah principles, to which TH must adhere. “Both gravitate towards sustainable and equitable outcomes.” Like some sustainable funds, Shariah funds use negative screening to exclude companies heavily involved in tobacco, alcohol, gambling, pork products or weaponry, against the principles of Islam.

This makes it more challenging to manage equities, the Malaysian asset management executive said, “so Shariah funds have to take more risk by going down non-traditional sectors or more concentration in other sectors.”