Top institutional investors curbed by regulatory constraints

Khazanah, the EPF, KWAP and PNB cite the need to boost their investments abroad

By NG MIN SHEN & MARK RAO / Pic By MUHD AMIN NAHARUL

Four of Malaysia’s largest institutional investors are setting their sights on overseas assets to grow their portfolios, but regulatory challenges at home could hamper their growth.

Khazanah Nasional Bhd, the Employees Provident Fund (EPF), Retirement Fund Inc (KWAP) and Permodalan Nasional Bhd (PNB) cited the need to increase their investments abroad as they see the values there that cannot be accessed domestically — yet.

Interestingly, three of the four players are now helmed by new leaders, likely a result of the Pakatan Harapan administration’s culling of heads at government-linked bodies after taking office in May 2018.

EPF CEO Tunku Alizakri Raja Muhammad Alias (picture) said approximately 38% of the private retirement fund’s assets are based overseas currently, as initiated under the globalisation of the group’s assets in the late 2000s under the leadership of then CEO Datuk Shahril Ridza Ridzuan, who now helms Khazanah.

“We do actually want to go and push more money outside, we were quite early in the game thanks to Shahril Ridza. But now, we’re sort of constrained by our ‘big brother’ Bank Negara Malaysia (BNM). We have a problem — we are flush with cash and we’re growing every month.

“On a net basis, we get RM1.5 billion to RM1.9 billion on a monthly basis. Very soon, we’ll be a RM1 trillion fund. The real challenge is, where do we put this cash?” he said during a panel session at Invest Malaysia 2019 in Kuala Lumpur yesterday.

The EPF’s assets under management (AUM) stood at RM833.76 billion as at end-2018. Foreign investments across asset classes contributed 37.52% to the fund’s gross investment income last year, which amounted to RM50.88 billion.

It currently invests in 40 countries, with its overseas portfolio totalling RM222.61 billion.

Tunku Alizakri said the fund’s method of achieving its goals may change, although its core purpose remains the same.

Civil servants’ pension fund KWAP appears to be facing a somewhat similar issue — its CEO Syed Hamadah Othman said the fund is currently working with the central bank to re-draw its overseas investment lines.

“We’re in negotiations with BNM to find ways of utilising our investments to do more overseas, up to the limit we’ve been allowed to,” Syed Hamadah said at the panel session.

He said the group is eyeing real estate as the existing properties under its belt — including student accommodations and office blocks in the UK, Australia and Europe — provide stable rental income and yields to the fund’s liking.

“Apart from properties, it has to be private equity, which is consistent with our strategy as a long-term investor. We don’t need to realise our investment in a short time. We can wait for five to seven years, so I think that’s where our direction is — to be more active in that space,” Syed Hamadah said.

He added that 87% of the fund’s assets are presently invested domestically, while the remaining 13% is held overseas. Syed Hamadah has been leading the fund since November 2018.

KWAP’s AUM in 2017 stood at RM140.8 billion. The fund previously said it expects its AUM to grow to around RM150 billion for 2018.

Khazanah also has its eye on the international stage, with MD Shahril Ridza revealing that one of the group’s key management issues under its previous model was a heavy concentration in selected local assets and companies.

“So, from a risk diversification standpoint, we need to look at that especially for our commercial fund, particularly if we are trying to get optimised returns over the long term. We have to restructure that over the next five years over a better selection of geographies and sectors,” he said.

Khazanah said earlier this month that it would split its RM135.5 billion portfolio into commercial and strategic portions as part of its bid to drive higher returns, with the commercial fund to have a more strategic asset allocation-based portfolio over the next five years.

Moreover, 60% of the commercial fund will be in public equity, 30% in private firms and 10% in real assets.

PNB president and group CEO Datuk Abdul Rahman Ahmad also said the country’s largest asset management firm is working to rebalance its portfolio — with the aim of deploying cash into other asset classes, as well as diversifying further into global assets.

He said the company’s investments are concentrated in domestic public equities, comprising over 70% of its portfolio, while its global investments only make up about 4%.

Abdul Rahman said PNB intends to redirect part of its cash into other asset classes like private equity, fixed income and real estate, but noted that the company is still lagging behind in terms of its investments in global assets.

“We’re still behind the curve compared to other Malaysian government-linked investment companies, but we have to do it judiciously. We have to do it to understand the impact of flows on our external trade and we want to make sure we do it in a gradual manner,” he said.

PNB’s AUM exceeded RM295 billion as at January 2019.