The United Kingdom’s National Employment Savings Trust (NEST) is preparing to introduce an active global high-yield bond fund. The new mandate will add to the existing ‘building blocks’ that underpin the scheme’s default NEST retirement date funds, and some of its alternative fund choices.

The multi-employer defined contribution fund, launched just five years ago, looks after more than £1.4 billion ($1.8 billion) on behalf of 4.1 million members and is set to grow considerably as auto-enrolment gathers pace.

“High-yield bonds can offer attractive returns in an otherwise low-yielding fixed income environment,” says chief investment officer Mark Fawcett, who has been in the role since NEST’s outset.

“Procuring a high-yield bond fund will also further diversify our members’ portfolios. By including this asset class in our building-block mandates, we will be joining the growing number of institutional investors holding high yield.”

There are nearly 50 retirement date funds in NEST’s default strategy. It accounts for the bulk of members and their assets, which are divided into three investment strategies depending on their age.

For young savers in the foundation phase, strategy is low risk, aiming for returns that match inflation and encourage saving. The growth phase, typically lasting 30 years, targets returns of inflation plus 3 per cent in a diversified strategy. The consolidation phase invests in inflation-matching assets to de-risk.

The active bond allocation marks a departure from NEST’s general preference for passive management. Its commitment to passive is based on an investment belief that indexed management, where available, is often more efficient than active management. It is also part of NEST’s need to control costs in line with its 0.3 per cent annual management charge.

High yield, and a handful of other allocations, are the exception, Fawcett explains.

“We need to believe that active managers are likely to improve the risk-adjusted returns relative to the index in any given asset class,” he says.

“Thus, we have elected to use active in credit markets where indices are less well constructed and we believe active managers can manage default risk. Hence, for investment-grade credit, emerging market debt and (in the future) high yield, we use active managers. Also, in some asset classes, such as direct real estate, passive management is clearly not an investable option.”

ESG criteria in the mix

For equity markets, NEST generally uses passive management, although Fawcett stresses that the fund does “select thoughtfully” which index to track.

For developed markets, it uses just market-cap weighted, whereas for emerging markets it tracks two alternatively constructed indices.

NEST made its first allocations to alternative indices through two emerging market equity mandates in 2014. One fund weights companies according to certain fundamentals; the other screens out stocks on the basis of certain environmental, social and governance (ESG) criteria.

NEST’s new bond mandate will have to incorporate ESG criteria, now integrated across all the retirement date entities and other fund choices.

Far-reaching ESG objectives are outlined in the pension provider’s inaugural responsible investment report, titled Working for Change, published mid last year.

“Considering [ESG] risks and opportunities, combined with being an active investor, is part of how we make the most of members’ pots,” Fawcett explains. “Integrating ESG into our investment processes is one of the means we deploy to grow members’ money over the long term.”

The report highlights four key aims.

Better risk-adjusted return: Targeting an improvement in ESG performance where there is evidence that doing so can lower the amount of risk needed in order to achieve a return.

Better functioning markets: Working to improve how markets operate and are regulated in jurisdictions where NEST invests.

Support long-term wealth creation: Encouraging the companies NEST invests in to deliver sustainable and stable performance to support good returns for members over many years.

Manage reputational risks: Protecting NEST’s reputation and increasing members’ trust by encouraging companies to act in ways members can feel confident about.

With these key aims in mind, NEST went on to identify its most important ESG risks, Fawcett explains. So far, these include how companies treat the environment, addressed through focusing on companies’ greenhouse gas emissions; how companies interact with others, tackled through a focus on conduct, culture, and staff reward; and how companies lead and organise themselves, addressed through a focus on audit and dividends that contribute to public and investor confidence and trust.

Long-term partnerships with fund managers

NEST has also built a reputation for nurturing long-term manager relationships, something Fawcett believes lies at the heart of successful investment strategy.

“Fostering long-term partnerships with our fund managers is crucial to establishing mutually beneficial commercial terms and providing for a stable framework for our asset allocation decisions. We want to avoid the destructive feedback loop of hiring managers at the top of a performance cycle and firing them at the bottom. It is precisely this behaviour that encourages investment managers to take inappropriate short-term risks and charge higher fees for short-term revenues. Of course, there is a difference between low cost and value for money – NEST’s focus is very much on the latter, subject to our fee budget.”

The fund’s internal team comprises a small but skilled group responsible for managing core aspects of the investment strategy, from asset allocation and risk management to the development of ESG and the responsible investment policy.

Large funds continue to dominate global pension assets. The Willis Towers Watson Global Pension Assets Study 2017 found that total pension assets at the end of 2016 were $36.435 trillion. The world’s largest 300 pension funds now account for 42.5 per cent of that. The largest 20 funds alone account for 17 per cent.

The largest pension markets in the world, by total assets, are the US, UK, Japan, Australia and Canada.

The US dominates with $22.48 trillion, followed by the UK with $2.86 trillion, Japan with $2.80 trillion, Australia with $1.58 trillion and Canada with $1.57 trillion.

The largest seven markets, which also includes the Netherlands and Switzerland, account for 91.7 per cent of the world’s total pension assets.

Over the last 10 years, the Hong Kong market has experienced the fastest growth, with a compound annual growth rate of 7.8 per cent for the decade. It was followed by the Australian market, with a rate of 6.9 per cent, and the US at 4.9 per cent. Three of the largest 22 markets experienced negative growth over the last decade (France, Japan and Spain).

In the US, the top 10 pension funds represent 8.5 per cent of total assets, but the top 10 Japanese funds represent 63.7 per cent of total assets in that market. The distortion is due primarily to the Government Pension Investment Fund, which represents 43.5 per cent of Japan’s pension assets. In the UK, the top 10 pension funds represent 16.2 per cent of total assets.

In terms of asset allocation, real estate and other alternatives have been the biggest winners over the last 10 years, with an increase in allocation from 4 per cent to 24 per cent across the largest seven pension markets in that time period.

In the 2017 report, Australia, the UK and US have above-average allocations to equities, while the Netherlands and Japan have above-average allocations to bonds.

The home bias in equities has fallen over the past decade, from 68.7 per cent to 42.8 per cent across the largest seven markets.

Defined contribution assets continue to make up more and more of the market, now accounting for 48.4 per cent, up from 41.1 per cent in 2006. Australia and the US have the largest proportion of defined contribution assets, with 87.0 per cent and 60.1 per cent, respectively.

The report states there are six factors that are growing in influence on pension fund development.

They are:

  • Improvements in governance

Risk-management focus

Pension design towards a defined contribution model

Pressure for talent

New value chain. A more effective value chain will emerge, with the use of passive and smart beta leading to modest fee compression.

ESG and stranded assets. The move towards more integrated approaches to managing ESG factors and exercising better stewardship over ownership is gathering pace. This will require the support of increased disclosure, measurement and analysis of extra-financial factors.

Two of the Netherlands’ largest fund managers, PGGM and APG, are developing investment strategies designed to help boost the United Nations’ sustainable development goals (SDGs).

APG manages €436 billion ($465.8 billion) on behalf of 4.5 million Dutch pension scheme members; PGGM manages pension assets worth €205.8 billion. Both believe institutional private capital is critical to developing the UN’s 17 ambitious SDGs, and are working alongside other Dutch financial institutions towards that end.

The UN SDGs are linked to challenges around climate, poverty, healthcare and education, and will require an estimated annual $5 trillion-$7 trillion by 2030.

In line with a growing belief amongst other global investors, the Dutch managers argue that investing in consideration of the greatest challenges of the age is not only of societal importance, but also in the best interest of their beneficiaries and investors.

The Dutch initiative is groundbreaking both for pushing a national SDG investment agenda and for uniting the country’s pension funds, insurance firms and banks around the shared goal.

The initial consultation process, completed last year, took six months and brought together more than 70 investors, government representatives and expert practitioners. In their resulting report, titled Building Highways to SDG Investing, the signatories offer concrete ways to accelerate and scale SDG investment at home and abroad.

“I hope this will mark the development of a new mind set in the financial sector, just like 10 years ago, when the idea started to take root that institutional capital should be invested responsibly,” says PGGM chief executive Else Bos.

“I am, personally, very keen on this development, as I am convinced the SDGs’ contribution to a more stable world, and hence to a stronger and more sustainable economy, will ultimately help us generate better returns for our clients.”

A pioneer for new strategies

PGGM has already invested €10 billion in line with four SDGs themes – climate, food security, water scarcity and health – and is targeting €20 billion by 2020.

It’s a fixed goal that casts PGGM in a leadership role around SDG investment. The manager is duly pioneering new strategies, including how best to apply SDG investment to public markets through active strategies. It has built up an SDG-based “solutions” portfolio, with three-quarters of the current €10 billion allocation in liquid equities and bonds. Investments are drawn from a universe of 350 listed companies that contribute positively to PGGM’s selected four SDG themes.

The universe includes big conglomerates that are acknowledged “transformational leaders”, or others that may have only a small part of their business involved in solutions, but still have a big impact, like Unilever and wind turbine manufacturer GE.

Smaller companies with specific lines of business related to the four themes are also in the universe, says Piet Klop, senior adviser, responsible investment at PGGM.

“Our internal team and an external fund manager have picked about 70 companies from this universe for our equities ‘solutions’ portfolio,” Klop says. “I believe this initiative sets us apart from other impact funds because it shows you can have an impact through listed equities.”

The companies in the universe are selected according to their positive impact and commitment to measuring that impact.

“We are careful not to claim that we generate impact ourselves, but this way we support those companies that do generate an impact and measure their results,” Klop says. He notes that persuading companies in the universe to report impact is an ongoing challenge.

Active strategy costly but worth it

“Rome wasn’t built in a day. Some companies are more willing than others to carry out impact accounting,” he explains.

Yet PGGM’s ability to measure the non-financial return of its solutions portfolio is a vital requirement of its biggest client, Dutch healthcare fund PFZW. It’s also the key reason for the active strategy.

“If you want to make allocations to selected themes, there is, as yet, no option other than active management,” Klop says. “The [indices] available are not what our client is looking for because the impact data is not available. Our client needs to communicate impact to beneficiaries.”

The active solutions strategy accounts for about 5 per cent of PGGM’s public-equity allocation, where the manager overwhelmingly favours passive strategies. The fund has about €55 billion in passive equity allocations. Although the active allocation is expensive, Klop says the returns are promising.

“We carefully keep track with the broader market index, and believe we can match this in the long run,” he says. “Even when energy companies and financials, which are largely absent in our universe, are getting a boost, like they have since the US election.”

When it comes to SDG investment in private markets, the Dutch pension managers highlight the importance of so-called blended finance. Here, the idea is that the Dutch Government and other institutions invest alongside private capital to share risk.

It is co-operation that will help generate SDG investment that would not have happened otherwise. Blended finance would bring an increase in awareness of SDG investment, along with policy support, guidance through government bureaucracies and financial structuring expertise. It would also act as a catalyst to bring in other investors.

“In private markets, blended finance may help fund opportunities earlier in the investment chain, so we can tap more,” Klop says.

PGGM and APG’s initiative will soon prove how viable SDG-focused investments are. With any luck, they hope their strategy will encourage other investors to use this kind of sustainability as a lens in their investment decisions, too.

“You can have a measurable impact at market-rate returns,” Klop says.

If 2016 reminded us of anything, it’s that forecasting, especially political forecasting, is tough. With few pollsters or commentators having accurately predicted the outcome of either the Brexit referendum or the US presidential election, it would be wise to keep an open mind in relation to elections taking place in 2017. Growing nationalism, fragmentation and what some have dubbed “the death of liberal politics” are likely to remain prominent influences on the political landscape for some time.

Against this backdrop of geopolitical tumult, here are four themes it will be important for investors to consider when building portfolios in 2017.

  1. Fragmentation

Taken together, Brexit, the election of President Donald Trump, the rise of populism across Europe, and the increasingly nationalist tone of presidents Vladimir Putin and Xi Jinping, suggest a fragmentation of the prevailing global political order.

In an environment of heightened political risk and fatter tails, stress-testing portfolios against large moves in equities, bonds and currency will be important when assessing portfolio risk exposures. Volatility-sensitive investors may wish to consider approaches to managing their downside risk exposure via hard or soft hedges.

As the performance of sterling following the Brexit vote illustrates, political surprises create the potential for large currency moves. Protectionism and trade tensions could also lead to currency volatility. This increases the importance of having a clear policy on hedging currency risk and may also create opportunities for active currency or global macro-managers.

  1. Shift from monetary to fiscal stimulus

Last year may have brought the high point in monetary stimulation. Policymakers are increasingly recognising the limits and unintended consequences of quantitative easing and negative rate policies. At the same time, increasing calls for fiscal stimulus have been supported by both mainstream economic voices and populist politicians. The speed and magnitude of any shift from monetary to fiscal stimulus could have important implications for investors in the years ahead, not least in relation to the potential build-up of inflationary pressures.

Investors should, therefore, have a clear understanding of the impact that higher inflation could have on their ability to meet their objectives. For portfolios lacking in inflation protection, investors may wish to consider direct inflation hedges or real assets.

Regardless of the direction of yields, an increase in bond market volatility due to an increase in uncertainty around monetary and fiscal policy (following a period in which policy has been one-directional) should create more opportunities for strategies such as global macro, absolute-return bonds and unconstrained fixed-income.

  1. Capital abundance

Following eight years of central bank largesse and low levels of business investment, the world is awash in financial capital seeking yield. The exceptional returns of the past eight years will not be repeated and there is a scarcity of “easy beta” to be harvested. We believe portfolios dominated by traditional beta (that is, equities, credit and government bonds) offer a relatively unattractive risk/return trade‑off looking ahead. Investors will, therefore, need to prepare for lower returns or consider less familiar asset classes and more flexible strategies in order to deliver on their return objectives.

In this environment of low yields and low to moderate risk premia, we believe investors should place a greater emphasis on diversification of return sources. This can include systematic factor exposures (or “smart beta”) and idiosyncratic alpha (a function of manager skill) across a range of liquid markets.

While many private markets have had significant inflows in recent years, opportunities remain for high-quality managers to extract returns from a combination of illiquidity and complexity premia and direct asset management (or hands-on value creation). This is especially true for areas of the private markets where there is still a structural imbalance between the demand and supply of capital – notably private debt finance for smaller companies that have limited access to the capital markets.

Less familiar segments of the credit markets (such as asset-backed securities, private lending, trade finance and receivables) offer investors the potential to generate a premium to cash of 2 per cent to 4 per cent a year as compensation for complexity and illiquidity risk. Secured finance strategies provide one potential access route to such assets.

  1. Structural change

Amid the short-term discussion of politics and economics, longer-term structural forces, such as demographic trends, climate change and technological disruption, could also have far-reaching, if less obvious, implications for investors.

There is clearly some uncertainty around the future direction of US climate change policy under the Trump administration. However, climate change remains an issue of global importance, and we continue to believe investors should review portfolios’ exposure to carbon-intensive assets to assess the impact policy developments (such as carbon pricing or a carbon tax) could have on them. Carbon footprint analysis on listed-equity portfolios and recent developments in low-carbon indices can be valuable tools in addressing this source of risk.

The investment implications of demographic trends are far from clear, not least because changes in working patterns over the coming decades could mitigate the impact of ageing populations, thereby halting or even reversing any rise in dependency ratios. However, it is clear that some countries will be more challenged by these trends than others (either because their demographic trends are further advanced or because cultural factors make them less likely to be able to adapt in time). This will probably create differences in economic outcomes at a regional level.

Lastly, technological disruption will create winners and losers at a corporate level. This should generate opportunities for long/short equity investors, perhaps particularly on the short side of the book, as identifying the losers from technological change may be easier than picking the winners. An extension of this point is that market cap indices may be at particular risk of technological disruption, given that they hold large weights in the incumbents across many sectors.

The year ahead is sure to bring its share of challenges and opportunities. Investors who seek a clear understanding of their exposure to various sources of risk and build portfolios able to capture opportunities as they arise will probably have a more positive experience than those who do not.

 

Phil Edwards is European director of strategic research at Mercer.

Ten years ago, the UK’s £20.9 billion ($26.1 billion) Wellcome Trust, the charity established in 1936 with legacies from pharmaceutical magnate Sir Henry Wellcome, had a budget of about £500 million to spend on its medical and scientific research. Today, that has doubled, thanks to the success of an investment strategy split across public and private equity, hedge funds, property and infrastructure. Most recently, the fund has also been buoyed by slashing exposure to sterling ahead of the Brexit vote. Wellcome has just reported its investment portfolio added £3.5 billion in the year to September 2016, posting a return of 18.8 per cent.

Calling sterling correctly ahead of Brexit, as well as reaping the benefits of a steadily reduced home-country bias, are key components behind the latest returns. It means more money to fund initiatives such as developing vaccines, fighting drug resistant infections and mining patient data.

“Tactically, we viewed the risk to sterling from the referendum to be asymmetric and reduced our sterling exposure (including hedges) to a [record] low ahead of the vote. Sterling’s subsequent depreciation – and generally steady performance in underlying assets – enabled us to record a sterling return in the year of 19 per cent,” the fund’s trustees state in a recent report.

The Mega Cap Basket

Another reason behind Wellcome’s success is a substantial public-equity allocation. An internally managed Mega Cap Basket (MCB) which, at £5.2 billion accounts for 45 per cent of Wellcome’s 50.5 per cent public-equity exposure, drove returns. Unlike external managers with a bias towards smaller, higher-beta companies, the MCB is characterised by solid, large enterprises. It has intrinsic advantages that include the absence of management fees, an ability to use long-term market timing (for example, in 2015, the fund added consistently to unpopular resource stocks) and all the benefits that come with patient capital. Of the 27 stocks in the basket, 25 were first bought in late 2008.

“We have only rarely sold shares in any of these,” the trustees explain. “We have sold out of 10 companies completely; we have added three new ones, one of which (Facebook) we had held since it was private. We have 10-year absolute return targets for each company and no focus on market or sector comparisons. Each member of our investment team covers no more than four MCB companies and we have regular and constructive engagement on long-term themes with senior management. Hence, we buy and sell businesses, not share prices.”

This success has thrown a harsh spotlight on the fund’s external managers, whose returns have been much poorer. Wellcome’s 11 external equity managers are responsible for £4.2 billion worth of equity investments between them; eight underperformed against their reference benchmarks, by at least 5 per cent in each case.

“Although nine of the 11 are still ahead of their benchmarks over five years, warning bells are sounding,” the trustees note.

Over the past decade, the fund has reduced its external active management mandates in global and developed equity markets from 85 per cent to about 20 per cent of total public market exposure.

Hedge funds ‘underwhelming’

Today’s large 10.7 per cent allocation to hedge funds has been steadily halved from 23 per cent in 2008. Strategy includes a broad allocation that considers a variety of approaches but avoids funds that employ substantial leverage to achieve returns. It is also an allocation that is struggling.

“Hedge funds had a poor year and performance over three and five years is now underwhelming,” the fund’s trustees note. “Among the multi-strategy funds, it is evident that a number of firms, if not all, simply grew their assets too far and too fast. Among the equity long/short funds – even those with the discipline to remain hard closed to new monies, as virtually all of ours do – many are … being caught in ‘crowded trades’ [like] long-only managers. For them, after strong performance in 2014-15, it was a particularly disappointing year.”

Nevertheless, the trustees note that hedge funds should soon benefit from reinvestment risk rising elsewhere, as prospective future returns diminish from equities and, notably, from bonds, making long/short funds more competitive. However, the headwinds still appear strong.

“Very careful attention to bottom-up selection will remain key,” they advise.

Premium return from private equity

Private equity accounts for 25.2 per cent of the portfolio, in an allocation that has “continued to provide a premium return after costs and fees for illiquidity”. In 2015-16, large buyout funds led the way, with a 16 per cent return in US dollars. Although venture realisations have slowed after a couple of “spectacular” years, things could be about to improve. The fund’s 10 largest venture exposures have a substantial discount to the valuations their latest round of capital raising implies, the trustees note, adding, “There would appear to be plenty of latent value.”

Property interests of £2.4 billion are overwhelmingly UK-based and had a stable year, although the impact of the referendum vote is still being assessed.

More disruption ahead

Going forward, Wellcome’s trustees note, disruptive forces will continue to affect the part of the portfolio invested in higher-risk assets such as venture funds, direct private investments and multi-asset partnerships in selected emerging economies. These forces will include tailwinds such as the shift to e-commerce, the sharing economy and the impact of social networking.

On a sectoral basis, Wellcome will maintain its high exposure to technology-based companies and financials, especially in the US, for which prospects are “robust”. Wellcome is also betting on increased consumer demand, tilting towards China, India and other developing markets.

“Our increased investment in 2015 – both in energy and mining companies and in long commodity financial instruments – has been well rewarded in 2016, as commodity prices have rebounded. Overall, we are comfortable, but certainly not complacent about both the shape of our portfolio and its component parts,” the trustees conclude.

Malaysia’s Kumpulan Wang Persaraan (Diperbadankan) fund for public officials, known as KWAP, will continue to diversify its asset allocation, increasing investment in private equity, real estate and other alternatives.

“We believe a diversified asset mix puts us in better stead to benefit from changing market cycles to ensure sustainability over the long term,” the RM126.8 billion ($28.3 billion) fund’s chief executive, Dato’ Wan Kamaruzaman Bin Wan Ahmad, says in an interview from KWAP’s Kuala Lumpur headquarters. “We have to recognise the fact that the prospect for returns is not as good compared with what we saw in the last 20 years. We expect returns for equity and fixed-income securities to be lower, due to the all-time low interest rates, modest global growth prospects and high valuations of financial assets.”

It’s an outlook that is leading the fund to “explore and widen” its opportunity set, he says.

One reason KWAP can push into long-dated private markets is because the fund, established in 1991, still has no liabilities.

“Once we assume liability obligations, our investment strategy would have to be re-oriented and reconfigured to ensure that we have sufficient funds to manage the real cash-flow demands and pension pay-outs,” he says.

Alternatives including property, private equity and infrastructure account for 4.4 per cent of assets under management.

Alternatives pay off

Most recently, KWAP’s international alternative investments have added most to the portfolio, posting the highest return on investment, at 8.82 per cent, as of September 2016.

Domestic private equity has also been one of the fund’s best-performing allocations in recent years.

This is a factor Dato’ Wan Kamaruzaman, who joined KWAP as chief executive in 2013 following his role as head of treasury at Malaysia’s Employees Provident Fund, attributes to “the turnaround of venture capital”.

Venture-capital returns within the private-equity space outperformed other strategies at a level not seen since the height of the dot.com boom, he says. Yet he remains mindful of the challenges that come with private equity.

“Private equity has a long gestation period and is, in general, a challenging asset class,” he explains. “It creates a natural barrier to entry into this space.”

The challenge, and the opportunity, is to buy at the right price, creating value – something he calls “fixing what needs to be fixed” – and exit at the right time via the right route. He cites KWAP’s sale of a stake in Malaysian power producer Malakoff in its 2015 initial public offering as an example of handling all these factors.

“Done right, private equity can be a lucrative addition to the traditional asset classes in a pension fund, providing the much-needed alpha in this low-return environment,” Dato’ Wan Kamaruzaman says.

Other alternative forays include the fund’s first investment in domestic property, when it acquired land in the heart of Kuala Lumpur city centre in 2015. That investment brought the number of properties KWAP owned or co-owned to 14. Eight are in Australia and three are in Britain.

As of October 2016, assets are split between fixed income at 52.6 per cent, equity at 37.3 per cent, the 4.4 per cent alternatives allocation and a 5.7 per cent allocation to cash. Much of the public equity allocation is actively managed.

“We encourage active management in our public equity portfolio, with stringent risk and compliance monitoring,” Dato’ Wan Kamaruzaman says. “Our team of in-house analysts and experienced portfolio managers conduct in-depth due diligence and research that enable us to identify undervalued stocks with the potential to generate good returns over the long term.”

Eyes on foreign opportunities

KWAP has only about 11 per cent of the fund invested overseas, something Dato’ Wan Kamaruzaman is keen to increase.

“Under our existing strategic asset allocation, we had hoped to increase our overseas investments to 19 per cent of our AUM,” he says. “However, we had to defer this plan in 2014, following government directives. Our international investment would have been much higher than where it is now had our investments abroad resumed according to our transition strategy. We will resume with our international plans once the restrictions are lifted.”

Nevertheless, he insists restrictions do not completely inhibit the fund from investing overseas. Global investment opportunities are looked at on “a case by case” basis, with the most compelling getting approval.

“We are constantly communicating with our stakeholders and relevant authorities whenever we see compelling investment opportunities abroad … So far, we have been able to get the requisite approvals to invest in these specific opportunities.

“In the meantime, we are [also] raising our level of readiness by conducting the necessary groundwork and corresponding measures – research, analysis on investment strategies and asset classes – to ensure that we are already able to execute our investments effectively once the restrictions are lifted.”

Any increase in global investment has to be balanced with the fund’s keen priorities back home.

“KWAP remains committed to supporting the domestic economic agenda to the extent that it will also benefit the fund commercially without compromising our risk appetite,” Dato’ Wan Kamaruzaman asserts. It is a strategy that manifests particularly in KWAP’s proactive role in helping to build a sharia-compliant domestic bond market.

“Consistent with our long-term strategy to convert into a fully sharia pension fund, we have been investing in Islamic bonds underlying our efforts to deepen the country’s capital markets. This change is aimed at attracting more global investors, especially long-term investors like sovereign wealth and pension investors, to invest in the local market and at the same time enhance market vibrancy and boost investor confidence.”

Sharia strategy

KWAP’s steps towards Islamic law include building sharia-compliant portfolios with external managers. The fund has appointed five external fund managers to manage its domestic sharia equity mandate, six external fund managers to manage its domestic sukuk mandates and four external managers for its global sukuk mandates.

“On our internal side, we continue to support sharia instruments and deepen the Islamic capital markets. As of the end of September 2016, our sharia-compliant investment represents 49.7 per cent of the total assets. KWAP’s sister fund, The Employees Provident Fund, is offering an Islamic retirement plan, something KWAP is also considering,” Dato’ Wan Kamaruzaman says.

“KWAP has completed a readiness assessment to set up a sharia fund within KWAP or to convert [the fund] into a fully sharia pension fund. We don’t have a specific timeline for this, as the local and global Islamic finance eco-system must improve and develop further to support our sharia ambition,” he says, linking it to the fund’s own efforts to deepen the local market.

External management, internal expertise

The bulk of the portfolio (85-90 per cent) is managed internally, due to substantial holdings of domestic assets.

“These are areas in which we have strong conviction and expertise,” Dato’ Wan Kamaruzaman says. However, he is in favour of more external management for the diversification and increased opportunity it would bring the fund.

“Using external managers diversifies KWAP’s portfolio, expands the range of investment opportunities available and taps on their expertise,” he explains. “In the long run, we hope to leverage their expertise through these relationships to further develop internal talent, especially in managing more complex investments.”

Using external managers to build internal expertise boosts skills in Dato’ Wan Kamaruzaman’s growing team and helping the fund thrive is his favourite part of the job.

“I truly enjoy sharing my experience in the private sector and capital markets with the young team in KWAP,” he says.