Attacking as Important as Defending in a Resilient Portfolio Strategy: Malaysian Kwap | Asset owners

Kumpulan Wang Persaraan (Kwap), Malaysia’s federal pension fund, is taking a proactive approach to mitigating the ongoing turmoil in global markets.

“You have to be able to attack, not just defend,” said Hazman Hilmi Sallahuddin, chief investment officer at Kwap, on stage at Asian investors 12th Southeast Asia Institutional Investment Forum in Singapore on November 22.

“When we talk about resilience in portfolios, people often associate it with a defensive bias. Within the limits of our strategic asset allocation plans, we also consider that a resilient portfolio has room to attack,” he explained.

Sallahuddin stressed that the proactive approach will be taken on the basis of a stable Strategic Asset Allocation (SSA). At Kwap, this means that ongoing factors such as rising inflation and interest rates, as well as potential recession in some markets, will not impact the long-term investment objective. from the federal pension fund.

“We stick to our SSA, but beyond that we have a tolerance corridor and tactical asset allocation. To deal with short-term volatility, we can play with these two factors in which the long-term objective is still clearly defined,” Sallahuddin said.

Total assets under management (AUM) of Kwap is listed as MYR 135.51 billion ($30.2 billion), but since a large portion of overseas investment is denominated in US dollars, Sallahuddin explained that the actual AUM is around MYR 35 billion. dollars.

AN EVOLVING MIX

Sallahuddin is spearheading a move of portfolios from an 80-20 percentage split of domestic and foreign assets, respectively, to 70-30. At the same time, the split between public and private markets will change from 90-10 to 80-20.

“We need to relate to political risk in Malaysia rather than geopolitical risk. We had a very interesting election on Saturday (November 19) and the result was unexpected. A new government needs to be formed, so with our current 80% focus on the domestic market, that plays a role,” he explained.

Sallahuddin sees the national orientation as a blessing in disguise this year, as it has made Kwap relatively resilient in terms of performance.

“The performance of each [has been] affected by the markets this year, and the same goes for Kwap, but the domestic economy and market has been strong, including strong demand, so domestically our current exposure makes us quite resilient,” a- he explained.

Yet, while Kwap’s overseas portfolio is set to grow significantly, the biggest geopolitical risk for the pension fund in the medium to long term is the relationship between the United States and China.

Moreover, the Russian-Ukrainian conflict and its implications lead the Kwap to review its positions in Europe. Sallahuddin explained that one of Kwap’s economists started using the term Wipe – war, inflation, politics and energy – as a reference in 2022.

“We hope that the conflict can be resolved in the medium to long term, but will continue to influence this Wipe view. Historically, geopolitical risk [last] forever, and as a long-term investor and pension fund, we stand by our SSA and execute accordingly,” Sallahuddin said.

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THE NEED FOR SPEED

As Kwap increases its foreign share of the portfolio, the current de-globalization trend and its implications must also be taken into consideration. Sallahuddin said the two main risks here are supply chain disruption, particularly with regard to China, and capital flows.

“When building a resilient portfolio in the context of de-globalization, we must first ensure that our SSA is consistent. This then means that we are aiming for alpha and we are also diversifying. This gives us the opportunity to look more into the private markets and take advantage of the illiquidity premium there,” he explained.

To do this, Sallahuddin stressed the importance of being agile and adapting quickly to changes to take advantage of investment opportunities. This required a review of internal decision-making processes.

“Being a government pension fund has traditionally been associated with relatively slow decision-making and execution. This year we launched a transition plan where we are optimizing processes and changing everything, so we are becoming even more progressive. The need for speed has become important to adapt to ongoing macroeconomic development this year,” Sallahuddin said.

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LOOK BEYOND

Optimized decision-making processes also aim to increase resilience through diversification. Strategic asset allocation shifts, with higher allocation overseas and in private markets, will require exactly that, the chief investment officer said.

“We are currently heavily concentrated in North America. We are also a bit overweight in China relative to our benchmark, so those are some of the markets we need to diversify from,” Sallahuddin said.

Elaborating on the types of assets, he explained that strategic asset allocation and increasing exposure to the private market both impose a certain bias on Kwap.

“While we haven’t considered SAA, we currently see the best opportunities in private equity and private credit. It comes down to their ongoing review valuation and the vintage of the fund, which gives us a good position to buy next year,” Sallahuddin said.

Sallahuddin has been appointed as Kwap’s new Chief Investment Officer in January 2022. He joined with a background in private equity and venture capital investments and previously worked with Malaysian sovereign wealth funds Khazanah Nasional Berhad for 12 years, among other roles.