Retirement Fund Inc chief executive officer Datuk Wan Kamaruzaman Wan Ahmad speaks to A JALIL HAMID, LOKMAN MANSOR and ZARINA ZAKARIAH
Question: What percentage of the government pension is paid by KWAP?
Answer: KWAP is not just about investment. We also take over the payment of pensions. The money is not from KWAP’s existing funds. It is credited to a special account that KWAP then accesses and pays the pensions. The amount is close to RM1.8 billion a month, which we disburse to 650,000 pensioners.
Q: So, that money is from the government?
A: Yes. They give it to us every month, and we disburse. We don’t touch our funds, which, as at Dec 31, 2016, was RM129.9 billion, just shy of RM130 billion.
The fund started in 1991 with the first injection of RM500 million. It was part of the Accountant-General’s Office. KWAP was corporatised in 2007, and, at the time, the fund was RM44 billion. Now, it is RM130 billion. So, in 20 years, we have grown annually at about RM10 billion.
Q: Where do KWAP’s funds come from?
A: The funds come from contributions by the Federal Government (RM1.5 billion a year), contributions by employers (statutory bodies, RM3 billion) and accumulation of investment income over the years (averaging RM6 billion a year).
Q: What about your returns?
A: Last year, our returns were 5.33 per cent, but we do not pay to the government. We reinvest the money. The 5.33 per cent return is not paper profit, mind you, but realised profit, just like what the Employees Provident Fund announces. That is the policy.
We do not have any dividend payments. Whatever returns we get, we put back into the KWAP fund and reinvest. That is why the KWAP fund keeps increasing every year.
Q: So, there is no contribution to the government at all?
A: There was one time in the 10 years of KWAP’s existence, during the 2008 to 2009 crisis, that the government needed to use funds. It is the government’s money anyway. That was the only time.
Q: The 5.33 per cent return last year, is it below or above target?
A: The year before (2015), the return was 5.41 per cent. We expected it to be lower because the market was difficult. So, when our return for last year was more or less like the year before, it’s actually quite good. The board of directors is very happy with 5.33 per cent. I think the performance is reasonable and quite good.
Q: What has the trend been in the last two to three years?
A: The returns for the last three years have been going down. We are in an environment of ‘lower-for-longer’, meaning lower returns for a much longer period. Interest rates, productivity, GDP (gross domestic product) and inflation are all lower. The only thing that’s higher is uncertainty and market volatility.
When it’s lower-for-longer like this, we invest in the fixed income market, bonds and MGS (Malaysian Government Securities). The returns over 10 years is four per cent. We want returns of more than five per cent, so the returns from equity must be higher, but equity has been negative for three years, so it’s difficult. Only overseas investments can help. And, especially with the weak ringgit, returns from overseas investments, especially properties and equity, will be better.
So, from KWAP’s funds of RM129.9 billion, 11.6 per cent is overseas investments, and 88.4 per cent domestic investments. The returns from that 11.6 per cent are much higher at 15 per cent, so overseas investments have their benefits.
For example, last year, we sold a building in London that we bought four years earlier. We bought it for £215 million, and sold it for £275 million, so we got £60 million. Minus cost, we pocketed about £60 million, so the returns from overseas investments are much better.
Q: Is there a ceiling in terms of the percentage of KWAP’s investments overseas?
A: We have a target of 19 per cent of our assets to be invested overseas by 2020. Say, by the end of this year, we achieve 14 per cent, so we will do it gradually. It is important to diversify our assets to ensure stable returns. The aspiration is to diversify assets, especially overseas assets. The only thing is there are instructions since 2015 and 2016 to restrict overseas investments. But we still want to, and it is possible to get case-by-case approval. That is why we still invest overseas, although it’s not as much as we would hope, especially investments that can give us high returns.
Q: What is the ratio of investments by asset class currently?
A: As of Dec 31, 2016, 51.8 per cent of our asset class is from fixed income, and 37.9 per cent in equity. And if you add it all up, that would total about 90 per cent. And another five per cent is for property and private equity, and about five per cent is in cash.
As I mentioned, 11.6 per cent is overseas investments and 88.4 per cent domestic. And we have our own asset management at 85 per cent, and external fund managers is at 15 per cent.
We have 10 different mandates for external fund managers of about RM17 billion. Between Islamic and non-Islamic, 52 per cent is Islamic and 48 per cent non-Islamic. We aim to increase (Islamic) every year, but we feel that it is a bit difficult to buy and sell assets as there are some liquidity issues. We aim to increase (syariah-compliant investments) up to 70 per cent, and then we will consider whether we want to make KWAP a totally Islamic Pension Fund or otherwise.
Q: What about liquidity of KWAP’s overseas assets?
A: For overseas assets, our aspiration is to achieve 19 per cent, and for now, we have not achieved that. And to sell (our assets overseas), that would make our target even harder to achieve. We are opportunistic. We cannot be sentimental. If there are offers that can benefit us, we will sell. That is our objective. Although (overseas investment) is a long-term objective, there is no sin in taking profit if the opportunity crops up.
Q: Any specific markets KWAP is looking at in terms of increasing overseas investments?
A: We already have properties in UK (the United Kingdom) and Australia. We used to have three buildings in the UK. We have sold one, so there are two left. For Australia, we have seven properties. We are still searching for more assets, such as in Continental Europe — in Germany and France. In Germany, we are currently bidding for one property so far. If we get it, we will start in Germany this year. Last year, we bid for a property in the US (United States), but we didn’t get it.
Our aspiration lies in more mature countries as the potential returns are higher. But the risks are also higher, although our risk appetite is moderate, so there are certain countries we cannot bid for.
Q: Why Germany and France?
A: For the assets that we acquire, we look at the duration of the tenancy, the tenants — how good the companies are — and how much is the return. And if we can borrow from the country, if the interest rate is low, and if we can rent it out at higher rate, these are the kinds of criteria that we look at.
The Brexit issue will actually benefit us more in Europe, the ones not making returns is the UK. So, that is why we are looking at Europe right now, but it has to meet our criteria.
Q: Can you elaborate further on how you plan to diversify your investments?
A: We don’t only diversify in terms of asset class, we can also diversify within the asset classes itself. For example, for equity overseas, we had an Asia Pacific mandate where we invested in Asia markets. And for the UK office, we invested in equity in the UK and Europe. So, we covered Asia, Europe and the UK. We may also enter into US equity markets because we want to continue diversifying. In Europe, we have €250 million, in the UK, we have £250 million managed by our UK office. If we diversify, we can add on some money to Europe, move some money to US market as well as Asia Pacific markets and cover more countries and so on. That is how we diversify within the asset class.
For our alternative assets (private equity, infrastructure and property), we have allocated for the respective asset classes. For infrastructure, we have power plants, telco towers, utility projects, highways... so within the asset class, we can diversify. For fixed markets, we used to buy government bonds. Now, we have moved into corporate bonds, and within that, we can also diversify into sectors such as plantation, which is doing better, or bonds that are issued by plantation companies.
Q: In the case of overseas investments, aren’t you still restricted somewhat by the authorities?
A: The instruction is not to involve foreign exchange. So, say KWAP buys assets in cash, for instance, a property we bought at AU$200 million, now we can take a loan equivalent to 70 to 80 per cent of the value of that property, and we have about AU$140 million to be invested anywhere we want. So, we are using loans and increasing our investments overseas using our existing assets that does not involve forex. The government’s concern is about outflow of the ringgit, and this is how we do it.
Q: How do you implement hedging for your investments?
A: We implement our hedging policy for our overseas investments. We used to have about 70 per cent (hedged), but now we have about 60 per cent of our (overseas) assets that are hedged. So, when the ringgit slid, we benefited in a way from some returns. And, we stick to it. If we take loans, we have to unwind the hedging, and we are quite good at it. We do forward rating, and when it reaches its maturity, we don’t renew. But, we are reviewing our hedging policies, and we are hiring a consultant to take a look at our hedging policies, among other things.
Q: What is the purpose of hedging?
A: To protect the returns to a level that we are satisfied with. For example, in Australia, we expect seven per cent returns, but if the value drops five per cent, the returns we get is only two per cent, so we hedge and when the Australian dollar value dips, we will not be affected. The currency can increase or decrease the value of returns, so that is why we hedge, to protect our investments.
Tomorrow: Part Two in ‘Business Times’