KWAP looking to increase exposure

KWAP CEO Nik Amlizan Mohamed

PETALING JAYA: The relative valuation of stocks on Bursa Malaysia is considered “cheap” and may offer opportunities for the Retirement Fund Inc (KWAP) in the near to medium term even as market volatility continues to dominate risk assets.

KWAP CEO Nik Amlizan Mohamed said the benchmark FBM KLCI used to trade at 17 times price to earnings ratio (PER) just a few years ago but the pandemic and current bearish global markets have seen valuation of the local index fall to 12 or 13 times PER.

“And there may even be cheaper companies (on Bursa) as well. We like the ones which pay a high dividend obviously, have cashflow along with a business strategy which is something that we can understand and track where their progress is at,” she said at the MIDF Conversations forum yesterday.

While KWAP is looking to increase its exposure in the private market, in the public market space the fund preferred companies which have a good environmental, social, and governance (ESG) strategy in place, she added.

“ESG is very close to our heart. Companies who are looking at and embracing ESG to help make the world a better place and move to become exemplary champions within their industry – we will be invested in them as well,” she said.

However, Nik Amlizan noted green investments that are readily available on the public market consists of only about 8% of total assets that are available in the market today.

“If we are serious on becoming a carbon neutral portfolio, we can’t just be invested into these (8%). We must look at the other 92% in order to elevate them to become green. And in this transition from brown to green businesses – we can’t kill these companies. How can we not provide them a lifeline to make this transition,” she said.

She added KWAP’s investment approach is based on a strong proponent for this “just transition” that is anchored with a workable plan and journey from the company.

“Each industry would have its own preferred journey. Actions do matter, while we can say we want to do this and that, it must be followed through by real actions,” Nik Amlizan added.

She added KWAP was aware of the “green washing” tendencies today and preferred to measure ESG-friendly moves that companies make to how impactful the outcomes are.

Nik Amlizan was appointed to head KWAP in late 2020 after having served as the CEO of Lembaga Tabung Angkatan Tentera.

She was also KWAP’s chief investment officer for four years and worked with the organisation in various roles since she first joined the fund in 2007.

At present, KWAP has 80% of its assets under management (AUM) worth RM159bil (in 2021) parked in the public and private Malaysian market while the remainder 20% of its investments are abroad.

“Come rain or shine, our performance is highly dependent on how well our markets do and we will continue to stay invested with our partners in their journey of trying to expand regionally or globally. There are some really good companies that we actually have quite frequent conversations with as well,” she said.

The bulk of KWAP’s money in fixed income is also in domestic issues and the current volatility may tempt the pension fund to trade the market.

“However if you hold to maturity, you will get the returns – or the yield that we bought it at. We are very confident in the government and corporate papers (we bought) – we are watching this very closely as well,” she said.

Nik Amlizan noted KWAP aims to provide a 6% returns per annum (PA) on average and this has been so over the past 10-years on average.

“There will be some volatility in returns here and there but over time it should be around 6%. However, we are on the cusp of some significant changes as far as the capital market assumptions are concerned as the easy years of low interest rate environment is no longer there. We are expecting a heightened interest rate environment due to heightened inflationary pressures that is quite sticky,” she said.

KWAP’s targeted 6% PA returns compares favourably with the Employees Provident Fund’s 6.1% PA dividend rate for conventional accounts and 5.65% for the syariah accounts which was declared for 2021 and above Permodalan Nasional Bhd’s income distributions of Amanah Saham Bumiputera 2 and Amanah Saham Malaysia of about 4.3% and 4% PA respectively announced in March.

“We are currently reviewing our strategic asset allocation to build in these new assumptions (higher interest rate) to ensure that we are able to take advantage of this when the recovery comes later,” she said.

She added there are opportunities for the fund in the private market which offers double digit returns when compared to single digit returns from the public market.

The fund aims to build up its private market portfolio holdings but this would not be at an expense of its public market’s holdings noting KWAP’s AUM is expected to see a growth overall.

“The public markets are very liquid while the private markets are very illiquid. We will also not be exposed to the volatility we face in the private market. But selecting the right partner is key because if we get it wrong, it would be very costly. This must be really defined in the early stages of our investment,” she said.

“We must embrace volatility and ensure of our ability to embrace short term volatility. Any investments we do would involve (taking) risk,” Nik Amlizan added.

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