Malaysian pension fund targets longer-dated bonds

A street scene in Kuala Lumpur. Malaysia is the world's largest market for Islamic bonds known as sukuk and the global industry has expanded to about US$2 trillion (S$2.7 trillion) in assets. The central bank cut the overnight policy rate last Wedne
A street scene in Kuala Lumpur. Malaysia is the world's largest market for Islamic bonds known as sukuk and the global industry has expanded to about US$2 trillion (S$2.7 trillion) in assets. The central bank cut the overnight policy rate last Wednesday, for the first time in seven years. PHOTO: AGENCE FRANCE-PRESSE

KUALA LUMPUR • Malaysia's second-largest pension fund plans to buy more bonds with maturities of 10 years and above to hedge against another interest rate cut as it moves further towards becoming a full- fledged Islamic entity.

Kumpulan Wang Persaraan (KWAP), which manages about RM120 billion (S$41 billion), is considering lowering its 5 per cent minimum return target because of the uncertainty in global markets, CEO Wan Kamaruzaman Wan Ahmad said. The fund achieved a 6.15 per cent gross increase on investment in 2014, he said, adding that it is seeking to expand its syariah-compliant component.

The central bank unex- pectedly reduced the overnight policy rate last Wednesday for the first time in seven years, joining other Asian counterparts from Indonesia to Taiwan in lowering borrowing costs to spur growth.

KWAP plans to become a full- fledged Islamic pension fund in line with the government's ambition to be a global syariah-compliant financial hub, the CEO said. For now, 55 per cent of its assets comply with Muslim tenets.

"It's never been so difficult for an institutional investor to get these kinds of returns, but to me this is the new norm," Mr Wan Kamaruzaman said. "This low interest rate environment, low corporate returns, lower dividend yields will prevail for a much longer period."

Malaysia's interest rate cut is a "double-edged sword" as the fund's existing portfolio is "in the money", while new investments will probably be in instruments with lower returns, the CEO said. KWAP will be buying longer-dated bonds because "we see room for a further interest rate cut", he said.

KWAP bought 30-year Malaysian government bonds at a yield of 4.613 per cent on June 29, days after Britain voted to leave the European Union, Mr Wan Kamaruzaman said. The debt was quoted at 4.51 per cent yesterday, according to prices compiled by Bloomberg.

The fund has been able to maintain returns of about 5 per cent so far this year in part because it focuses on Malaysian securities rather than investments in other countries where yields are lower, he said.

Malaysia is the world's largest market for Islamic bonds known as sukuk and the global industry has expanded to about US$2 trillion (S$2.7 trillion) in assets.

"If the fund's assets reach 70 per cent, then we will probably look at turning the whole of KWAP into a full-fledged Islamic fund," Mr Wan Kamaruzaman said, adding that the fund does not have a definitive timeframe to achieve the target.

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A version of this article appeared in the print edition of The Straits Times on July 19, 2016, with the headline 'Malaysian pension fund targets longer-dated bonds'. Print Edition | Subscribe