By Chan Quan Min
Public pension fund KWAP has been seduced by potentially higher-yielding but treacherous investments. Tiger says with higher returns come risk. KWAP would do well to stick to the path that is tried and true.
We tigers are ruthlessly territorial. Often, we stick to our usual range, taking great care in enforcing the borders with our markings and only when absolutely necessary, defend them with our claws and fangs.
A tiger only very rarely ventures outside of his own territory. Although unusual and not very sensible, it is not entirely unheard of.
You never know, sometimes an adventurous tiger may find rich pickings outside his usual range. Unfortunately, most of the time this is not the case. It’s a dog eat dog world out there.
While catching up on his daily read, this humble tiger spotted one such adventurous tiger in search of greener pastures in the form of Kumpulan Wang Persaraan or KWAP.
The public fund managing close to RM97 billion in civil servant retirement pensions recently made the headlines for allocating huge sums towards investments in overseas markets and local small-cap counters.
Three weeks ago, KWAP was featured in an article in The Star, for allocating a cool RM300 million to invest in small-cap and medium-cap companies on Bursa Malaysia.
Wan Kamaruzaman Wan Ahmad
And just this Monday, a story also carried on The Star’s business section had KWAP’s CEO, Wan Kamaruzaman Wan Ahmad declaring the fund’s plans to allocate up to 100 million euros (RM430 million) to buy into companies listed on European exchanges.
This new investment would be on top of the 200 million pounds sterling (RM1.01 billion) currently being managed by the fund’s London-based subsidiary, Prima Ekuiti (UK) Ltd.
The pension fund claimed the move to invest more overseas was driven by the need to diversify and protect its investment portfolio.
“As a pension fund, we have a conservative approach to our investment strategy but that doesn’t mean that we avoid taking any risk,” Wan Kamaruzaman was quoted as saying.
Allow Tiger to butt in here. KWAP has really got to decide what level of risk they want to take. And with all due respect, it should be low, very low since they are a pension fund for public servants, not a gung-ho hedge fund.
Lets take a look at the current investment mix. KWAP last reported 55% of assets invested in fixed income securities, 35% in equity and the remaining 10% in a combination of property, private equity and infrastructure.
From this alone, Tiger can safely say that at least a good half of KWAP’s assets are held in risk-free securities. But what of the rest?
The Auditor-General’s latest report released early last October found the fund’s equity investments to be reasonably well managed. Nevertheless, the A-G did not hesitate to point out some weaknesses.
Chief among them is KWAP’s investment in TIME dotCom shares, which caused the fund to bear an unrealised loss of RM302.1 million and a realised loss amounting to RM209.6 million on the sale of the shares.
The Auditor-General also told off the fund’s own investment committee for failing to keep their paperwork up to scratch.
In concluding his audit report on KWAP, the A-G has this piece of advice to tame the fund’s roar:
“The KWAP investment panel should ensure investments in equity are made in companies that are competitive and able to give returns in the form of dividends and capital gain.”
Tiger’s take on the matter is: Should the public pension fund choose to heed the A-G’s advice, it should as much as possible limit risky investments.
Risky would include investments exposed to market fluctuations (read: small-cap stocks) and currency exchange risk (read: overseas equity markets).
Coincidentally, these are the very same type of investments KWAP is looking to increase its position in.
And increase in a big way KWAP will. The fund is reportedly seeking to increase its allocation for investment abroad from 10% up to 19% by the end of the next year.
If fund managers at the public pension fund care to learn, there is only one lesson in basic finance Tiger wishes to impart.
Nevermind complex calculations, the principles of finance are built upon a single, central tenant:
The risk-return tradeoff.
Tiger swiped this off a nifty site called Investopedia. It’s a great resource for definitions to finance jargon:
“Definition of risk-return tradeoff: The principle that potential return rises with an increase in risk.
Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns.”
And here comes the final blow in a powerful quip: “According to the risk-return tradeoff, invested money can render higher profits only if it is subjected to the possibility of being lost.”
This brings us to the perennial question. Should a retirement fund trade stocks?
There is no cut and dried answer but retirement funds such as KWAP and the EPF (Employees Provident Fund) should be mindful of their stated purpose to deliver long-term stable returns to their members.
From KWAP’s own website it appears the fund has long held an ‘investment objective’ very much to this effect:
“KWAP seeks to maximise long term total returns in line with its risk appetite. KWAP targets to achieve a consistent total return over a five year rolling period.”
All the fund needs to do now is to keep to its word when it comes to its ‘investment objective.’
This might take an investment policy U-turn of sorts, given the recent fervour for the volatile and the risky.
Here is another line from KWAP’s own core values statement (under the subheading of ‘Integrity’) the fund should bear in mind:
“Listen with an open mind, respect the views, ideas and experiences of others.”
On that note, Tiger is done with dispensing financial advice.
GRRRRR!
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