Malaysia's $30 billion fund goes long as Islamic plan progresses

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 toward becoming a full-fledged Islamic entity.

Kumpulan Wang Persaraan (Diperbadankan), which manages about 120 billion ringgit ($30 billion), is considering lowering its 5 percent minimum return target because of the uncertainty in global markets, said Chief Executive Officer Wan Kamaruzaman Wan Ahmad. The fund achieved a 6.15 percent gross increase on investment in 2014, he said, adding that it's seeking to expand its Shariah-compliant component. The central bank unexpectedly reduced the overnight policy rate 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 Shariah-compliant financial hub, the CEO said. Presently, 55 percent of 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," Wan Kamaruzaman said in an interview in Kuala Lumpur Wednesday. "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 "doubleedged 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 longerdated 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 percent on June 29, days after the U.K. voted to leave the European Union, Wan Kamaruzaman said. The debt was quoted at 4.51 percent Monday, according to prices compiled by Bloomberg.

The fund has been able to maintain returns of about 5 percent so far this year in part because it focuses on Malaysian securities rather than investments in other countries where yields are lower, he said. The yield on the 10year Malaysian government bond was 3.57 percent Monday, compared with 1.55 percent for U.S. Treasuries with the same tenor at the close on Friday and negative yields in Germany and Japan. Malaysia is the world's largest market for Islamic bonds known as sukuk and the global industry has expanded to about $2 trillion in assets. "If the fund's assets reach 70 percent, then we will probably look at turning the whole of KWAP into a full-fledged Islamic fund," Wan Kamaruzaman said, adding that the fund doesn't have a definitive timeframe to achieve the target. "Nevertheless, the Islamic finance eco-system must be developed and complement our expectations." Wan Kamaruzaman said the fund will likely keep its roughly 2 percent allocation to U.K. assets, despite the results of the referendum, because it adds diversification to the portfolio. KWAP, which agreed to sell its 88 Wood Street building in London for 270 million pounds ($357 million) in March, owns two other properties in the city.