Equity

About Equity Department

Equity investment in KWAP refers to the act of buying, holding and selling shares of any public company whose securities are listed or have been approved for listing on Bursa Malaysia. The activity is primarily governed by the Capital Market & Services Act 2007, KWAP Act 2007 and KWAP Investment Policy & Guidelines (IPG).

Equity as an asset class, plays a significant role in KWAP's portfolio, generating a considerable portion of the total investment income of KWAP. Generally, KWAP's investment in equities are divided into two broad categories being Internal Equity and External Equity, The former, as the term suggests, is managed internally by the internal portfolio managers of KWAP while the latter is the portion of funds outsourced to External Fund Managers (EFM). This section generally explains our investment in Internal Equity and its critical role as one of the most important asset class in KWAP's portfolio.

Our Portfolio

Allocation for Equity

As at 31 March 2012, KWAP’s internal exposure to domestic equity market increased to RM23.27 billion or 28.42% of total fund size of a higher base of RM81.88 billion at cost compared to RM21.09 billion or 27% on fund size of RM78.05 billion as at 31 December 2011. As a result of the profit taking activities, internal equity team achieved investment income of RM415.04 million or ROI of 1.87% as at 31 March 2012. Of the total investment income, RM281.77 million or 68% was derived from sale of shares whilst the balance of RM133.26 million was derived from dividend income net of tax.

Sector Allocation

In terms of sector allocation, domestic equity portfolio is well diversified, 29.0% of KWAP’s internal equity portfolio is invested in the banking and finance sector, 14.0% in plantation, 17.3% in oil and gas sector, 9.3% in utilities, 9.6% in telecommunication, 5.3% in construction, 3.8% in consumer, 3.4% in transportation, 2.1% in properties, 2.4% in automobile and 3.8% in others sector. KWAP’s biggest holdings in terms of listed companies’ total shares issued included Bintulu Port Holdings Berhad 9.65%, Gamuda Berhad 7.91%, Kossan Rubber Industries Berhad 7.54%, Benalec Holdings Berhad 7.46%, Time DotCom Berhad 7.46%, Axis Real Estate Investment Berhad 7.42%, Mah Sing Group Berhad 7.18%, Top Glove Corporation Berhad 6.60%, UMW Holdings Berhad 6.42%, IJM Corporation Berhad 6.41%, WCT Bhd 6.18%, JT International Berhad 6.12%, Petronas Gas Berhad 5.75%, SP Setia Berhad 5.19%, Wah Seong Corporation Berhad 5.18% and Amway (M) Holdings Berhad 5.15%.

Style Allocation

In constructing the portfolios, we seek to have the right balance between the three major categories of stocks; being Income, Growth and Value. While some stocks may fit in more than one of the previously mentioned categories, the stocks are generally categorised according to their most dominant characteristic. Our current allocation between the three group of stocks, as measured by the percentage of their respective market value, are as follows:

International Diversification

In recognizing the need for greater diversification, plans are currently devised for diversification into foreign equities within the next 2-3 years . Successful implementation of diversification would enable us to reap the benefits through significant reduction in the risk profile of our current portfolios. Staff are currently enrolled in appropriate training programs and industrial attachments to better equip themselves with the proper knowledge and skills

Proxy Voting

As common shares are attached with voting rights, we take an active participation in the AGM and EGM of the listed companies in regards to their proposed decisions. All voting decisions are decided upon by the Investment Panel or Chief Executive Officer of KWAP, based on the materiality of the decision impact to the financial standing of the respective company. In most cases, KWAP appoints two representative officers to attend the meetings and vote on behalf of KWAP.

Major Investments

Table below shows the list of investments with substantial shareholding in companies listed on Bursa Malaysia as 31 December 2010 :

No	Name of Company	Percentage of Holding
1	Bintulu Port Holdings Berhad	9.54
2	Time DotCom Berhad	7.62
3	Petronas Gas Berhad	6.41
4	Wah Seong Corporation Berhad	6.37
5	Kossan Rubber Industries Berhad	6.26
6	Top Glove Corporation Berhad	6.21
7	Axis Real Estate International	5.86
8	WCT Berhad	5.21

Our Approach

We strive to deliver superior returns to meet our stakeholders’ needs and objectives by creating efficient portfolios through a well-defined investment process. These portfolios are governed by clear investment mandate and parameters, as well as a definite risk management framework. Portfolios constructed are closely monitored in an ever-changing economic and market trends to identify factors that could adversely impact the fundamentals of the stocks held.

When it comes to equity investing, we place a great emphasis on active management. With the belief that the market has never been strongly efficient, portfolio managers and analysts can work together to find long term investments that trade below their fair value. Over time, we believe returns generated by a portfolio of these identified undervalued assets will exceeds average market return.

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As a pension fund, our focus is on selecting fundamentally sound companies with secured long-term business prospects, predictable earnings, strong management, good track record as well as good corporate governance. Often times, our inclination towards such criteria will bring about a selection of dividend yield counters.

Companies listed on Bursa Malaysia will typically undergo a rigorous and stringent filtering process by our team of experienced analysts. Selected companies will be maintained under our Stock Universe, which explicitly means, these are the permissible stocks that portfolio managers are allowed to invest in. Presently, KWAP Research maintains some 70 companies under their List of Stock Universe. The number is expected to expand as the size of the team increases and as the team starts covering regional companies.

Equity Investment Objectives

Our investment objectives in equities can be exemplified in the following keypoints:

To achieve optimal portfolio through maximizing return while maximizing risk relative to market.
To achieve consistent and stable income via dividend and realized income from sales of shares.
To achieve capital growth via investment in equity market.

Research

We take pride in having our own proprietary research to provide us with the insights into invested. Previously run as a separate department, now, the Research Department has now been absorbed by the Equity Department to enhance the investment process and information flow. Despite the integration which took place in late 2008, research analysts continued to retain their full autonomy in conducting analysis and giving recommendations. At the same time, the integration has improved coordination between analysts and portfolio managers resulting in efficiency and effectiveness in the investment decision making process.

Click on flash animation below to view KWAP's investment research approach

Accuracy of analysis as well as speed of communication form an integral part of our research. With the aim to be ‘first in-the-know’, analysts and portfolio managers are equipped with latest state-of-the-art technologies to aid and facilitate their research undertaking. Bloomberg, Reuters and Datastream are examples of the systems utilised by our analysts in carrying out their research of companies under their coverage. Earning models are exclusively developed by analysts, based on specific investment assumptions to assist in the projection of earnings forecast of these companies.

In addition, our team of analysts maintains a set of ‘Model Portfolio’ that serves as a benchmark for portfolio managers. The weightage assigned to a particular stock in the model portfolio is a reflection of the analyst’s views and analysis on fundamental of that particular stock and its sector outlook.

In our aspiration to become a high performance organisation, close monitoring of the financial performance is a habit. We track diverse set of performance metrics to measure the performance of equities. A great deal of emphasis is placed on two performance indicators being Return on Investment (ROI) which measures the realised return over average fund invested and Total Return, as measured by Time Weighted Rate of Return (TWRR), which tracks the portfolio's total return inclusive of the realised and unrealised gain. Total Returns measurement enables the evaluation of portfolio performance against selected benchmarks. Other performance metrics includes portfolio dividend yield relative to benchmark yield, portfolio beta, Sharpe ratio, information ratio and tracking error. This serves as guide for portfolio managers to identify factors affecting their performance.

Performance Metrics


Basic Performance	Active Management	Asset-class Specific

ROI

Total Return

Standard deviation

Measures realised gain over average fund invested.

Captures both Investments income and unrealized capital gains.
Adoption of FRS standards required.

Measures riskiness of returns.
Enables estimation of risk-adjusted returns.

Sharpe Ratio
Measures excess return over risk-free per unit. Enable overall portfolio appraisal

Active Return	Active risk/tracking error	Information ratio
Return over benchmark. Captures positive or negative effect of active management.	Measure risk of active returns.	Measure excess return over benchmark per unit of active risk. Enable TAA and manager appraisal.

Beta
Measures sensitivity of equity portfolio returns to market movements

Counterparty Evaluation

The Investment Policy & Guidelines (IPG) of KWAP requires a minimum of twice yearly evaluations of its counterparties. High emphasis is placed on counterparty evaluations with the expectation of the best level of service from counterparties that deal with KWAP. This also ensures that the quality of the services by counterparties commensurate with the level of business provided. A clear and transparent method of counterparty evaluation has been established.

Criteria of Evaluation

Counterparties are evaluated on 3 major criteria being Dealing, Research and Back Office. The table below provides the details of each criteria on :

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Results of Evaluation

The evaluation results are communicated to the Investment Committee, the Investment Panel as well as the respective counterparties. The counterparties are subsequently categorised into different tier groups which determine the eligible amount of investment to be awarded.

List of Counterparties

At present, KWAP’s panel of counterparties consists of 18 stock broking houses with 15 locally incorporated and 3 foreign affiliated brokers. The panel list of investment banks, financial institutions and public listed companies only includes counterparties that fulfill the minimum requirements as stipulated by the IPG as well as surpassing the minimum threshold of each periodical evaluation. Listed below is the panel of counterparties of KWAP:

Affin Investment Bank Bhd
Alliance Investment Bank Berhad
Aminvestment Bank Berhad
CIMB Investment Bank Berhad
CLSA Securities (M) Sdn Bhd
Credit Suisse Securities (M) Sdn Bhd
ECM Libra Avenue Securities Sdn Bhd
HLG Securities Sdn Bhd
HwangDBS Investment Bank Bhd
JP Morgan Securities (M) Sdn Bhd
Kaf-Seagroatt & Campbell Securities Bhd
Kenanga Investment Bank Bhd
Maybank Investment Bank Berhad
MIDF Investment Bank Bhd
MIMB Investment Bank Bhd
OSK Investment Bank Bhd
RHB Investment Bank Berhad
TA Securities Holdings Bhd

Corporate Exercise Calendar

Equity

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