Strategic Asset Allocation (SAA)

Strategic Asset Allocation

Why is it important?

KWAP has adopted Strategic Asset Allocation (SAA) as a key element in the investment decision making process. The importance of having an appropriate SAA is crucial in terms of deployment of capital and fund to asset classes which best demonstrates the most optimal risk return trade off. It is a well known and empirically proven fact that asset allocation is the prime driver of investment performance as compared to market timing and security selection. In this aspect, KWAP endeavors to build and develop a better appreciation and greater understanding of the SAA, taking into account both the practical and dynamic evolution of the concept .

Allowable Asset Class

The Investment Panel shall, subject to such restrictions or limitations as may be imposed in any direction issued under subsection 7(4), invest the fund:-

On deposit in the Central Bank of Malaysia (Bank Negara Malaysia), any duly licensed bank or financial institution as defined under the Banking and Financial Institutions Act 1989 (Act 372), any development financial institutions defined under the Development Financial Institutions Act 2002 (Act 618), any Islamic bank under the Islamic Banking Act 1983 (Act 276) and any duly licensed banks or financial institution outside Malaysia in any currency including the Ringgit.
In money market instruments, including treasury bills, bankers' acceptances and certificates of deposit in any currency including the Ringgit.
In loans, on terms remunerative to the Retirement Fund (Incorporated), to the Federal Government or the Government of any State in Malaysia subject to Article 111 of the Federal Constitution.
In loans, on terms remunerative to the Retirement Fund (Incorporated), in respect of any public authority or corporation in which the Federal Government has an interest.
In loans, on terms remunerative to the Retirement Fund (Incorporated), in the respect of any company.
In bonds, commercial notes, private debt securities, promissory notes and bills of exchange within the meaning of the Bills of Exchange Act 1949 (Act 204) and other negotiable instruments of similar nature on terms remunerative to the Retirement Fund (Incorporated), in respect of any company or corporation.
In bonds, commercial notes, private debt securities, promissory notes and bills of exchange within the meaning of the Bills of Exchange Act 1949 (Act 204) and other negotiable instruments of similar nature on terms remunerative to the Retirement Fund (Incorporated), in respect of any public authority of corporation in which the Federal Government has an interst.
In the acquisition or subscription for shares or debentures in any public company whose securities are listed or has have been approved for listing on a stock exchange in Malaysia, the issue or sale of which has been approved under the Securities Industry Act 1983 (Act 280).
In the securities of companies or corporations which are not listed and quoted on any stock exchange established in Malaysia provided that the total amount of moneys so invested in any one such company or corporation shall not exceed thirty per centum of the total amount of shareholders' funds of that enterprise at the time of the investment unless prior written approval of the Minister is obtained to invest in excess of such percentage.
In the acquisition of moveable or immovable property and interests therein.
In any other investment with the approval of the Minister.

Process

In general, the process begins with the collation of views and strategic direction at the Board level. Typically, the broad view and set of beliefs are then articulated as the investment objective of the funds. This is subsequently cascaded down to the investment process in the form of the overall Investment Objective and Philosophy of KWAP. These objectives combined with the risk tolerance fund become the major motivation behind the investment goal and asset allocation process of the funds. Notwithstanding this, a statutory body, an important pre-requisite is the ultimate buying-in from the major stakeholders

The mechanics behind the SAA regime at KWAP is based on the Markowitz’s Mean Variance Optimization technique and the CAPM Efficient Frontier. However, the thinking that goes into the process allows for some element of subjectivity, therefore making it moderately flexible. It is important to emphasize that such optimization processes are complemented by subjective and qualitative overlays and decision factors.

The optimization process involves many iterations and processes which eventually culminate in the end-state SAA which best reflects the prevailing long term views. The underlying assumptions incorporated into the optimization involve the outlook and risk return projections for each asset class as well as their corellations. These assumptions, also known as Capital Market Assumptions, provide the quantitative platform for the optimization.

Review

Given the dynamic nature of financial and capital markets, it is essential that KWAP reviews its SAA on an [periodic] basis. This is to inform the Board and Investment Panel of the impact to KWAP's investment performance, objectives and strategies as a result of any issues, trends or possible implications that arise from the prevailing behavior of each asset class. In situations where market movements resulted in a deviation of the current asset allocation from its desired position, allowable ranges are given to provide room for flexibility. KWAP believes that it should observe the SAA and realistically (within the constraints) and where deemed necessary, refine it from time to time to better enhance the fund’s mobility to generate returns without taking risks beyond its capacity and capability.

The Link to Liability and Risk

In the absence any present obligations to assume liabilities, the approved end state SAA is aligned with current objective of overall fund growth by maximizing returns. Despite this desire, there is always a conscious and pragmatic attempt to associate and link the entire investment process to the ongoing assessment of the liability status of the funds. This is an important aspect of the overall process for it provides clarity and general direction to the risk management framework and relevant parameters in which KWAP operates in. The eventual assumption of liabilities holistically encapsulates and defines KWAP’s existence as a corporate entity.

The Transition Master Plan

The end state SAA becomes the focal point behind the formulation of our Transition Master Plan. The plan describes the transition from the fund’s current position and provides a broad direction en-route to the end state SAA. It is a three year process that is subject to a periodic review.

Investments

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