KENANGA ISLAMIC INVESTORS BERHAD - 2017

MARC has assigned an investment manager rating of IMR-2 to Kenanga Islamic Investors Berhad (KIIB). The rating reflects KIIB’s well-established investment management process, underpinned by its prudent risk management practice, which are sufficient for its relatively small size in the domestic asset management business.

KIIB is a wholly-owned Islamic fund management subsidiary of Kenanga Investors Berhad (KIB), providing Shariah-compliant investment management services including the management of unit trust funds and investment funds. Both companies are significantly integrated through the sharing of similar infrastructure and resources. MARC views KIIB as a small asset manager with assets under management (AUM) of RM1.7 billion. This constituted about 1.1% of the total Shariah-compliant AUM of RM149.6 billion in Malaysia with 74 asset management companies as at end-December 2016.

KIIB manages nine unit trust funds and eight wholesale funds, in addition to privately mandated funds from government agencies as well as pension funds, insurance companies, corporate and individual clients. MARC considers KIIB’s investment strategy as traditional, with investments mainly in the domestic market, which are appropriate given KIIB’s current shared resources and infrastructure.

KIIB’s unit trust funds were mainly from KIB as it does not have a licence to promote unit trust funds. In terms of investment strategy, KIIB’s funds are deployed mainly in the money market, which constituted about 66% of its AUM, followed by equity (28%) and fixed income (4%). However, money market funds provide lower management fees compared to other funds.

KIIB mainly invests in traditional asset classes of equity, sukuk and money market instruments domestically. MARC considers the investment management process as robust, supported by a clear investment policy, an appropriate information system and experienced professionals. It focuses on attributes of individual companies such as potential earnings growth rather than macroeconomic conditions. In contrast, for fixed income investments, KIB considers changes in macroeconomic conditions as key factors. Its investment management strategy is supported by a reputable investment analytics system and significant automation that offers the possibility of business expansion.

KIIB shares resources with KIB in terms of investment personnel. Its senior investment team members have about 10 years of relevant experience in domestic and regional markets. The current investment portfolio size is also viewed to be manageable for the investment team. In terms of risk management, KIIB adopts the governance and risk management framework of its parent. MARC notes a clear and independent reporting line between the various risk management functions, with risk supervision by KIB’s board of directors and the group’s risk management committee. KIIB’s policies and infrastructure to manage compliance risk, conflict of interest, counterparty risk and business continuity are in sync with its parent. The risk management process is supported by an information system that allows for stress testing, value at risk calculation and back testing of investment portfolios.

KIIB’s retail funds recorded relatively higher returns compared to their respective benchmarks, reflecting its successful active investment management approach. It can be observed that all of the unit trust funds outperformed their respective benchmarks.

MARC views that KIIB is still in the build-up stage as reflected by its low AUM. Nonetheless, over the last five years it has managed to generate sufficient management fees to cover operating expenses. For 2016, KIIB registered a pre-tax profit of RM0.7 million. MARC understands that KIIB has managed to remain profitable due to the benefit of cost sharing with its parent.

Major Rating Factors

• Small asset management company;
• Established investment processes;
• Strong governance and risk management framework;
• Steady investment return and track record; and
• Moderate financial profile.