KENANGA INVESTORS BERHAD - 2017

MARC has assigned an investment manager rating of IMR-2 to Kenanga Investors Berhad (KIB). The rating considers KIB’s well-established investment processes, strong risk management practices and operating track record which are moderated by its size and financial profile.

KIB is a fund manager with assets under management (AUM) of RM7.1 billion, accounting for about 1.0% of total AUM in Malaysia as at end-December 2016. Wholly-owned by Kenanga Investment Bank Berhad (KIBB), KIB serves as its parent’s fund management arm, managing both conventional and Islamic schemes.

KIB established its first unit trust fund in 1996, growing its portfolios to 26 unit trust funds, seven private retirement funds and 20 wholesale funds as at end-December 2016. It also manages private mandate funds from government agencies and pension funds, among others. Nonetheless, AUM size has remained modest as growth has been irregular in recent years. MARC views a stronger AUM growth will be key to strengthening KIB’s business franchise.

MARC considers KIB’s fund strategy as less complex and appropriate to current domestic demand. KIB’s investments are mainly in traditional asset classes with equity funds constituting 44.0% of total AUM, followed by fixed income funds at 36.6% and money market funds at 17.4%. Its overseas investment is relatively new and accounts for about 0.3% of total AUM as at end-December 2016. KIB’s current infrastructure and resources are sufficient to cater for the additional AUM growth. Its key business growth strategy is to expand its distribution channels for its investment products. Currently, KIB distributes investment products through a fair-sized contingent of 1,200 unit trust, 800 private retirement scheme agents and 18 bank and non-bank institutional unit trust advisers across 11 regional offices.

MARC considers KIB’s investment management processes to be underpinned by a clear investment philosophy, processes and style, supported by an appropriate information system. The fund manager also benefits from significant support extended by its parent KIBB, with which it shares a common brand name and resources. Certain support functions, including information technology, human resources and internal audit, are managed at the group level, providing KIB with cost savings.

KIB’s investment analysis and portfolio construction process are comprehensive, focusing on macro-economic environment, business and financial analysis. It undertakes equity and fixed-income investments by employing well-founded approaches through which companies with strong fundamentals and potential earnings growth are identified. Portfolios are subject to scenario reviews on expected return variability to ensure appropriate diversification. The portfolio performance is also measured against established benchmarks.

KIB employs an investment analytics system comprising Bloomberg Port and a risk analytics system. Its trading and backroom activities are highly automated using Bloomberg AIMS and PORTIA respectively. The current systems are able to cater for KIB’s business growth. Operational risk is managed through forward and backward-looking assessments, including regular self-assessments aiming to identify key risk areas and establish indicators to provide early warning signals.

MARC views the investment team as experienced with senior team members having more than 10 years of relevant experience in domestic and regional markets. With 16 members in the investment team comprising analysts and portfolio managers, the current investment portfolio size is deemed as sufficient.

KIB adopts the governance and risk management framework of KIBB, under which clear and independent reporting lines between various risk management functions are established with active risk supervision by KIB’s board of directors and the parent’s risk management committee. KIB has policies and infrastructures in place to manage compliance risk, conflict of interest, counterparty risk and business continuity risk, among others. The risk management process is supported by reputable information systems for risk analysis, compliance checking functions, value at risk calculation and back testing of investment portfolios.

KIB’s investment track record has been fairly strong with its retail funds recording relatively higher returns compared to their respective benchmarks, reflecting its successful active investment management approach. MARC observes that about 80% of the unit trust funds outperformed their respective benchmarks for the one-year, three-year and five-year returns.

KIB’s profitability has been affected by the recent weak market conditions which have weighed on its funds performance. Additionally, given its modest AUM size, management fees generated are just about sufficient to meet its operating expenses. For 2016, KIB registered a pre-tax loss of RM5.3 million (2015: pre-tax loss of RM6.2 million). In MARC’s view, growth in KIB’s AUM would be key to generating higher management fees that would not only be able to meet operational expenses but provide a buffer against the more volatile performance fees.

Major Rating Factors

• Modest-sized asset management company;
• Established investment process;
• Strong governance and risk management framework;
• Steady investment return and track record; and
• Moderate financial profile.