KENANGA ISLAMIC INVESTORS BERHAD - 2018

MARC has affirmed its investment manager rating of IMR-2 on Kenanga Islamic Investors Berhad (KIIB). The rating reflects KIIB’s established investment management processes, underpinned by a prudent risk management framework that is sufficient for its relatively small-sized asset management business.

KIIB is wholly-owned by Kenanga Investors Berhad (KIB), a domestically well-established fund management company that is part of the Kenanga Investment Bank Berhad group (Kenanga). KIIB was set up to offer solely Syariah-complaint investment management services while its parent KIB offers conventional fund management services.

As at end-2017, KIIB had assets under management (AUM) of RM2.2 billion, which places it as a modest Islamic asset management company. It manages nine unit trusts and wholesale funds each, in addition to private mandate funds from government agencies, pension funds, insurance companies and corporate clients. Its unit trust funds are channeled by its parent as it does not have a license to promote these funds. As at end-2017, retail funds (unit trust and retail wholesale funds) accounted for 52% of total AUM with the remaining 48% being institutional funds. Given KIIB’s substantial exposure to institutional funds and its moderate AUM size, any sharp withdrawals of funds during adverse market conditions would pose a risk to its operating performance.

MARC views the significant integration of KIIB and its parent through shared infrastructure and resources as a key factor in reducing operational costs and strengthening efficiencies. Among the shared resources is the pool of experienced investment personnel whose senior members have about 10 years of experience in the domestic and regional markets. KIIB also adopts the governance and risk management framework of its parent through which operational and investment risks are managed. MARC observes that the risk management process is anchored by an information system that allows for key risk assessments including stress tests, value-at-risk calculations and back-testing of investment portfolios to be carried out. During the year under review, KIIB did not encounter any major compliance issues.

KIIB maintains a robust investment management process with clear investment policy goals. Its strategy for equity investment is to adopt a bottom-up approach by focusing on financial and business attributes of individual companies. In contrast, for its fixed income investments, KIIB adopts a top-down approach by considering changes in macroeconomic conditions as key factors. Its investment management strategy is supported by a reputable investment analytics system and significant automation that allow for timely investment decision-making.

KIIB’s investment management approach for its unit trust funds, which are mainly in equity, continued to outperform the return benchmarks in 2017. However, its sukuk and mixed asset classes registered weaker performance than their respective benchmarks.

KIIB’s revenue which predominantly consists of management fees grew by 34.1% y-o-y to RM3.4 million in line with strong AUM growth in 2017. Pre-tax profit more than doubled y-o-y from RM0.7 million to RM1.8 million, driven by lower staff costs and higher revenue. MARC notes that 50% of the AUM is from the money market investment fund, which derives relatively lower management fees compared to other funds. KIIB has remained profitable over the last five years, partly as a result of resource and cost sharing with its parent.

Major Rating Factors

• Relatively small-sized asset management company;
• Established investment management processes;
• Strong governance and risk management framework adopted from parent;
• Steady investment return and track record; and
• Moderate financial profile.