KENANGA INVESTORS BERHAD - 2018

MARC has affirmed its investment manager rating of IMR-2 on Kenanga Investors Berhad (KIB). The rating is supported by KIB’s well-established investment processes, sound risk management practices and strong operating track record. These factors are counterbalanced by a relatively moderate asset size and an adequate financial profile stemming from undertaking a rapid growth strategy.

KIB is wholly owned by Kenanga Investment Bank Berhad (Kenanga), a key investment bank in the country and for which it serves as a fund management arm. It has assets under management (AUM) of RM8.4 billion, accounting for about 1% of total AUM in Malaysia as at end-2017. The investment manager has continued to grow strongly, registering an AUM growth of 18% y-o-y that outpaced the domestic industry average growth of 11% y-o-y during 2017. The strong growth was driven by its flagship equity fund which has a track record of outperforming its benchmark.

In tandem with the investment appetite of its clients, KIB mainly offers plain vanilla products. Its funds are mainly invested in traditional asset classes with equity funds constituting 53% of total AUM, followed by fixed income at 28% and money market at 15% (2016: 44%; 37%; 17%). KIB is largely focused domestically; its overseas investments accounted for only 0.6% of total AUM.

MARC notes that KIB has established a private wealth department to further support the growth of its high net worth business segment. The investment manager has also obtained a financial planning licence which allows it to expand the product offerings for its retail segment. Additionally, an online platform is being developed to distribute unit trust funds and is expected to come onstream by end-2018. These initiatives could potentially lead to a more diversified and stable client base, and provide higher management fees. To date, KIB’s customer base mainly comprises institutions, with institutional funds accounting for 56% of total AUM (end-2016: 65%). The higher proportion of retail funds at 43% of total AUM reflects KIB’s increased efforts to strengthen its retail segment (end-2016: 35%).

MARC views that KIB’s infrastructure and resources are sufficient to cater for additional AUM growth. During the review period, the investment manager strengthened its distribution network by increasing the number of unit trust agents to 1,600 (2016: 1,200). In addition, the investment manager continues to benefit from significant support extended by parent Kenanga, 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.

In terms of investment processes, KIB maintains a disciplined portfolio construction process, supported by comprehensive investment research and reputable information systems. Securities are included in KIB’s investment universe upon obtaining consensus among investment sub-committee members and approval from the chief investment officer. Portfolio managers undertake security selection from the investment universe while portfolios are subject to scenario reviews on expected return variability to ensure appropriate diversification. Their performance is also measured against established benchmarks.

KIB continues to rely on reputable investment analytics systems comprising Bloomberg Port and a risk analytics system. Its trading and backroom activities are highly automated using Bloomberg AIMS and PORTIA systems respectively. Operational risk continues to be managed through forward- and backward-looking assessments, including regular self-assessments aimed at identifying key risk areas and establishing indicators to provide early warning signals.

KIB’s investment team comprises 19 members who collectively have a range of expertise that can cater for additional AUM growth. MARC notes that there has been no significant change to total number of investment personnel. There were five departures from the investment team that were replaced by experienced hires during the review period. Overall, the investment team is considered as experienced with several senior team members having more than 10 years of relevant experience in domestic and regional markets.

MARC notes that KIB has voluntarily adopted the Malaysian Code For Institutional Investors in October 2017. The Code is jointly launched by the Securities Commission Malaysia and Minority Shareholders Watchdog Group in 2014 to provide guidelines on effective stewardship by institutional investors. The adoption of the Code strengthens the investment manager’s risk management and governance framework which is supported by active oversight by the board of directors and its parent’s risk management committee. The investment manager also maintains comprehensive policies and infrastructure to manage risks. The risk management process is supported by reputable information systems for risk analysis, compliance-checking functions, value-at-risk calculations and back-testing of investment portfolios.

KIB’s investment track record remained fairly strong; more than 85% of its unit trust funds outperformed their respective benchmarks for the one-year, three-year and five-year returns, reflecting its successful active investment management approach. In addition, compared to its peers, the performance of KIB’s equity and balanced funds was above average in their respective categories in the past three years. MARC also notes that KIB won a few awards in 2018, including for the best pension house by Asia Asset Management and the best Islamic equity group by Thomson Reuters Lipper Malaysia.

KIB’s financial profile remained weak, although losses before tax narrowed to RM2.6 million in 2017 from RM5.3 million in 2016 on the back of a 39.6% y-o-y increase in revenue to RM83.9 million. As at end-2017, KIB’s shareholders’ funds stood at RM24.2 million, remaining higher than the Securities Commission’s minimum requirement of RM20.0 million.

Key Rating Factors

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