KENANGA ISLAMIC INVESTORS BERHAD - 2019

MARC has affirmed its investment manager rating of IMR-2 on Kenanga Islamic Investors Berhad (KIIB). The rating reflects KIIB’s established investment management process, 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 Kenanga Investment Bank Berhad (Kenanga). KIIB provides solely Shariah-complaint investment management services including managing unit trust funds and investment funds. KIIB is a relatively small Islamic asset manager in Malaysia, with assets under management (AUM) of RM1.4 billion accounting for 0.8% of total Shariah-compliant AUM in Malaysia as at end-December 2018.

KIIB’s unit trust funds are channelled by its parent as it does not have a license to promote these funds. Its funds are mainly invested in traditional asset classes, with equity funds constituting the bulk of total AUM at 64% as at end-December 2018. This is followed by money market funds at 32%, while fixed-income and balanced funds remained modest at 3% and 1%. As at end-December 2018, retail funds (unit trust and retail wholesale funds) increased significantly to 70.8% of total AUM with the remaining 29.2% being institutional funds (2017: 52%; 48%).

KIIB leverages on the infrastructure and resources of its parent, KIB, which reduces operational costs and strengthens efficiencies. Among the shared resources is a pool of investment personnel with sufficient experience in the fund management field. In terms of risk management, KIIB adopts the governance and risk management framework of its parent. The risk management process is supported by an information system that allows for key risk assessments including stress tests, value-at-risk (VAR) calculations and back testing of investment portfolios. To date, there have been no major risk management or compliance issues.

MARC considers KIIB’s investment management process as robust with clear investment policy goals. The investment manager uses a bottom-up approach for equity investments and a top-down approach for its fixed income investments. Its investment strategy is supported by 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. These systems allow for timely investment decision-making.

Amid challenging market conditions, the performance of KIIB’s funds weakened to negative 9.5% compared to an average 0.8% over the past five years. All of the equity funds underperformed compared to benchmarks for the one-year and three-year returns. For money market funds, their returns were slightly higher than the respective benchmarks during the year.

KIIB recorded lower revenue of RM1.5 million in 2018 due to the contraction in AUM and lower management fees, translating into lower profit before tax of RM0.3 million. MARC notes that KIIB has remained profitable over the last five years, partly due to resources and cost sharing with its parent.

Major Rating Factors

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