KENANGA INVESTORS BERHAD - 2019

MARC has affirmed the investment manager rating of IMR-2 on Kenanga Investors Berhad (KIB). The IMR rating considers KIB’s well-established investment management processes, strong risk management practices and operating track record. These factors are moderated by its relatively small asset size and moderate financial profile.

Wholly owned by Kenanga Investment Bank Berhad (Kenanga), KIB serves as the fund management arm of its parent and manages unit trust funds and investment funds through both conventional and Shariah-compliant investment schemes. With assets under management (AUM) of RM7.2 billion or about 1% of total AUM domestically as at end-December 2018, KIB has a modest size. Its AUM was affected by the challenging market conditions that had led to a 13.7% y-o-y decline during 2018.

The decline in AUM was largely attributable to institutional clients, whose proportion of funds of AUM declined to 42.2% from 56.4% as at end-2017. In order to reduce reliance on institutional clients and create a more diversified and stable client base, KIB is launching products targeted at retail investors. Additionally, an online platform is being developed to strengthen its current distribution channels. The first phase of the digital platform is to be rolled out by 3Q2019. KIB offers plain vanilla investment products to meet its clients’ investment appetite, focusing mainly on domestic investments: equity funds made up 58.4% of total AUM, fixed income 31.1% and money market funds 6.2% (2017: 53.3%; 29.2%; 14.6%).

In terms of KIB’s capability to execute fund strategies, MARC views the fund manager to have relevant expertise and adequate resources as part of the Kenanga group. To date, KIB has 19 experienced investment personnel with several senior members having more than 10 years of significant experience in domestic and regional markets.

MARC notes that the fund manager continues to benefit from operational and financial support extended by its parent with which it also shares a common brand name. Certain support functions, including information technology, human resources and internal audit, are managed at the group level. MARC views the operational interlinkages between KIB and Kenanga allows for cost savings and improved efficiencies.

KIB’s investment management process is underpinned by a comprehensive investment analysis and portfolio construction process, which are supported by appropriate information systems. Investment portfolios are subjected to periodic reviews to access their performance, which are measured against established benchmarks. The investment team is supported by reputable investment analytics systems comprising Bloomberg Port and a risk analytics system. Its trading and backroom activities are highly automated using the Bloomberg AIMS and PORTIA systems.

KIB’s governance and risk management framework remained sound, supported by active oversight by the board of directors and its parent’s risk management committee. Comprehensive policies and infrastructure have been put in place to manage risks, which are well supported by information systems for risk analysis and compliance-checking functions.

During 2018, KIB strengthened its risk management surveillance by monitoring portfolio exposures on firmwide perspective. Operational risk is managed through forward- and backward-looking assessments, including regular self-assessments aimed at identifying risk areas and establishing key risk indicators to provide early warnings.

In terms of fund performance, MARC observes that most of KIB’s equity unit trust funds had underperformed against their respective benchmarks for the one-year return, indicating higher volatilities of its equity funds relative to the benchmarks. During 2018, KIB’s top 20 largest unit trust funds’ performance also weakened to negative 13.9% compared to an average 4.0% over the past five years. The fund performance was affected by weak market conditions during the year.

In terms of financial performance, KIB recorded profit before tax of RM4.9 million in 2018 on the back of a 15.8% y-o-y increase in revenue to RM97.1 million. As at end-December 2018, KIB’s shareholders’ funds stood at RM29.8 million, above the Securities Commission’s (SC) minimum requirement of RM20 million.

Key Rating Factors

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