KUALA LUMPUR, July 18 — Malaysia’s second-largest pension fund expects lower returns this year and plans to buy more bonds with maturities of 10 years or more to hedge against further interest-rate cuts.

Kumpulan Wang Persaraan (Diperbadankan), which manages about RM120 billion, is also considering lowering its 5 per cent minimum return target because of recently increased uncertainty in global markets, said Chief Executive Officer Wan Kamaruzaman Wan Ahmad. The fund achieved a 6.15 per cent gross return on investment in 2014, he said.

Malaysia’s central bank unexpectedly  reduced the overnight policy rate Wednesday for the first time in seven years, trimming the amount financial institutions pay to borrow from each other by 25 basis points to 3 per cent. Policy makers joined Asian counterparts from Indonesia to Taiwan in acting to spur investment and economic growth.

"It’s never been so difficult for an institutional investor to get these kinds of returns, but to me this is the new norm,” Wan Kamaruzaman said in an interview in Kuala Lumpur Wednesday. "This low interest-rate environment, low corporate returns, lower dividend yields will prevail for a much longer period.”

‘Double-edged sword’

Malaysia’s interest-rate cut is a "double-edged sword” as the fund’s existing portfolio is "in the money,” while new investments will probably be in instruments with lower returns, the CEO said. KWAP will be buying longer-dated bonds because "we see room for a further interest rate cut,” he said.

KWAP bought 30-year Malaysian government bonds at a yield of 4.613 per cent on June 29, days after the UK voted to leave the European Union, Wan Kamaruzaman said. The debt was quoted at 4.51 per cent Friday, according to prices compiled by Bloomberg. 

KWAP has been able to maintain returns of about 5 per cent so far this year in part because it focuses on Malaysian securities rather than investments in other countries where yields are lower, he said. The yield on the 10-year Malaysian government bond was 3.54 per cent Friday, compared with 1.54 per cent for US Treasuries with the same tenor and negative yields in Germany and Japan, Bloomberg-compiled data show.

Wan Kamaruzaman said the fund will likely keep its roughly 2 per cent allocation to UK assets, despite the results of the referendum, because it adds diversification to the portfolio. KWAP, which agreed to sell its 88 Wood Street property in London for £270 million (RM1.4 billion) in March, owns two other locations in the city. 

It purchased the 10 Gresham Street office building, which had a unit of Lloyds Banking Group Plc as its anchor tenant, in 2012 for £200 million, according to its  website. KWAP bought about 80 per cent interest in the 440,000-square-foot Intu Uxbridge shopping center in 2014 for £174.8 million, the website shows.

London’s property market could face a "steep correction” after prices surged in recent times, Wan Kamaruzaman said. KWAP also has about £200 million in equity investments in the UK, he said.

"You need to treat Brexit with caution,” he said. "The trouble is that the London market has always been at the forefront before, but the correction this time round could be deeper because of the impact on globalisation.”

‘Not sentimental’

KWAP may sell the Sydney building that houses the Australian stock exchange. The fund bought the 14-story property at 20 Bridge Street in 2011 for A$185 million, its website shows.

"We have expression of interest from both Australian and global players, if the price is right, we will sell,” Wan Kamaruzaman said. "Even though we are under-invested globally, we are not sentimental about investments.”

KWAP receives an average of about 4 billion ringgit annually in pension contributions, Wan Kamaruzaman said. It reported gross investment income of RM6.47 billion in 2014, with the largest contribution coming from equities at 39 per cent of the total, according to its website. Loans and private debt provided 23 per cent of income, while Malaysian government securities made up 17 per cent, the website shows.

The fund allocated 54 per cent to fixed income, 36 per cent to equities and the remaining 10 per cent to other investments, including real estate, at the end of 2014, according to the website. Overseas investments currently account for 15 per cent of total assets, while the fund has a mandate to invest as much as 19 per cent abroad, Wan Kamaruzaman said.

The fund’s 2015 results will likely be released in August, pending clearance from the parliament, he said. — Bloomberg