Tabung Haji plans to expand global equity mandates

Malaysia’s hajj pilgrims fund, the RM75 billion ($17.9 billion) Lembaga Tabung Haji, is actively seeking global equity mandates as part of a shift in asset allocation that would result in a sizeable allocation to the sector, all through active managers, in the coming months.

The new mandates all of which will be to global equities managers, will include European and North American allocations. The fund will also increase its domestic allocations but declined to give details of how this would be achieved, or the relative share of foreign and domestic allocations.

The move comes after equity valuations dropped to appealing low valuations earlier this year.

The new global equities mandates will come from divesting from Asia-Pacific mandates – which comprise the fund’s only foreign equity allocations currently – Damshal Awang Damit, chief investment officer of Tabung Hajj told AsianInvestor from Kuala Lumpur, headquarters of the fund board. Currently the fund’s only foreign equity allocations are to Asia-Pacific.

“We are looking to growing global equities allocation to diversify the fund risk. We are in the process of selecting managers,” said Damit, adding that the fund had not yet made any appointments.

The decided to increase allocations to domestic and global equities during March, when valuations fell to attractive levels and the fund found itself holding high levels of cash. The recovery in prices since then means the fund will make the allocations more slowly than it initially planned, Damit told AsianInvestor.

MSCI's Europe index fell 35% between February 19 and its low on March 18 before rising 32% by August 14. The index provider's North America Index fell 35% between 19 February 19 and its low on March 23 before rising 54% by August 14.

Besides the increase in equity allocations, the fund is also allocating excess cash to sukuk, or Islamic-compliant bonds, and taking profits in some equity investments that have made gains, Damit said, declining to offer any examples.

Currently Tabung Haji’s sukuk allocations – all of which are domestic – account for 55% of total assets (all managed in house). It has 22% in equities (with a target of 25%), including an allocation to private equity via external fund managers, 10% in property (with a target of 15%) and the remaining 13% in cash (with a target of 10%).

Tabung Haji facilitates savings from Muslims looking to participate in the annual hajj pilgrimage to Mecca in Saudi Arabia through investments in sharia-compliant vehicles. Depositors may withdraw their savings at any time and many depositors use the fund for savings unconnected to hajj, Damit told AsianInvestor.

“A big portion of the depositors have also performed the Hajj but keep their money in [the fund] to earn stable returns or profit distribution. The fund has a sharia board which ensures compliance. Damit said that the board broadly agrees with the selection criteria of overseas indexes, including Dow Jones and MSCI.

He noted that the recent recovery in equity prices was a surprise for the fund, which emphasises a bottom up approach.

“There is a disconnect between economy and asset prices. All the global measures point to economic crisis, but suddenly there is a v-shaped recovery [in equity prices],” he said.

Damit had expected prices to continue falling until the third quarter; he said that the increase in prices was driven in part by investor flows – especially those from retail accounts – rather than from fundamentals.

SEEKING GLOBAL MANAGERS

For the global equity mandates Tabung Hajj is open to managers anywhere in the world, including Asia. Damit said that track record is the most important factor when the investor assesses them, followed by the readiness of the manager to give training to Tabung Hajj staff, followed by good governance, and experience managing sharia compliant assets.

“When we appoint a manager we look to their long-term capacity to add value to our talent pool,” he said, adding that the fund would look to internalise what it had learned eventually to run its own strategies.

Tabung Haji made a strategic shift from equities to sukuk, or Islamic-compliant bonds, in 2018 when it shifted its focus from increasing AUM to preserving capital and set its current allocation targets. Gains from the fund are paid as hibah, or dividends, to savers every year, following the deduction of a compulsory zakat, or religious donation, of 2.5%. The hibah in 2019 was 3.05%, while it was 1.25% in 2018 and 6.25% in 2017.

In the sukuk space the fund favours short- and medium-term durations across the entire investment grade space. It declined to break out its allocations between government and corporate sukuk bonds.

“For now, our sukuk allocations are 100% domestic and focused on matching liabilities, relying on equities for capital growth,” said Damit.