Khazanah Joins Sovereign Funds’ Expansion Spree: Southeast Asia

When Khazanah Nasional Bhd. announced 2013 returns last month, the Malaysian sovereign wealth fund highlighted its international presence for the first time and plans to continue expanding abroad.

Khazanah, which has locations in Beijing and Mumbai, said in the annual report it opened offices in San Francisco and Istanbul, and included a map of the various countries where its companies have operations.

“The new offices indicate a further internationalization of their investments,” said Victoria Barbary, director at the London-based Institutional Investor’s Sovereign Wealth Center. “I expect Khazanah to seek more technology investment through its office in California. And that might help bolster some knowledge transfer to their domestic firms.”

Asian sovereign wealth funds are setting up more offices abroad as they increase investments in alternative assets such as real estate and infrastructure, which require more local expertise than stocks and bonds. Korea Investment Corp. also said last month it’s considering opening an office in China, in addition to ones in London and New York.

Asia’s growing economies have helped the region’s state investors to build on their local portfolios and they are now turning to opportunities abroad. Eighty-two percent of total foreign direct investments by sovereign funds in the Asia-Pacific region were in alternative assets, compared with 39 percent in 2007, according to the Sovereign Wealth Center.

‘Comfort Zone’

Asia’s state funds “are getting out of their comfort zone,” said Song Seng Wun, a Singapore-based economist at CIMB Group Holdings Bhd. Asia’s growth prospect “gives the region’s sovereign wealth funds a bit more confidence. I expect this development to accelerate,” he said.

The expansion overseas reflects how some Asian funds are maturing and catching up with the rest of the global sovereign investors, said Patrick Thomson, London-based global head of sovereigns at JPMorgan Asset Management Inc. Half of the sovereign funds around the world are less than nine years old, based on JPMorgan Asset data.

Funds “are not just sitting back in their home countries and buying indexes,” Thomson said. “They are becoming much more active.”

State funds are expanding into new locations amid market moves that are going in different directions, CIMB’s Song said. Asset allocation has become “much more complex” over the past several years and “need people with local knowledge on the ground,” he said.

Property Buys

Foreign investments by Asia’s state investors accounted for more than double the amount spent domestically in the four years to 2012, according to the Sovereign Investment Lab at Bocconi University in Milan.

Real estate has been a popular overseas investment recently among the funds. Singapore’s GIC Pte bought Blackstone’s 50 percent stake in London’s Broadgate office complex in December, most of which was constructed in the 1980s. China Investment Corp., known as CIC, purchased Winchester House, leased by Deutsche Bank AG for its City of London headquarters, from KanAm Grund KAG, the seller announced in November 2012.

In Khazanah’s brochure for its annual report, the company, which managed 103.5 billion ringgit ($31.5 billion) at the end of 2013, led with its return and product segmentation before elaborating on its international presence. On the website, the item on its global offices was placed at the very top of the page for the brochure.

New Investments

Khazanah opened the two offices in September and October after trimming stakes in domestic companies, including Tenaga Nasional Bhd., Malaysia’s biggest power producer. It also divested its entire 45 percent stake in technology company Time Engineering Bhd., while agreeing to buy a 90 percent interest in Turkish insurer Acıbadem Sağlık ve Hayat Sigorta AS for $252 million in July.

Khazanah is seeking more Asian insurance investments, Managing Director Azman Mokhtar said last month, adding that the company may list such assets in the future.

The company, which reported a 19.1 percent increase in net asset value for 2013, still has 90 percent of its portfolio in Malaysian firms, according to its most recent annual report released in January.

KIC, as the South Korean state fund founded in 2005 is known, said in August that it plans to expand its investments in China after it was granted a license allowing it to buy the nation’s stocks under the Qualified Foreign Institutional Investor, or QFII, status. The fund managed $57 billion at the end of 2012, according to its latest annual report.

KIC held stakes of less than 1 percent in Bank of America Corp., Apple Inc., Exxon Mobil Corp. and Google Inc. as of December, according to data compiled by Bloomberg.

Local Talent

“Given the nature of funds like KIC and CIC, for example, it makes sense for them to have foreign offices as it enables them to trade twenty-four hours a day and tap local talent,” Institutional Investor’s Barbary said.

China’s sovereign fund, with more than $550 billion in assets, opened its first overseas office in Toronto in January 2011, four years after the fund’s inception. CIC has acquired stakes in U.S. bank Morgan Stanley, Singapore-based commodity trader Noble Group Ltd. and French satellite operator Eutelsat Communications SA.

Not all state funds in the region are seeking to expand abroad. Australia’s Future Fund, set up in 2006, currently has no plans to open overseas offices, said Will Hetherton, the fund’s spokesman in Melbourne. He added that the fund’s approach is to “maintain a small and focused team.”

More established state-owned investment companies in the region have been among the first to expand globally.

Sao Paulo

GIC, which in August reported a 20-year annualized real rate of return of 4 percent for the year ended March 31, has focused on global investments since it started in 1981. The fund is planning to open a Sao Paulo office, a person familiar with the matter said in June, its ninth location after cities including London, Mumbai, Shanghai, Tokyo and New York, according to its website.

Temasek Holdings Pte, Singapore’s state-owned investment company founded in 1974, is setting up offices in London and New York, adding to locations including Sao Paulo, Mumbai, Shanghai and Hong Kong, according to its website.

“If you want to invest in assets in a distant location, it’s not enough to crunch the numbers from home, jump on the plane and talk to the executives,” said Sven Behrendt, managing director at Geneva-based political risk research and advisory firm GeoEconomica, which researches sovereign wealth funds. “Asia’s sovereign wealth funds know that and that’s why they will continue setting up offices abroad.”

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